"If we don't payout incentive compensation when you had clearly superlative performance, it sends a bad message and it causes people to ask just how big a discount are they willing to work for," Kelly told the newspaper.

However, a top state lawmaker says that offering such rich rewards for beating the market averages encourages the managers to take bigger risks.

"The whole issue goes back to the go-go days of the '90s — the roaring markets, the high leverage," said Sen. Kevin Eltife, R-Tyler. "I'm no longer interested in reaching out and getting the ultimate return on our money. I'm more interested in the safety of our money."

Eltife, who sits on the Senate committees on finance and business and commerce, suggests replacing incentive pay with competitive salaries.

"You can have fund managers and people right now in this environment, pay them good salaries, be competitive with the private sector, and I do not think it's a requirement in this environment to pay incentive for these fund managers."

The market value of the retirement fund portfolios fell from more than $111 billion in 2007 to $87.7 billion in 2008, a smaller loss than experienced by comparable investors, the retirement system officials said. Managers still earned bonuses totaling $2.2 million and $4.3 million in those respective years. Those payments were deferred until the market returned to the black and are part of the $8.2 billion in bonuses paid in January, the newspaper reported.

The state's retired teachers, however, question the fairness of such rich compensation to investment managers when retirees are not receiving part of those benefits, said Tim Lee, executive director of the Texas Retired Teachers Association. He notes the fund can still pay only 81 cents for each dollar retired teachers are owed over the next 30 years.

"When you look at the performance of the teacher Retirement System, it's been good. Has it been outstandingly better than anybody else? That would be a stretch," he told the newspaper.