Word that Harvard Management Company (HMC), the University's endowment-investment
arm, paid one of its portfolio managers $6.1 million last year made headlines
in the Wall Street Journal and Boston Globe in July. The compensation
accrued to Jonathon S. Jacobson, M.B.A. '87. As the Crimson noted, he "took
home more than 20 times what President Neil L. Rudenstine did." Not
that Rudenstine would be surprised by the news; he, other University officials,
and outside money managers who serve on the HMC board of directors approve
all bonus payments to its employees.
According to HMC president Jack Meyer, Jacobson's compensation largely represents
performance-based pay for his results over the five years ending June 30,
1995. During that time, Jacobson managed the Mercury portfolio (domestic
stocks) now totaling about $800 million; co-managed a three-year-old emerging
markets fund now totaling about $300 million; and managed two smaller portfolios.
Mercury earned an annualized return of 24.9 percent-more than twice the
Standard & Poor's 500 stock index-and the emerging markets portfolio
earned 38.3 percent compounded annually, trouncing the 16.1 percent return
of its benchmark. Those results, Meyer said, yielded Harvard "hundreds
of millions of dollars" more than investments that only matched the
market over that period-making Jacobson, in effect, the largest benefactor
in University history.
Meyer noted that HMC's bonuses are not paid out immediately, but are banked
and subject to "clawback" in case of poor future performance.
(The Mercury fund beat its benchmark by 8.8 percent in its worst year.)
Those banked funds are invested in the general endowment account, providing
an additional performance incentive. As a result, Meyer wrote in a memorandum
to his directors, "No one receives a large bonus at HMC who has not
made a lot of money for Harvard." The cost of managing Harvard's investments
internally, he continued, "is less than 60 percent of what it would
cost for equivalent asset allocation and equivalently good performance achieved
through external management."
How common are incentive payments on this scale? According to William J.
Poorvu, M.B.A. '58, a Business School adjunct professor, "It's not
unusual that someone would get 10 to 20 percent of the profit above a Treasury-rate
benchmark" for certain kinds of assets. Poorvu is a director of the
Massachusetts Financial Services mutual funds and a member of the investment
committee at Yale University, which primarily uses external managers. He
gives this example: the manager of a $200 million portfolio earns a return
12 percentage points higher than her benchmark-and so receives a performance
bonus of $4.8 million (20 percent of the extra return).
Samuel L. Hayes III, D.B.A. '66, Schiff professor of investment banking
at the Business School, serves on Swarthmore College's investment committee.
There, 11 outside managers handle $650 million in assets, all on a straight
fee basis. Those fees are described by a private money manager interviewed
by this magazine as totaling .55-.85 percent of assets, depending on the
investment strategy, for an institutional client's billion-dollar equity
portfolio-$5.5 million to $8.5 million per year. Even on that basis, says
Hayes, "It's a reflection of how lucrative this industry is that many
of the largest donors to eleemosynary institutions are money managers."
While HMC overall fell slightly short of its benchmark in the 1995 fiscal
year, when total investment return was 16.8 percent, over the past five
years its results have exceeded those of comparable funds by more than 2
percent annually. That puts HMC in the top 5 percent of its competitive
universe, if still-painful point-a smidgen behind Yale.
For Meyer, the bottom line is that "HMC is an investment firm, not
an academic institution," so the "relevant compensation standardsare
those of other investment firms with equivalent performance." As Poorvu
puts it, "Whether English teachers should be making this much less
than investment managers is a societal issue."
On that societal issue, one might consult another Harvard expert, president
emeritus Derek Bok. His 1993 book, The Cost of Talent: How Executives
and Professionals Are Paid and How It Affects America, explores relative
pay, its effect on allocating talent among occupations, and motivation.
It ends with the "ultimate question" about compensation, "whether
a preoccupation with material gain can produce either a deeply satisfying
existence or a life that we look back upon with pride." Bok concludes
that in pondering the matter, "we should remember that a long, almost
unbroken tradition of secular and religious thought informs us that the
answer is no."