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Letters | 7 Ware Street

Pay—and Performance?

January-February 2015

For more than a decade, some members of the College class of 1969 have questioned the University’s compensation for staff members of Harvard Management Company (HMC). It is a tempting target, locally and globally.

No doubt many elite-college graduates look down their noses at the University of Alabama, the other Crimson (Tide), whose football coach now makes $6.9 million per year. But how many outsiders know Harvard for its world’s-largest university endowment, and its highest-paid portfolio manager, who received $7.9 million in calendar year 2012 (the most recent reported—and a fraction of the top pay a decade ago): 10 times President Drew Faust’s salary, and about 40 times that of a tenured professor? How to reconcile that with, and within, a nonprofit institution?

1-, 5- and 10-year investment returns for Harvard, Yale, Princeton, Stanford

On the larger scale, what does it mean for society if this is the “market” for investment talent? Among the outside private-equity, hedge-fund, and real-estate professionals who also invest assets for HMC, some no doubt make much more than the Harvard staffers in downtown Boston. Indeed, the eight- and nine-figure gifts headlining the current capital campaign often derive from the stupefying fortunes accrued by members of that profession. HMC itself has suffered an exodus of investment managers who set up their own hedge funds, often with a stake from Harvard, in pursuit of far greater personal rewards. (The family foundation of Jonathon S. Jacobson, M.B.A. ’87, who decamped in 1998 to set up Highfields Capital Management LP, has assets recently reported to exceed a third of a billion dollars.)

Good questions, but not the only question. Beyond what Harvard pays, what has it bought for its money? Charles Skorina, a recruiter for money-management talent, also writes about the field. As he put it in late September, “[W]e ourselves have written critically about pay and performance at Harvard, but our emphasis has been mostly on the performance part.” Skorina has calculated returns for several endowments. His data for the largest— Harvard’s closest peers as research universities with huge portfolios and complex investment strategies—are shown.

Each school has different objectives and assets, to be sure. But consider the pertinent example of Yale: the second-largest endowment; a portfolio even more skewed toward illiquid, private investments (which have lagged behind public-securities returns during the recent bull market); and even more reliant on its endowment to fund operations than Harvard was when things fell apart in the fall of 2008. The Elis’ 10-year return, a good measure of long-term performance, stands at 11.0 percent, versus 8.9 percent for HMC.

Compounding matters, HMC maintains that its mix of internal and external fund management reduces expenses (another hint at how much the principals of those private investment firms take home). As HMC board chair James F. Rothenberg—a member of the Harvard Corporation, co-chair of The Harvard Campaign, and former University treasurer—said in the September announcement of 2014 endowment results, “HMC’s unique hybrid model has saved the University approximately $2 billion over the last decade as compared to the cost of management for a completely external model.” Performance figures are reported after expenses, so Harvard should be enjoying a nine-figure annual cost advantage over its peers. That suggests its gross investment returns lag even further behind.

Absent an upending of money management, HMC professionals’ pay packages seem unlikely to change. Their compensation is in fact more attuned to performance than much of the staggering fee and other income commanded at the financial-services pinnacle. But a sustained 2 percent underperformance relative to peers—three-quarters of a billion dollars in annual returns at the Harvard endowment’s current size, and compounding over time—is too big to ignore.

An energetic conversation about compensation and equity within the University? Bring it on. But another highly relevant question for HMC’s new president and CEO and its board, whatever their pay policy, concerns performance.

~John S. Rosenberg, Editor

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