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."
