Alumni Urge Lower Pay For HMC

The group of alumni who in 2003 led a successful charge to reduce what it termed “excessive” multi-million compensation for Harvard’s money managers has renewed its push for lower pay in light of Harvard’s plummeting endowment value.

The group, which first protested Harvard money manager compensation in 2003, when Harvard Management Company paid its top officials a total of $107.5 million in salaries and bonuses, wrote in a letter to University President Drew G. Faust that “it is unquestionable [that managers] collected hundreds of millions of real dollars for having created value that was, as it turns out, largely fictional.”

Following the group’s initial protests, Harvard sharply reduced payments to its chief investors to less than a quarter of their 2003 levels, and the scrutiny over salaries played a part in prompting an exodus of money managers that included HMC’s long-time CEO Jack R. Meyer.

In response to the alumni letter, University spokesman John Longbrake wrote in an e-mail that senior management compensation “reflects industry standards [and] saves significant money for the university, relative to the costs of external investment management.”

Last year, compensation for HMC’s president and top five officials summed to $26.8 million for the fiscal year ending June 30—a 20 percent increase from the previous year, but a marked drop from that of five years earlier.

The 10 signatories of the letter—all members of the College’s class of 1969—are proposing that compensation for endowment managers should not exceed that of the highest-paid academic or administrative officer of the University.

In the academic year 2006-2007, Harvard’s highest paid official was Provost Steven E. Hyman, who brought home $549,683, including benefits.

The alumni added that while ideally no bonuses should be awarded to endowment managers, “if, for whatever reason, the managers receive any bonuses in the future, they should be based on increased annual income for the university,” not on estimated increases in the endowment’s total value or comparisons with other market indices.

HMC awards bonuses to managers individually based on value added to the endowment above specified market benchmarks; it subjects bonuses to a “claw-back provision” that allows the University to take back the bonuses if funds perform below these market benchmarks at later dates.

The letter calls for Harvard to withdraw the $21 million in bonuses paid to managers for the fiscal year ending June 30—even though the endowment posted returns of 8.6 percent during that period, beating the S&P 500’s 13.1 percent fall. In the four months since then, the endowment has decreased in value by 22 percent, while the S&P has declined by 24.6 percent.

Co-signatory David Kaiser ’69 initially misunderstood the terms of the claw-back provision, but when the provision was clarified during an interview with The Crimson, he maintained that the University ought to ask for its money back because of the subsequent real declines in the endowment—even though managers have out-performed market benchmarks.

“Obviously [there should be] no bonus in a year in which the endowment decreased in value,” Kaiser said, adding that in a time when “everything else is being cut,” it makes no sense to be awarding bonuses.

He also said that bonuses should only be considered if “you can show a sustainable increase in the contribution that the endowment is making to the operation of the university.”

Harvard spent $1.6 billion of its endowment in 2008 to cover operating expenses and capital projects, an increase of nearly 25 percent over previous years and the University’s largest endowment payout ever.

While some schools, including Yale, outsource large portions of endowment management work to hedge funds and external investment firms, Harvard relies heavily on its in-house managers.

Yale Chief Investment Officer David Swensen—who makes roughly $2 million a year—has criticized HMC’s high salaries in the past, saying that such pay “tears at the fabric” of the University and leaves HMC “inherently unstable.”

For the decade ending 2006, Yale achieved annualized endowment returns of 17.2 percent, beating Harvard’s return of 15.2 percent—a figure that the alums have cited in arguing that high returns can be achieved without high salaries and that external managers may be more cost-efficient.

But Yale, like all universities, is not legally required to disclose how much it pays external fund managers, which complicates comparisons of overall payments to money managers.

—Staff writer Peter F. Zhu can be reached at pzhu@fas.harvard.edu.