Harvard Executive Salary: A Fair Reflection

A September study by the Center for Social Philanthropy at the Tellus Institute indicates that the 2009 average salary for Harvard executives was more than three times that of any other Massachusetts university. Harvard had an average executive compensation of $4.2 million, compared to $1.2 million for the next highest contender, Boston University.

However, the study released greatly skews the average compensation due to the inclusion of salaries of Harvard Management Company executives. Investment fund managers are often compensated based on the ultimate returns of the asset portfolios. For schools such as Boston University with an endowment of approximately $1 billion, it makes sense that fund managers are compensated less than at Harvard where the endowment currently stands at $32 billion. Based on commonplace practices that reward financial managers proportionately for the fund performance, the salary earned by HMC executives should come as no surprise. In fact, the 21.4 percent return by HMC in fiscal year 2011 is an achievement when compared to the performance of actively managed private funds and should be appropriately rewarded. The unsettling factor, however, is that the report unfairly suggests that Harvard “executives,” which includes faculty administrators such as University President Drew G.  Faust, earn an exorbitant allowance.

The report also decries the creation of “a new class of highly compensated investment officers on campus,” a Wall Street trend that the Tellus Institute contends should not be prevalent in the non-profit sector. However, without adequate incentives for skilled asset managers, HMC would be unable to attract the talent needed to manage an endowment as large and complicated as Harvard's. In order to support the extensive research facilities, academic programs, and grants offered to all university students, endowment funds need to defray the great impetus for investment managers to join the private sector.

The overarching tendency by forums such as the Tellus Institute to criticize the salaries made by endowment fund managers stems from the belief that these jobs are within the “non-profit” realm, and, therefore, compensation should be accordingly reflective. However, HMC is first and foremost an investment fund, measured by the size of its returns—not the humbleness of its managers. In order to ensure financial stability and continued funding of Harvard's operations, then, we need to attract the best and brightest to lead the endowment's investment strategy. The Tellus Institute's report argues that university endowment management “has been eroded by a Wall Street culture focused on profitable investment returns as if they were central to colleges’ institutional missions.” However, this attitude overlooks the fundamental basis of any college's operations: money. HMC and its executives allow us as Harvard students to enjoy the benefit of attending an educational institution with multitudinous opportunities created by what the Tellus Institute mocks as “profitable investment returns.”

In attracting talent, HMC competes against other premier endowment funds such as that of our neighbor down the river, MIT Investment Management Company, with a $9.9 billion endowment. Just as any other corporation, HMC must and should pay competitive salaries in order to attract and retain the best minds who yearn to work in the non-profit endowment management sector. These individuals have committed to forgo massive salaries managing independent investment funds, and they should be compensated in a manner that reflects the fair market value of their skills. The Tellus Institute's criticism fundamentally overlooks the simple basic concept that—at least in the world of finance—in order to get the best, you must pay accordingly.

We shouldn’t be eager to denounce the salaries earned by those who manage our endowment fund. If anything, we should be thankful for the opportunities HMC creates.