A Defense of Harvard Management Company

Every spring, specifically in about a month, the President and Fellows of Harvard College file IRS Form 990, which among other disclosures releases the compensation of several top Harvard officials, including those from Harvard Management Company. Every spring, it becomes known that the heads of HMC earned incomes often a few times more than even President Faust, and sometimes around 100 times more than other Harvard employees. Often a small controversy erupts on campus about this income disparity, with calls to reduce the pay of the top HMC managers. And why not? If your gut reaction to this inequality was not one of discomfort, I would be concerned.

Here are the top three compensations at HMC’s last reporting cycle: President and CEO Jane Mendillo: $3.5 million; Head of Fixed Income Apoorva Koticha: $4.4 million; and Head of the External Platform Andy Wiltshire: $5.5 million. Comparatively, President Faust was paid $875,000. (For context, over 90 percent of HMC portfolio manager compensation is tied to investment performance, and in the six months prior to last year’s released payday, the rate of Harvard’s investment return was 21.4 percent.)

Spoiler: It is not likely that this year’s figures will be much different, nor will our gut reactions. What can be different, I hope, is that we are more prudent this time before we call for compensation reductions. Regardless of the situation’s equity, there is a basic truth existing in the world that Harvard cannot ignore—the market for highly qualified investment professionals is a competitive one. As such, if Harvard were to pay its best too far below competitive wages, those men and women could leave HMC and work at other institutions. In a competitive market, the compensation for top investment professionals will always be bid up to the value they produce for their institutions.

If we were to ignore these market forces and reduce the pay of HMC officials anyway, instead of discovering a more equitable Harvard, we would likely discover those professionals working at Yale or perhaps Convexity Capital Management, the firm founded by former HMC CEO Jack Meyer, who took 17 percent of HMC’s top workforce with him on his way out the door. Those men and women are still being paid highly, and alas, the inequality persists. The only difference is now there are different employees taking their place back home in Cambridge.

In fact, there is substantial evidence that HMC officials are already paid less than market wages. I know what some of you are thinking: How could $5.5 million possibly be less than competitive? And yet, The Crimson found that HMC compensation is “well below Wall Street standards,” resulting in “HMC’s long-running difficulty in retaining talented hires.” This likely means two things for Harvard—losing top talent to other firms resulting in foregone capital gains for the school, and increased adjustment costs resulting from the higher turnover. Lowering compensation further at HMC would only exacerbate these two problems. Indeed, the savings to Harvard from the lower compensation would very likely be overwhelmed by the forgone returns and higher adjustment costs that would ensue. It is important to consider that not even Wall Street firms enjoy paying their employees highly—they are paid highly because management and shareholders believe the firm would be less profitable without the elevated compensation. In a sense, Wall Street firms voluntarily incur higher compensation costs so they don’t have to deal with worse costs.

Let me be clear—by no means am I saying that Harvard or university students in general should stop caring about fairness in their communities. The world would be a much darker place if that happened. On the contrary, I simply think we should be wiser in how we direct our energies to achieve the fairness we seek. There are so many causes we could promote to fight income inequality that would be significantly more effective than taking aim at HMC compensation, such as expanding the Earned Income Tax Credit, supporting nutrition and health, or ensuring public schools in poor districts get state and federal funding to supplement their weaker property tax bases. The list goes on.

So please, next month when Form 990 is released, let’s be too busy fighting the real battles to notice.

Justin S. Katiraei ’15, an inactive Crimson business editor, is an economics concentrator in Leverett House.