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Rudenstine Defends HMC Pay

President Says Money Managers Earn Their Keep

By R. ALAN Leo

President Neil L. Rudenstine defended the record-high pay of Harvard Management Company (HMC)'s top-compensated employees this week, after HMC came under media scrutiny of in July for paying its money managers as much as $6 million in fiscal year 1995.

In an interview Wednesday, Rudenstine told The Crimson that Harvard Management Company has actually proved very cost-effective, and that the company's top-paid money managers earned the bulk of their compensation though bonuses for stellar performance over several years.

The Harvard Crimson, the Wall Street Journal and the Boston Globe all wrote articles in July spotlighting the $6.2 million package paid to Senior Vice President for Foreign Equity Jonathan S. Jacobson in 1994.

"Academia may be lining up behind Wall Street in paying lucrative salaries--but only to those who manage endowments, not those who teach," declared the Globe article on July 26.

And the Wall Street Journal headline on July 25 read: "One Money Manager's Pay Is in Ivy League of Its Own."

But Rudenstine said that although Harvard is the only University to hire its own money managers, most schools pay a similar amount to private investment firms.

"All the studies we get suggest we are more cost effective than our peers or whatever, but we certainly have every reason to believe that we are at least comparable," he said.

Rudenstine also said that Jacobson, who posted returns of almost 25 percent over the last five years, was worth the price.

"Six million dollars is a very great deal of money. But one must also realize that it's this exceptional level of performance, earning this added exceptional return for the endowment, that will help everyone inside the institution--and that the performance has been sustained year after year after year. He's probably done a better job than anyone else in the country managing his particular kind of portfolio," Rudenstine said.

Rudenstine stressed that Jacobson's salary was only about $200,000 dollars, and that the bulk of his remaining pay was a bonus for exceeding his bench- mark--the average performance of other funds in his area.

The benchmark-bonus system, Rudenstine said, is "a very tough system and it's very performance related."

Even if a money-manager earns a bonus by exceeding the benchmark one year--the manager still may lose the bonus by falling short of the benchmark the next.

Rudenstine said that newspaper articles which compared the performance of Harvard's endowment to the Standard and Poor's 500 were inaccurate, since it measures only domestic stocks.

"The appropriate benchmark for the total endowment's performance...is not the S&P 500. It's a benchmark appropriate for a very large, very diversified portfolio," he said

The benchmark-bonus system, Rudenstine said, is "a very tough system and it's very performance related."

Even if a money-manager earns a bonus by exceeding the benchmark one year--the manager still may lose the bonus by falling short of the benchmark the next.

Rudenstine said that newspaper articles which compared the performance of Harvard's endowment to the Standard and Poor's 500 were inaccurate, since it measures only domestic stocks.

"The appropriate benchmark for the total endowment's performance...is not the S&P 500. It's a benchmark appropriate for a very large, very diversified portfolio," he said

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