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Alums Decry University Investor Salaries

HMC delays reporting of its multi-million dollar bonuses until early January

By Stephen M. Marks, Crimson Staff Writer

Harvard has delayed reporting its endowment managers’ multi-million dollar salaries until January, and the size of those salaries has begun to incite protests among prominent alumni.

Last year, the University’s two best-paid money managers took home $17.5 million and $17.4 million, enough—according to Boston Magazine—to make them the Boston area’s second and third highest-compensated employees, and enough—according to the Chronicle of Higher Education—to make them the highest-paid in academia. And those salaries will jump even higher this year, according to Jack Meyer, president of the Harvard Management Company (HMC), the University’s in-house endowment manager.

Meyer said that although the University has no obligation to report fund managers’ salaries until May, those figures have typically been reported in November or December. The figures will be released later because HMC’s board of directors wanted to review the compensation at its quarterly meeting yesterday, he said.

In response to the rising compensation of HMC investors, seven members of the Class of 1969, whose members are entering their 35th reunion year and will thus be heavily solicited for donations, sent a letter to University President Lawrence H. Summers on Nov. 25, objecting to the size of HMC salaries in light of rising student expenses.

“We consider these issues to be directly related,” the letter says. “If Harvard can afford to pay over $50 million per year to a small number of financial managers, and if it does so because the Endowment has recently experienced excellent growth, it is clear that Harvard can afford to reduce more than $50 million per year from the ever-increasing cost burdens on current students and debt burdens on recent graduates.”

The letter’s signatories—who also sent copies to the officers and reunion co-chairs of their class, Vice President for Alumni Affairs and Development Donella Rapier and Vice President for Government, Community and Public Affairs Alan J. Stone—leverage their financial power in the letter, threatening to curtail their giving to the University unless it reconsiders the issues they raise.

“Unless the University limits payments to financial managers to appropriate levels, stabilizes the costs for current students at the College, and reduces debt burdens on recent graduates, we see no reason why alumni should be asked for gifts,” the letter says.

Over two weeks later, neither Summers nor anyone else at the University has responded to the letter, according to Stone. He said a response would be forthcoming and declined to comment further.

At least one signer said he was upset by the University’s failure to respond thus far.

“I’m also somewhat disappointed that we haven’t received any reply at all in two weeks, not even an acknowledgement that it was received,” David E. Kaiser ’69 said.

It’s The Money

Meyer said the letter failed to account for the improved endowment performance that such large bonuses generate.

“The letter fails to recognize that there is a direct connection between bonuses and value added to Harvard,” he said. “If you don’t pay the $17.5 million bonus, you don’t get the approximately $175 million in value added—so their math is a little perverse.”

But Jeffrey C. Alexander ’69, who is chair of Yale University’s sociology department, said Harvard’s system doesn’t necessarily net better returns.

“I’ve checked with other universities and most of the fund managers believe that Harvard doesn’t get a higher rate of return than the others,” Alexander said.

The crux of the issue is that Harvard is one of only two universities—Duke University is the other—that retains an in-house endowment management firm. As a result, while the managers of other schools’ endowments might also draw large salaries, they are not directly paid by those schools.

A Chronicle of Higher Education article found that Yale—which outsources its investment—drew better returns from its endowment than Harvard from 1992 to 2002.

But Meyer insisted that keeping investment functions in-house results in lower fees and better returns for the University. He lauded HMC’s salary system, which is “all quantitatively driven” and rewards managers for outperforming market benchmarks.

“Our compensation is superior to any other compensation in the business,” Meyer said. “Our compensation plan is a good deal for Harvard.”

He added that HMC’s system of withholding some income to prevent future underperformance helps ensure that managers invest carefully.

“Every time a portfolio manager makes a bet, he or she stands to lose as well as to win, and that’s very important in the culture of this place,” he said.

The letter “broadly rejects” the argument that Harvard is merely paying its managers market wages. Meyer, however, called the letter “dead wrong” on that point and said that Harvard is actually paying wages below market value.

He also said that the University was right to put such a premium on the value of its money managers, noting that if the endowment had produced median returns over the last 10 years, the University would have $9.6 billion less.

“Economically I would say that the writers are penny-wise and pound-foolish,” Meyer said. “Culturally, they may have a point. It’s difficult to employ world-class portfolio managers in an academic setting.”

Kaiser, however, said he thinks alternative money management teams could be employed. He suggested hiring rich, successful investors late in their careers or letting a combined Business School-Economics department team manage as an education project.

“I personally hope and believe that you could find excellent managers who would understand that this job was not part of the normal market of managing huge sums of money, and that they might view it as something of an honor to be able to do the job, and in return for the honor, they would not be trying to secure the maximum possible amount of compensation,” Kaiser said. “I just don’t think that it has to be this way to secure reasonable returns—there’s no way to prove that there’s a linear relationship between the amount of bonus that you pay and the return that you get.”

Enough Endowment?

The letter also addresses the issue of rising tuitions and other student costs, urging Harvard to apply its $19.3 billion endowment to help offset the growth of those expenses.

“We call on the University to spend additional Endowment earnings for the specific purpose of reversing this four-decades-long march toward an ever rising price tag for higher education that has become ever more burdensome to students and their families—not only at Harvard, but throughout the nation,” the letter reads.

Alexander said that Harvard should strive to show “moral leadership” by taking the lead on addressing rising student costs, and the letter pointed out that if Harvard were to take action, “other universities (and their alumni) would surely take note.”

To pay for decreasing student costs, the letter explicitly calls for the University to increase the amount of revenue it draws from the endowment each year.

“What is Harvard accumulating its endowment for?” Alexander asked. “Why doesn’t it use some of that to deflate the cost of undergraduate education?

Professors and others at Harvard have also complained lately that the University is being too meager with payout, especially in light of last year’s 12.5 percent return on the endowment. The University had initially planned not to increase payout from this fiscal year to next year. But it voted in November to increase payout by 2 percent for next fiscal year and voted again this week to raise that amount to 4 percent.

Nonetheless, University officials have always insisted that preserving the value of the endowment is critical. They aim to spend between 4.5 and 5 percent of the endowment annually—last year, the rate was 5.1 percent.

“The goal...is to maintain the real value of the endowment and spending over time,” Meyer said in August.

But the alumni say they hope to raise the issues of money manager compensation and rising student costs. Kaiser said the letter has begun to attract media attention, if nothing else—he reported receiving four calls from the press about the letter over the last two days.

“That’s why we wanted to get this out in the public—so that people would start engaging in this kind of discussion,” Alexander said.

—Staff writer Stephen M. Marks can be reached at marks@fas.harvard.edu.

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