Never a Better Time To Re-evaluate HMC

There they go again.

Once more, the top officials of the Harvard Management Company (HMC) have pocketed barrels of money for investing Harvard's $6 billion endowment. As The Crimson first reported yesterday, seven executives of the company earned more than half a million dollars in fiscal 1993. Two raked in more than $1.2 million--about six times the salary of President Neil L. Rudenstine. HMC President Jack R. Meyer, meanwhile, received $962,213, marking the second straight year that his compensation has increased by roughly 30 percent.

For quite some time now, we--along with the rest of the University--have marveled at these mind-boggling compensation packages.

And for quite some time, we have scoffed at the ridiculous explanation given by University officials for these salaries--that Harvard needs to pay Wall Street-level salaries to attract Wall Street-level professionals to manage its $6 billion endowment.

For one thing, the salaries at HMC in many cases exceed the salaries paid on Wall Street. A study last year in Pensions & Investments magazine indicated that private pension fund managers at the high end of the pay scale earn slightly more than $300,000 annually. That is about one third what HMC President Jack R. Meyer earned last year--even though Meyer and most pension fund managers have similar jobs and manage similar amounts of money.

Translation? Even Wall Street doesn't pay Wall Street-level salaries the way Harvard defines them.

If Harvard's performance justified the higher salaries, we might not be so concerned. But it doesn't.

Last year, for example, HMC earned a return of 16.8 percent on Harvard's money. That's good, but not great. Yale, for example, earned 17.3 percent. Meanwhile, the president of Yale's management company earns about $200,000, according to a recent report in the Wall Street Journal. And in previous years, Harvard's returns have been far worse. Yale, for one, has outpaced Harvard's rate of return in eight out of the last 10 years, at a fraction of the cost in compensation. Other leading universities typically also perform as well or better than Harvard does over the long term, while paying far lower compensations.

The main reason other universities pay lower salaries to their money managers is because most of them distribute the money to independent firms to manage. In most cases, the universities' in-house investment managers merely supervise the work of those firms, deciding which to hire and fire.

In Harvard's case, however, the University manages virtually all of its money in-house, resorting to outside firms only in rare instances. Harvard officials claim the large amount of money Harvard has to invest--about twice that of any other university--merits such a set-up. The in-house firm allows for more flexible and cost-efficient management of the money, University officials say.

But this claim is bogus. Other universities hire and fire the independent money management firms they employ all the time. Indeed, the biggest problem with Harvard's system is that it doesn't do just that--HMC's top employees have virtually tenured positions.

That's why it took nearly a decade of steadily plummeting returns before the University finally ousted Meyer's predecessor, Walter M. Cabot '55. And it's why many of Cabot's top henchmen, including Scott M. Sperling and Michael Eisenson--the managers of HMC's high-risk, high-gain private placement portfolio--continue to work at HMC, earning stratospheric salaries, despite their lackluster performance. Sperling and Eisenson achieved fame several years ago for becoming the first HMC officials to top the $1 million compensation barrier, just two years before the University marked down the value of their portfolio by about $200 million, roughly 20 percent. Indeed, there's reason to believe the portfolio's value was inflated in the first place, thereby contributing to the two men's earnings.

So far, the University has resisted calls to reduce the salaries at HMC and distribute more of Harvard's money to outside money managers. Meanwhile, alumni and faculty members around the University chafe at the high salaries HMC pays for average to below-average performance.

As Harvard embarks on the biggest fundraising campaign in higher education history, we think the University's reluctance to reassess HMC's purpose and procedures in unfortunate. There has never been a better time for a comprehensive re-evaluation of the way Harvard manages its money.