Show Them the Money

It goes without saying that, in times like these, the issue of executive compensation is indeed a touchy one. Early this year, the world was shocked to learn that many of Wall Street’s besieged “masters of the universe” had still pocketed vast sums of money in bonuses and salaries—despite the sharp economic downturn that some believe was caused largely by their decisions. Following suit, a group of 10 members of the College’s Class of 1969 have called for drastically lower pay for top executives at the Harvard Management Corporation, who manage the university’s endowment. They have also requested that the managers give back their income earned during the fiscal year ending June 30, when HMC’s top six officials made a collective $26.8 million. Even given the fact that in the following four months, Harvard’s endowment plunged a record 22 percent—losing roughly $8 billion—such calls for drastically lower pay are unreasonable, as they fail to take into account the true impact these officials have on Harvard’s endowment.

The financial industry generally compensates its employees very lucratively, and it is naïve to assume that HMC should behave in any other way. Unless Harvard keeps pace, its top-caliber financial professionals might seek other jobs, leaving positions to be filled by less talented individuals. This same class of alums protested the $107.5 million HMC paid its top officials in 2003. When Harvard proceeded to sharply reduce HMC executive compensation, CEO Jack R. Meyer left the company along with many other successful money managers. It should not be forgotten that, in Meyer’s 15-year tenure as CEO, the endowment grew from $4.8 billion to $25.9 billion. The experts needed to run HMC are entitled to the salaries the financial industry would otherwise afford them; risking their departure in a knee-jerk reaction to the recent economic crisis could—in the future—place Harvard’s endowment in an even worse position than the one it now occupies.

While HMC pays top managers large bonuses, in the long term those officials more than justify their compensations by generating impressive endowment returns. Between 1995 and 2005, for instance, Harvard’s endowment garnered an annualized return of no less than 15.9 percent, which amounts to much more than the sum total of officials’ compensation packages. It is also worthwhile to note that Harvard manages its endowment in-house, so HMC officials appear only on the surface to make much more than money managers at peer institutions. In reality, other schools may pay far more in management fees and expenses, even though they do not directly employ their investors.

While the endowment has fallen recently, so has the rest of the market. The overall performance of Harvard’s endowment is still laudable given the circumstances. In short, mismanagement cannot be blamed as the reason it fell as it did this fall, and HMC officials should be compensated at rates standard in the financial industry.