A Wise Investment

On May 15, The Crimson reported that several Harvard Management Company executives saw significant jumps in their compensation between 2012 and 2013. Stephen Blyth, then head of public markets and now HMC’s President and CEO, saw his pay roughly double from $5.3 million to $11.5 million, while head of alternative assets Andrew G. Wiltshire saw his compensation increase from $7.9 million to $8.5 million. Natural resources portfolio manager Alvaro Aguirre-Simunovic enjoyed a $3 million increase in compensation, from $6.6 million to $9.6 million. In the past, such jumps in HMC compensation have sparked controversy – as recently as last August, members of the Class of 1969 wrote a letter to the University complaining about the total compensation of HMC’s managers. Seen in context, however, Harvard’s compensation of those who manage its endowment is both necessary and worth the price tag.

Just considering the size of Harvard’s endowment gives some idea of the need for and importance of good management. Harvard recently renamed its School of Public Health because of a $350 million gift, but a puny one percent increase in the size of Harvard’s $36.4 billion endowment would accrue about $364 million to the University. Given that the return on Harvard’s endowment for the fiscal year that ended in June of 2014 was 15.4 percent, and 11.3 percent the year before that, the HMC executives are regularly earning the University many times the value of the School of Public Health gift. While the relationship between the return on the endowment and the endowment’s contribution to the University’s operating budget is indirect, more money to generate funds for critical expenses is always welcome.

Moreover, any fair analysis of HMC executive compensation must take into account the unique way in which Harvard chooses to manage its endowment. Most universities use outside asset-management companies; HMC uses what it calls a “hybrid model,” in which it manages the endowment “both on an internal trading platform, as well as through investment arrangements with third party managers.” Harvard estimates that it saves “more than $1.5 billion in management costs compared to what an equivalent external management strategy would have cost over the past decade.”

In addition to this cost saving and the general significance of the endowment, the increased compensation for Mr. Wiltshire and Mr. Aguirre-Simunovic represents the key role that investments in timber plantations have played in Harvard’s endowment, especially since 2008. As head of alternative assets and natural resources portfolio manager, respectively, Mr. Wiltshire and Mr. Aguirre-Simunovic manage these innovative and profitable investments, and their compensation reflects their success. Harvard, it seems, has been “yelling timber” long before Kesha made it cool.

In short, Harvard derives significant benefits from its endowment, and it needs the best managers possible to take advantage of its hybrid model. While the compensation of those managers is high in absolute terms, relative to the immense potential of the endowment and the world of finance, it is far from exorbitant. As an investment in Harvard’s future ability to fulfill its mission, the compensation of HMC’s executives has a high return.