Retaining top talent to manage Harvard’s endowment
Occupy Harvard has voiced strong criticism of income disparity among Harvard employees. In particular, protesters have voiced anger at the level of compensation for top executives at Harvard Management Company (HMC). Select supervisors of Harvard’s endowment bring home seven-figure salaries on an annual basis. Many students believe that this is unfair, especially given the wage disparity between HMC executives and Harvard’s lowest paid workers. Do the highly-compensated employees at HMC deserve such extravagant salaries?
In terms of performance, Harvard Management Company has consistently posted strong returns on investment. Over the past 20 years, HMC has beaten market indices by an annual average of 4.6% (see chart on right). So Harvard has obviously attracted talented endowment managers. The problem is that the university is a participant in a very competitive labor market for financial professionals. Harvard must bend over backwards to retain talent, because skilled investors realize that they can receive much higher compensation in the private sector.
Harvard uses its strong financial situation to add value for the university and society in general. The money flowing in from the endowment is used to fund research, provide financial aid, and construct buildings and laboratories. Consequently, Harvard should make it a priority to achieve world-class returns on investment. Attracting and retaining talented investment managers is key, and compensation is an important piece of that puzzle.
The Market for Endowment Managers
Harvard is unique among universities in that it chose several decades ago to internally manage a significant portion of its endowment. This model differs from that of other universities like Yale, which currently entrusts its entire endowment to outside fund managers. This is the reason that HMC has traditionally paid such high compensation; in fact, its highest-paid employee (at $8.4 million) is not the CEO, but the Head of Internal Management, Stephen Blyth. Additionally, compensation is tied to performance, and those who produce the best returns are given bonuses.
However, compensation still remains a thorny issue. Sandra Korn, an active member of the Occupy Harvard movement, argues in a recent Crimson op-ed that Harvard should reduce executive pay for the management company by finding someone willing to work for less:
Our alumni lead in the world of investment banking and hedge fund management. Undoubtedly, Harvard could find an excellent and successful investment manager who would manage the endowment for a salary less than what she would earn on Wall Street.
There’s one problem with that assumption: employees of Harvard Management Company already receive multiples less than their colleagues in the private sector. “If you have the right characteristics for the job, you probably won’t want to work for Harvard because the compensation is so much better elsewhere,” says C. Dixon Spangler Jr., a member of Harvard’s board of overseers. Meanwhile, in the private sector, successful hedge fund managers can earn hundreds of millions of dollars. It is telling that in Boston’s John Hancock Tower alone, there are four investment funds run by former HMC employees. These funds have consistently beaten the market, as well as their past employer.
Harvard has been able to hire some of the brightest minds in finance to manage its endowment; it makes sense that these fund managers are highly in demand elsewhere in the industry. This is because Harvard is a participant in a highly fluid job market in the upper echelons of the financial sector. As Mark Yusko, CEO of Morgan Creek Capital Management, tells the HPR, these professionals “migrate from mutual funds to hedge funds to private equity, and the compensation rises as they move.” Yusko himself left his position managing UNC Chapel Hill’s endowment to join the private sector.
Lost Expertise
We’ve seen that same story many times over at Harvard. Below is a chart displaying some notable figures who have left Harvard Management Company since 2005.
The obvious takeaway is that these people don’t have trouble finding a job elsewhere. Additionally, the opportunities available in the private sector are often more lucrative than the ones they left behind in Boston.
Of particular interest is the story of Jack Meyer, CEO of Harvard Management Company from 1990-2005. During that 15 year period, Meyer and his team grew the endowment from $4.7 billion to $22.6 billion. Despite this performance, Harvard Management Company came under attack in 2005 over the issue of compensation. Meyer suggested that if Harvard was not willing to pay top dollar to retain talented money managers, it should instead move to the model of other universities, hiring outside managers. However, he correctly identified a key problem with that model: “our fees would go up and our returns would go down.” Meyer ultimately left HMC in 2005, taking star bond traders David Mittelman and Maurice Samuels with him, to found Convexity Capital Partners. The hedge fund has outperformed the market by an annual average of 7.7% over the past five years. Ironically, Harvard has invested $500 million in that fund, and still pays its former employees in the form of fees.
Leslie Golub, a Harvard alumnus and founder of Golub Capital, put it best: “The compensation protesters have accomplished none of their goals. The people they were complaining about are making more money and Harvard’s endowment has less money.”
Harvard’s Objectives
So far, we have taken for granted that it is a good thing that Harvard’s endowment has grown over the past two decades. Some in the Occupy movement would even question that. Korn:
Must our endowment really continue to grow larger and larger just to help sustain financial aid and House upkeep? Providing exceptional financial aid should not necessitate continual and exponential growth of Harvard’s endowment.
It is irresponsible to suggest that Harvard should be complacent with its finances. Our privileged financial situation does not mean that we can spend indiscriminately. Additionally, access to world-class returns on investment allows Harvard room for expansion. It will finance important projects like renewal of the House system, and ensure that Harvard continues to have access to the best faculty and researchers in the world.
Yusko, a veteran manager of two endowments, tells the HPR that a university’s management company has a “fiduciary duty” to maximize return with a prudent level of risk. Consequently, Harvard Management Company “has an obligation to hire the best managers.” As students, we are not privy to inside information about compensation, negotiations, or contracts. We do not know what the “price tag” for each executive is. However, if an HMC employee has consistently produced good returns, it is in Harvard’s best interest to retain him or her at whatever cost will remain profitable for the university.
This article has made no statement on salary levels for Harvard’s lowest-paid workers. However, we may even suggest that with a solid financial bedrock, Harvard may be able to increase wages for custodians and dining hall workers.
Harvard cannot determine the level of compensation that will be attractive to top fund managers. However, we can continue to offer pay packages at a competitive level, in tandem with industry standards. Doing so will ensure that we retain access to world-class returns on investment. That in turn will allow us to continue leadership in financial aid, research, and a host of other important fields.