Harvard's fund salaries may hit $40m

By Steve Bailey, Globe Staff, 12/11/2003

Performance numbers for Harvard University's giant endowment indicate that two of its managers could make more than $30 million this year and as much as $40 million.

The size of their compensation has attracted attention inside the Harvard community and caused a delay in the annual reporting of how much the money managers will be paid. Normally, Harvard Management Co., which oversees the university's $19.3 billion endowment, releases compensation figures in December.

But Harvard Management is delaying any announcement until January as the board of the money management unit discusses how to deal with the fallout from the huge compensation numbers and whether the pay system should be altered, according to Jack Meyer, chief executive of Harvard Management.

Compensation for the money managers has drawn scrutiny as far back as 1990, when Harvard Management touched off a storm by reporting it had paid two managers $1 million each the previous year.

Meyer, as he has in the past, defended the system, saying it has helped add billions of dollars to Harvard's endowment at a fraction of what the university would have to pay outside managers for similar performance. "The compensation plan used at Harvard Management is superior to any other system in the investment business," he said in an interview yesterday.

Meyer would not discuss compensation for individual money managers. But he did confirm that the payouts would be "substantially higher" for some managers than they were in fiscal 2002, when David Mittelman, a US bond manager, was paid a record $17.5 million.

Harvard's managers are paid based on a system that measures their performance compared to various market benchmarks as well as on the size of their portfolios. In fiscal 2003, which ended in June, two Harvard bond managers in particular crushed their benchmarks, producing giant returns. According to the investment letter Harvard Management releases each year, Maurice Samuels, who manages overseas bonds, produced a 52 percent return, nearly tripling his benchmark of 18 percent. Mittelman was up 30 percent for the year compared to his benchmark of 17 percent.

Their performance was considerably better than a year ago, and their paychecks should reflect that. In fiscal 2002, Samuels beat his benchmark by 110 percent and was paid $15.9 million; for fiscal 2003 he beat his benchmark by 190 percent. Mittelman beat his benchmark by 73 percent in fiscal 2003 compared to 67 percent in fiscal 2002, when he was paid $17.5 million. Based on how they were compensated in the past, and the growth in the assets they managed in fiscal 2003, a Globe analysis indicates they will earn $30 million to $40 million.

By comparison, Harvard President Lawrence Summers makes $450,000 a year.

Meyer said compensation is based on producing results beyond the market averages. "You don't get paid just because the market goes up. You have to do better than the market to get paid," Meyer said.

In addition, a substantial portion of the compensation is withheld every year in case there is underperformance in future years, he said. Only if there isn't will the managers eventually get their full pay.

The system, Meyer said, has paid off for Harvard: Over the past 10 years Harvard would have $9.6 billion less in its endowment than it does today if it had made only median returns.

"Now we're talking real money, and it dwarfs the compensation issue," Meyer said. The Harvard endowment ended the year at $19.3 billion, the largest in the country, and was up 12.5 percent, in the top 1 percent of all big institutional funds.

Despite the impressive performance, the high salaries at the nonprofit Harvard Management have long been a lightning rod for criticism for some in the Harvard community. The anticipation of the forthcoming record bonuses is already attracting attention inside the Harvard community.

In a letter to Summers, seven members of the Harvard Class of 1969 criticized the rising compensation for Harvard managers at a time when tuition is rising for students. They said they would base future giving on how Harvard deals with the issue.

"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," their letter said.

The letter was signed by Jeffrey Alexander, a Yale University sociologist; James Davidson, a free-lance writer in Pittsburgh; Stanley Eleff, a Tampa, Fla., attorney; Jonathan Hoffman, a Portland, Ore., attorney; Kenneth Jost, a journalist with Congressional Quarterly in Washington, D.C.; David Kaiser, a historian at the Naval War College in Newport, R.I.; and William Strauss, a theatrical director and historian in McLean, Va.

Meyer, who has run Harvard Management since 1990, called the alumni letter well meaning, but "dead wrong."

"They are incredibly naive about the real world," Meyer said. "If we restrict pay at Harvard Management to well below market rates. Harvard Management will achieve at best mediocre returns, probably less than mediocre returns because our size is a large disadvantage."

The price of managing Harvard's money keeps going up. For fiscal 1998, Harvard Management paid its top-earning managers and Meyer $45.4 million, according to its tax filings. Last year that number had risen to $74.6 million for the top five and Meyer. Meyer attributed the rising fees to the more complex mix of investments such as private equity, real estate, and timber. He said that if Harvard were to move its investment to outside managers as other universities do the fees would double for comparable results. The difference, he added, is Harvard would not have to report those fees every year.