Harvard Leads in Endowment Manager Pay as Returns Trail Peers

Harvard University isn’t letting underperformance get in the way of top pay.

Ten of the 25 highest-paid U.S. endowment executives at the richest private universities worked for Harvard Management Co. in 2012, the most recent year available, according to data compiled by Bloomberg. Harvard also paid senior managers at its $32.7 billion fund more than what leaders of peer endowments made, even as its investment results trailed the others.

“The cost of managing money through HMC is a fraction of the expense of equivalent external management,” Christine Heenan, a Harvard spokeswoman, said in an e-mail. “This has saved Harvard over $1 billion in management fees over the past decade.”

Harvard and many of the wealthiest schools have struggled to produce superior returns since the credit crisis as global stock markets outperformed private investments in buyout and hedge funds. While the universities count on endowments to subsidize as much as half of their operating budgets by helping cover the cost of financial aid, faculty and programming, the senior staff must be compensated at levels competitive with other institutional investors.

A review of the most recent tax filings of more than 20 of the richest private colleges shows how Harvard stands apart when it comes to asset management. It gave the head of its endowment less compensation than senior staff overseeing non-traditional investments such as hedge funds and natural resources. At every other institution, the chief investment officer or an equivalent position drew the most pay.

Large Staff

Harvard’s larger pay packages probably reflect its size and management structure, said Charles Skorina, an executive recruiter based in San Francisco. It has the biggest endowment by far in terms of assets and staff -- with about 200 people including support staff -- at Harvard Management Co. in Boston.

“If you’re going to pay well, at least pay for consistently good performance,” Skorina said.

The 2012 compensation is a fraction of what some staff earned under former HMC Chief Executive Officer Jack Meyer, who left in 2005 after 15 years amid an outcry from some alumni over escalating bonuses. In 2003, the two top-performing managers got a combined $69 million.

Yale University in New Haven, Connecticut, has the second-largest endowment, at about $21 billion, and employs fewer than 30 investment professionals, according to its website.

“Harvard’s the only endowment that’s actively managing a big portion of capital in-house,” said Josh Kaplan, managing director of Philadelphia-based Ascension Investment Management and a former CIO of Drexel University. “That’s incredibly rare. It requires a lot of resources and a specialized skill set.”

Competitive Pay

Harvard paid more than $44 million to 10 executives at the management company in 2012, according to regulatory filings. Andrew Wiltshire, a managing director and head of alternative assets, got $7.9 million in total compensation, making him the highest paid of all endowment managers surveyed. Alvaro Aguirre-Simunovic, managing director of natural resources, got $6.6 million, the second most. Yale paid the top two investment executives named in its filing a total of $5.3 million.

“They are really competing with the private sector for most of these employees,” said Mark A Borges, principal at Compensia Inc., a San Jose, California-based consulting firm. Harvard doesn’t “have the luxury of lining up their compensation strictly on the basis of the fund’s performance.”

Jane Mendillo, Harvard Management’s CEO who announced last month she will step down at the end of the year, received total compensation of $4.8 million, the fourth-most at Harvard. Mendillo, 55, is leaving after six years at the helm of the endowment and 21 years at the university. She was paid $5.3 million in 2011, according to tax filings.

Columbia’s Narvekar

The highest-paid endowment head among the more than 20 institutions reviewed was Nirmal Narvekar, Columbia University’s president of investment management, who made $5.6 million in 2012, tax filings show. New York-based Columbia’s five-year average annual return in 2012 of 4.9 percent was the best in the Ivy League, according to data compiled by Skorina.

Mendillo was the second-highest paid fund leader, followed by University of Notre Dame’s Scott Malpass at $4.3 million, Princeton University’s Andrew Golden at $3.9 million and Stanford University’s John Powers at $3.6 million.

Columbia and Princeton have generated some of the best investment returns in the eight-member Ivy League since the credit crisis. Returns are reported for the fiscal year while compensation data is for the calendar year.

The University of Chicago returned 6.8 percent in fiscal 2012, among the highest that year. It paid Chief Investment Officer Mark Schmid $2.6 million, according to its tax filing.

Swensen’s Pay

David Swensen, Yale’s longstanding CIO who is credited with crafting the endowment investing model and leading the push into alternative assets, made $3.1 million in 2012. That was less than Harvard’s seventh-highest paid executive, Oliver Grantham, who made $3.8 million. Grantham is a senior vice president of natural resources and son of famed investor Jeremy Grantham.

Some university tax filings include deferred compensation, which can get double counted and inflate reported pay packages. That was the case at Princeton, according to Martin Mbugua, a spokesman for the school in Princeton, New Jersey.

While market returns might be a guiding factor, the data from the universities reviewed show greater correlation between pay and the amount of assets under management, said Graef Crystal, a consultant to Bloomberg on executive compensation.

Performance has been a sticking point for Harvard since it posted a 27 percent investment loss in 2009 in the wake of the credit crisis and saw assets under management fall more than $10 billion. In the year that ended in June 2012, Harvard lost 0.05 percent, the worst in the Ivy League. The three-year return was 10.4 percent and 10-year 9.5 percent, the school said.

‘Overarching’ Strategy

In 2010, Harvard Management said it would tie senior management pay to the entire fund’s performance while reducing compensation if there was a negative return. It said at the time that more than 90 percent of portfolio manager pay was tied to performance and that bonuses often reflected several years of returns relative to a benchmark.

“HMC’s overarching compensation strategy is to maximize alignment of interests between our investment management teams and the university,” Mendillo wrote in a letter to the school’s alumni that year.

Heenan, the Harvard spokeswoman, said that investment managers make money only when they consistently outperform their market benchmarks and create value for the institution.

Mendillo said this week that she stands by the strategy she used to run the endowment. Speaking at an institutional investor conference in New York, she said the diverse portfolio will deliver more value over time than one invested in public equities, which have recently produced the biggest gains.

“No regrets,” Mendillo said, responding to a question at the conference. “The diversified equity exposure is more important. We have no way of predicting which market is going to be better.”

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