Dec. 12–What will Harvard President Larry Summers say about paying the nonprofit university’s top money managers as much as $40 million for their good work last year?
More than most, Summers should appreciate Harvard Management Co.’s pay-for-performance compensation system, which requires the university’s money managers to beat the markets before they are able to make any real money for themselves. After all, Summers made his reputation as a Harvard-educated free-market economist who, among other things, once infamously suggested that shipping polluting industries off to the Third World made good economic sense.
But Summers, the economist and former US Treasury Secretary, is also a man of considerable political skills, and he knows he will have to explain why the world’s richest university is paying $30 million to $40 million to its best money managers, even for superb performance that enriches the institution. And he is going to have to do it at a time when he tries to cut costs and look lean and mean as he gears up for a humongous fund-raising drive. Summers, through a spokesman, yesterday declined to comment.
These are, relatively speaking of course, challenging times at Harvard. The university is telling its units that they can expect flat budgets in the next fiscal year and with employee benefit costs continuing to rise, Harvard is looking at salary squeezes, layoffs, and outsourcing. That makes for an ugly contrast to a handful of money managers taking home tens of millions of dollars. “Greed is good,” movie character Gordon Gecko once suggested.
Just below the radar screen, Harvard is quietly cranking up the money-raising machine (again) for a very large campaign to fund Summers’s core priorities in undergraduate education, public service (financial aid for students in such low-paying fields as education and religion), science, and, of course, the build-out of the campus-of-the-future in Allston. So when Harvard, cup in hand, goes to the alumni it will have to explain why it needs billions more when Harvard Management is producing the kinds of returns that allow it to pay its best employees $40 million. Inconvenient it is.
Summers’s best answer is the one Harvard Management boss Jack Meyer has been giving for years: Harvard Management works. Why would we change it?
In an era when fat executive paychecks are out of style, Summers’s challenge will be to explain Maurice Samuels to the Harvard community.
The bond market had a terrific year, and Samuels, who manages Harvard’s foreign bond portfolio, had an even better year. A much better year. His portfolio was up an incredible 52 percent last year, almost triple his benchmark. Here is what that meant for Harvard: At the start of fiscal 2003, Samuels managed about 5 percent, or $1 billion, of the university’s general investment account. A 52-percent gain means that he added $520 million to the endowment, or $340 million more than if he had produced middle-of-the-road returns.
For that he will receive an obscene paycheck. But it will have cost Harvard far less than hiring an outside hedge fund to produce the same results. Here’s the math: First, a hedge fund would take a 1 percent management fee, or $10 million, whether the market went up or down. Then the hedge fund would take 20 percent of the profits, or $104 million of the $520 million. Total cost: roughly $114 million. If Samuels does, in fact, make $40 million for the year, he will have come at a far lower price than a hedge fund.
Summers the free-market economist can understand the logic of it all.
It remains to be seen if Summers the politician thinks he can explain it to the constituencies that matter.
—–
To see more of The Boston Globe, or to subscribe to the newspaper, go to http://www.boston.com/globe
(c) 2003, The Boston Globe. Distributed by Knight Ridder/Tribune Business News.
