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No Need for a Gold Watch

January 12, 2005

Most colleges would be thrilled to have the kind of controversy Harvard University has faced over its endowment in recent years. The endowment has grown so rapidly -- it's now worth more than $22 billion -- that annual payments to the university's money managers (which were linked to that growth) totaled many millions apiece.

On Tuesday, Jack R. Meyer, president of the Harvard Management Corporation, the entity that manages the endowment, announced that he was quitting, effective in June, along with several of his top money managers. Together, they plan to create a private investment firm.

Since Meyer arrived at Harvard in 1990, the university's investments have been among the top performers in higher education. And the billions in earnings on the endowments have allowed Harvard's leaders to announce major initiatives -- major even by Harvard standards -- to improve financial aid, expand the campus, and add research facilities.
But a vocal group of alumni and other critics have said it was unseemly for a nonprofit institution like Harvard to be paying anyone tens of millions of dollars. Indeed the pay to top managers at the investment corporation far exceeded the salaries of any Harvard faculty member -- or the university's president.

Several alumni in Harvard's Class of '69 wrote of the controversy: "If Harvard can afford to pay $107.5 million to six fund managers this year, Harvard can find the funds to make college education more affordable in fundamental ways, benefiting a far larger proportion of students."

Harvard's official statement on Meyer's departure did not mention the controversy over the payments to him and other investment managers.
In an interview with Bloomberg.com, Meyer said that the controversy did play a role in his decision to move on.

"It would be disingenuous of me to say that had no impact," Meyer said. "I will admit it will be nice to drop out of the spotlight a bit, but it's really quite far down the list."

The Boston Globe, in an article today, noted that Meyer was always "very proud" of the compensation system he put in place. "The heart of the system was pay for performance," the Globe reported. "A money manager could be awarded huge sums if he outperformed his benchmark, a comparable index fund. But he would be given only a portion of that award immediately. The rest would remain in a compensation account and could be taken away if his perfomance tailed off the following year. By withholding some compensation each year, the system was designed to reward success while discouraging excessive risk-taking in any given year."

The Globe also quoted Meyer as having said, remarking on the departure of some of his money managers in previous years to take jobs in the private sector: "Did they leave because we paid them too much?"

 

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