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Harvard endowment employees miss out on pay

Some won't get full compensation because of fund's performance

Harvard University said some employees at its $35.7 billion endowment won’t receive full compensation because the fund underperformed in the year through June.

Because the endowment lagged its benchmark by 300 basis points in fiscal 2016, “current and former employees will forfeit compensation that was held back in prior years,” Harvard Management Co. said Monday in a statement. HMC, which oversees the endowment, made the comment after a group of Harvard’s activist alumni on Monday demanded a revamp of the fund’s Wall Street-style pay.

HMC redesigned its compensation plan that went into effect July 1. The plan links the majority of an investment manager’s total compensation to performance relative to industry benchmarks, according to the statement.

The alumni group, which graduated in 1969, demanded that Harvard change the way it pays endowment employees after an internal report suggested benchmarks used to set bonuses were easy to beat. The alumni want greater transparency of how both pay and fees for outside managers are determined, as well as a much higher bar for bonuses.

“The present benchmark system should be scrapped,” the group of 11 alumni wrote in the letter addressed to Harvard Corp., the 13-member board overseeing the university. “At a minimum, any bonus system should be confined to rewards for truly extraordinary performance.”

The letter follows recent revelations from an examination of HMC that was conducted last year by consulting firm McKinsey & Co. The confidential report, which was viewed by Bloomberg, raised questions about the benchmarks used to determine pay, suggesting they were too easy.

The report zeroed in on what it called a performance paradox at Harvard, where year after year it reported a benchmark-beating investment return yet trailed peers such as Yale University. It quoted anonymous employees saying that the culture at HMC bordered on “lazy, fat and stupid.”

Harvard lost 2% on its investments in the year ended June 30 as most schools struggled with small losses. It has generated an annual average return of 5.9% over the last five years, among the worst in the Ivy League and trailing peers such as Yale, which had a 10.3% return.

Harvard’s portfolio of natural resources had by far the worst performance in fiscal 2016, losing 10.2% vs. a benchmark that was up 1.4% for the year. The team that built and oversaw the portfolio left last year and the new managing director is looking to restructure the $4 billion of holdings to free up cash for other investments.

In December, Nirmal P. Narvekar, the top-performing endowment manager from Columbia University, will take over at Harvard’s fund, replacing Stephen Blyth. Mr. Narvekar will become the eighth permanent or interim chief executive since 2005.

While the number of employees at HMC has increased, total compensation soared between 2009 and 2015, to $175.3 million from $68.2 million, the alumni group said, citing figures from publicly available tax returns. The five highest-paid managers got a total of $44.7 million in 2015, up from $25.2 million in 2009.

HMC said in the statement Monday that “incentive payments are made over a multiyear period with a significant portion held back and subject to forfeiture in the event the manager later underperforms their benchmark.”

The members of the class of 1969 have been scrutinizing compensation at the endowment since HMC revealed that in 2003 it paid its two top-performing traders around $35 million each. At the time, Harvard was a leader among institutional investors, producing top returns, yet the debate over pay led to the departure of CEO Jack Meyer and many staffers.

“They have talked about clawbacks in the past,” David Kaiser, a member of the alumni group, said in an interview. “Until we actually see that it happens, I can only hope that it’s true.”