The indignation expressed by some people at the huge pay packages of Jack R. Meyer and the professional investment staff at Harvard Management Co. is misguided.
The board of trustees overseeing Harvard Management agreed to those pay packages. Presumably the sophisticated, Harvard-educated trustees must have seen that the fund managers could earn very high rewards for very high returns — returns they delivered.
Perhaps, however, they failed to recognize the size of the investment returns the fund's managers could generate using the most sophisticated investment approaches, and therefore failed to put a reasonable cap on the possible earnings.
Criticism of the compensation packages no doubt resulted from the fact the trustees didn't spend enough time explaining the rationale for the compensation amid a competitive marketplace for talent.
Equally important, the low profile maintained by trustees and staff of the endowment meant that the endowment's constituency — faculty, students and alumni — was largely unaware of the great growth generated by the management team over the past decade or more, and unprepared for the size of the managers' earnings.
This furor was, in fact, the result of a failure to communicate. The various stakeholders were not informed of the nature of the compensation packages — how much was base pay, how performance compensation would be calculated, and whether the packages had penalties for under performance.
Trustees must be more open about the structure of compensation packages, especially at public funds, or huge endowments.
Professional pay has been a source of contention in recent years at a number of pension funds, including the North Carolina Retirement System, where its chief investment adviser quit in frustration over the Legislature's unwillingness to provide more financial resources, and at CalPERS, which sought to provide more reward to attract and retain talent.
Corporate plans operate even more opaquely, although they face the same competitive marketplace. In the corporate world, the pension executive is rarely paid well enough for his or her compensation to be reported in public documents. There the furor has focused on the level of top executive compensation.
Mr. Meyer's recent announcement of his resignation as president and chief executive officer of HMO provoked renewed criticism of Harvard Management's compensation practices and raised the issue of whether they should continue under new management.
Trustees, whether of a pension fund or endowment fund, should spend whatever time is necessary to devise and analyze pay to fit appropriately the type of investment policy they have, from passive to active. Trustees should make the packages as transparent as possible and explain them so constituents can understand them and, if they have disagreements, more informatively challenge them. Trustees should also seek periodic independent examination to determine what changes should be made.
Of course, top pay does not guarantee top performance. Pay should be tied to performance; and pay for performance should have a downside, too. As Mr. Meyer has explained, part of the Harvard remuneration to professionals is withheld and, in relatively bad years, given back.
Harvard is relatively rare in the fund having such large internal management. But other funds can learn lessons from its successes and its travails.
Focus on the pay package alone is misplaced without an attendant scrutiny of the other management costs and performance of the fund.
There should be more questioning, more scrutiny of fees and performance from investment management firms, consultants and brokerage firms. Last year, a survey of fees actually paid — not published fee schedules — to external managers by 100 pension sponsors with assets of at least $100 million found wide differences for the same active portfolio services and portfolio size. This disparity was found to be as much as four times the fees paid by others.
That survey shows sponsors haven't been scrutinizing their management fees enough. Many are overpaying for services. But many are also undercutting opportunity for better performance by shortsighted compensation policies. Perhaps the Harvard staff wasn't paid enough.