A lesson at Harvard
Critics of big paychecks awarded to the top managers of Harvard University's endowment got their wish for one year.
Harvard Management Co., which runs the university's $29 billion endowment, disclosed the annual compensation of its chief executive and five other highest-paid managers yesterday. The numbers, though still in the millions, represented a plunge from the pay levels for past years. The significance: less than meets the eye.
Andy Wiltshire, who runs a portfolio of timber investments, was the highest- paid Harvard Management executive, with a salary and bonus of $2.9 million for the fiscal year ended June 30. The six highest-paid Harvard Management executives combined earned $13.3 million.
A year earlier, those numbers would have looked like chump change. Bond manager David Mittleman made $18 million by himself as the top earner at Harvard Management that year. Another bond manager, Maurice Samuels , made $16.9 million.
That year, Harvard Management's top six made $56.8 million combined, which represented a big drop-off. The top six earned $78.4 million the previous year.
Score one for the critics, who complained that the big paychecks were inappropriate and contrary to the university's values? In a word, no.
The formula Harvard Management uses to compensate its managers, emphasizing pay for superior investment performance, hasn't changed a bit. But almost everything else in the endowment manager's offices was turned upside down during the past fiscal year, and the pay controversy played no small part in the change.
Chief executive Jack Meyer resigned in the fall of 2005 and took along Harvard Management's team of bond managers, who consistently earned the biggest paychecks by far, to create a new Boston hedge fund firm called Convexity Capital Management .
New chief executive Mohamed El-Erian arrived early this year and hired his own senior managers, but that took time. Some did not arrive before the end of the fiscal year.
Harvard Management's $6 billion bond portfolio, representing about 20 percent of the university's endowment, was managed by Convexity between the time Meyer left and El-Erian arrived. Convexity continued to manage $500 million but returned the rest to Harvard Management in a portfolio invested to mimic fixed-income indexes.
That shift virtually eliminated any big paydays for managers of Harvard's bond portfolio during the last fiscal year. Compensation will almost certainly be muted again for the current fiscal year because new managers are being given money to invest gradually as they prove themselves over a period of two or three years.
Even superior results won't mean as much, and will not be rewarded to the same degree, with smaller sums to manage. In the meantime, the balance of the money will remain invested in neutral, index-based portfolios.
All the management upheaval and index investing left Harvard's endowment with so-so investment returns during the last fiscal year. Harvard Management earned 16.7 percent, about average for big university endowments, but far below the cream of the crop, which gained 20 percent or more.
This was the real lesson in the pay controversy that drove Meyer and his investment stars nuts. Really superior performance can easily make a difference of a few percentage points in an endowment's total return in any year. An improvement of 2 percent at Harvard Management is worth about $600 million.
It's easy to see why huge paychecks for endowment investors bother some people. But anyone looking for the thoroughly altruistic money manager is fishing in an empty pond.
Harvard got real value for the fat paychecks it wrote in years past. A period of transition will briefly mute the critics, but the money question will be back before long. The only thing that would eliminate big compensation is investment disappointment, and that should be no one's idea of a solution.
Steven Syre is a Globe columnist. He can be reached at syre@globe.com. 
