HARVARD Vs. WALL STREET MONEY: WHO REALLY MAKES MORE?

Harvard Management Company, which runs the university’s $36 billion endowment, is under fire – again – from a contingent of aging activist alums who object to HMC’s executive paychecks.  The same sexagenarian social-justice warriors from the class of ’69 who drove chief investment officer Jack Meyer out of office in 2005 have now issued an open letter to university president Drew Gilpin Faust alleging that salaries and bonuses of her investment professionals are unconscionable and should be cut.  

We disagree.  

Harvard salaries are nothing remarkable compared to those of people running similar amounts of money on Wall Street.  And, if Harvard can’t pay near-Wall Street salaries they can’t reasonably expect to hire and keep the best available talent. 

We have tables below with the pay and AUM of 50 top Wall Street CEOs which make that point.

Our data won’t impress the 69-ers, who probably don’t think that even Wall Streeters should be making Wall Street salaries.  But if they can’t take down the people at Goldman Sachs or Citicorp, they might at least have enough clout to knock HMC’s high-earners off their perch in the Boston Fed Building.  They have, after all, done it before.  

The letter was probably intended as a shot across the bow regarding the pay of the next CEO who, we learned last week, is Stephen Blyth, a Harvard managing director who is being promoted to the top job.  We seriously doubt that he’ll get a smaller paycheck than Ms. Mendillo, but we shall see.  (We have some more comments on the Blyth appointment down below.)

Our friend Michael McDonald at Bloomberg has the background of the 69-er’s campaign here: http://www.bloomberg.com/news/2014-09-19/harvard-alumni-critical-of-pay-trace-roots-to-1969-tumult.html.  True, we ourselves have written critically about pay and performance at Harvard, but our emphasis has been mostly on the performance part.  

HMC’s investment returns over the past five years have been low relative to their Ivy League peers and non-profit institutions generally.  In that specific context we think the bonuses earned by their senior people look excessive when compared to other endowment managers who earned much less while achieving much better returns.  Ms. Mendillo can reasonably blame some of this on a situation she inherited, but the numbers are still what they are.

The data:

If HMC were a $33 billion sell-side asset manager competing for talent on Wall Street, what would they have to pay their CEO and other senior execs?

(Harvard AUM was $32.7 billion for FY2013, which aligns better with the 2012 AUM and compensation data we’re using for Wall Street firms in the chart below.  The updated AUM for FY2014, released just this week, is $36.4 billion.)

Among similar-sized firms, the median sell-side CEO comp seems to have been about $3.8 million in 2012.  Jane Mendillo’s compensation of $4.8 million was a bit higher, but still in the ballpark.

There are hundreds of firms on Wall Street (and elsewhere) who could be broadly described as “asset managers,” and most are privately held.  They aren’t legally obliged to disclose executive pay, and don’t.  A small subset of them, however, consists of publicly-listed companies who do reveal that information in proxy statements filed with the SEC.

As recruiters we work for boards on both sides of the market: for sell-side asset managers as well as for buy-side endowments and foundations.  So we keep an eye on these filings to see who’s making what.

First: Here are the top seven salaries at HMC in 2012, the latest available.  Then: a table ranking Wall Street money-management firms by AUM, along with their CEO compensation for the same year.  Harvard’s line is in red.

HARVARD MANAGEMENT COMPANY – Salaries 2012

NB: comp figures are the most recent available for the seven highest-paid HMC executives and refer to calendar year 2012.  We see that the seven senior managers at HMC had comp ranging from $3.5 million to $7.9 million.  The median is $4.2 million and the mean is $5.0 million.  Two made more than Ms. Mendillo; four made less.  The differences are driven by performance bonuses linked to their specific portfolio performance and employment contracts.  We’ll take the $4.8 million comp of the CEO, Ms. Mendillo, as representative of the whole group.  (This is W2 income and may exclude some deferred and other items.)  We then ranked her against fifty for-profit asset managers to see where they stood.  This chart shows assets under management and compensation figures for Ms. Mendillo (in red) compared to CEO compensation at fifty publicly-traded money management firms.

Wall Street CEOs versus Harvard Management Company:

AUM and CompensationFOR TOP 50 CEOs RANKED BY 2013 SALARY, SEE APPENDIX BELOW

NB1: To whittle our list down to 50 firms, we omitted most insurance companies, broker-dealers, and private equity managers. We focused on firms who make their living managing (mostly) public-market assets for institutional and/or retail customers.

NB2: All comp numbers are for 2012 reporting period.  They are the bottom-line numbers reported to SEC on proxy statements and include noncash stock options and/or awards of restricted stock or stock units

Some observations and caveats:

In the AUM ranking the $32.7 billion Harvard endowment falls among the bottom third of our list, just below Wisdom Tree (a major ETF manager/marketer) and just above Pzena Investment Management (a value-focused mutual-fund manager).  Mr. Steinberg at Wisdom Tree made about $1 million and Mr. Pzena made $1.7 million; both much less than Ms. Mendillo at similar-sized firms.  There are a lot of reasons for these disparities.  For instance, we can be pretty sure that founder/CEOs like Richard Pzena at Pzena Investment Management or Jonathan Steinberg at Wisdom Tree own large chunks of their companies and can look forward to capital-gain and dividend income (not to mention job security).  And they may already have had nice paydays in the past as they went public.  For example, after Pzena (PZN) went public in 2007 Mr. Pzena owned forty percent of the post-IPO shares, which obviously gave him control of the firm.  

There are other examples on this list.  So, founding CEOs and key execs often don’t need to pay themselves big salaries; they are owners as well as employees.  A mere hired hand like Ms. Mendillo had no ownership position in non-profit HMC and had to be compensated entirely in salary and performance bonuses.  Eyeballing this chart, it’s obvious that the link between AUM and CEO pay is a loose one.  We don’t need to do the math to see that the correlation coefficient would be modest.  But, if we look at the whole neighborhood, taking the median CEO compensation of the twelve firms flanking HMC (between $12 billion and $52 billion AUM), we get a median of $3.83 million.  By comparison, Ms. Mendillo’s $4.8 million, while a bit higher than that, is still in the ballpark.  

There would be nothing at all remarkable or newsworthy about the CEO of a $33 billion AUM Wall Street firm earning $4.8 million.  A comp number which is pretty remarkable is the eye-popping $68.97 million garnered by Mario Gabelli, CEO of GAMCO Investors (formerly Gabelli Asset Management Company).  The firm went public in 1999 and Mr. Gabelli has a 50 percent stake.  BlackRock, who’s AUM was about a hundred times larger, paid CEO Laurence Fink less than half as much! (We used the median instead of the mean in our calculation above partly to nullify the effect of Mr. Gabelli’s outlier comp.)

Despite what we said above about founder/CEOs who are content with their stockholdings and don’t need to draw a big salary, Mr. Gabelli and his board clearly have a different opinion.  His contract since 1999 awards him 10 percent of the firm’s pre-tax profits, and he takes it in cash, not stock (although other key execs get stock rights as part of their comp).  And, apparently, business is good, with growing AUM and healthy profits.  Michael Larson, who manages Bill Gates’ money, seems to think so.  He’s put Mr. Gates into GAMCO with a 1.9 percent stake through his Cascade Investments firm.

Mr. Weil woos an icon:

Many other CEOs on this list, however, aren’t sitting on founder’s stock; they are merely well-paid employees, like Ms. Mendillo.  Richard Weil, for instance, made about as much as Ms. Mendillo running the far larger $174 billion Janus Capital Group.  But he’s another free-agent executive recruited from PIMCO in 2010.  About half of his comp consists of restricted stock awards, and much of the rest is cash incentive.  And, as we go to press, Mr. Weil has just scored a dramatic coup.  On September 26th Janus announced that they had just hired Bill Gross away from PIMCO.  Now he will be portfolio manager for the new Janus Global Unconstrained Bond fund and related strategies.  He won’t even have to move.  Denver-based Janus has opened an office in Newport Beach for Mr. Gross’ convenience.  

Mr. Gross has been having some well-publicized troubles at PIMCO, but he is still a name-brand portfolio manager, one of the most respected in the industry.  Mr. Weil obviously built on his previous acquaintance with Mr. Gross at PIMCO to engineer this deal.  It will be interesting to see how many of Mr. Gross’s faithful customers may follow him from PIMCO to Janus.  Even a modest migration could be very helpful to Janus, which has less than 10 percent of PIMCO’s AUM.  On the day after the announcement, the stock of Allianz, PIMCO’s German parent, dropped by 6 percent in U.S. trading; while Janus shares jumped by 43 percent.  In fact, shares of many of those publicly-held asset managers on our list jumped also, apparently on the theory that money will continue to run out of PIMCO funds on this news, and will be looking for a new home.  

The early signs are that Mr. Weil made a clever move.  Even at age 70, Mr. Gross appears to be ready for a few more rounds.  He may have all the money he’ll ever need, but he’s known to have a healthy ego.  We suspect he would dearly like a chance to retrieve his Bond King crown and confound his critics.  According to the Wall Street Journal Mr. Gross recently made $200 million annually at PIMCO, although that’s never been officially acknowledged.  And we may never know what his deal with Janus is.  He is not being given a senior executive slot and, as a mere portfolio manager, his compensation will not be divulged in corporate proxy statements.  The Journal on its editorial page also asks whether anybody at PIMCO ever heard of a non-compete clause, which we think is a pretty good question.

Same titles, Different jobs:

We should underline the fact that buy-side and sell-side jobs are different because the objectives of their firms are different.  An endowment, pension, or foundation CIO is judged primarily on investment performance.  They have no control over the size of the portfolio they’re handed.  The Harvard CEO is not formally the chief investment officer, but he/she still effectively fills that role, since all the sub-portfolio managers report directly to her.  Her job is primarily investment management, but also has a large component of executive/administrative tasks.  A sell-side firm such as a retail mutual-fund manager also wants to have respectable return-on-investment numbers (of course) to advertise its wares.  But the CEO’s performance is based primarily on marketing, sales, and customer service, and that’s where he’s expected to focus and shine.  

Mr. Weil’s hire of Bill Gross is an excellent example of marketing and brand-building.On the sell-side it’s more about “sales alpha” than investment-return alpha.  There are investment strategists and portfolio managers in the organization, and they’re important; but they are typically a couple of tiers down from the CEO in pay and clout.  If there is a designated chief investment officer, he or she is generally not included in the small group of key executives whose compensation is divulged in proxy statements.  

According to one recent McKinsey study, actually managing the customer’s money accounts for only about one-third of the firm’s success.  Accordingly, we would expect it to occupy only about one-third of the CEO’s time and effort, and not be the major factor in his compensation formula.

See: http://tinyurl.com/lem76so (shortened link)

An update on Harvard performance and leadership:

As we go to press Harvard has just announced their fiscal-year results for 2014.  And, on the heels of that, they announced the promotion of Stephen Blyth to the CEO slot at Harvard Management Company.  Two months ago, about the time Ms. Mendillo’s departure was announced, HMC put out an estimate for their 5-year annualized return as of FY2014.  They said it would be between 11 and 12 percent.  This was artfully done, since it was much better than the previous 1.7 percent 5-year return as of FY2013, and it seemed to put Ms. Mendillo’s tenure in a good light.  

In Skorina Letter 60 we pointed out that 11-12 percent would probably still be a low number compared to Harvard’s peer endowments.  We also unpacked that estimate and predicted that Harvard would announce a FY2014 1-year return of 15.5 percent (our median estimate).  See: https://www.charlesskorina.com/nl60-harvard-turns-the-page-the-age-of-asset-management/.  The official 2014 return is, in fact, 15.4 percent; so we had it within 0.1 percent.  Good for us.  And their official 5-year return turned out to be 11.6 percent, inside the 11-to-12 percent bracket as predicted.  

But Yale’s new 1-year and 5-year returns are still much better, at 20.2 and 13.5 percent.  So HMC still trails its traditional peer and rival, as it has since 2009.  According to Aaron Cunningham at Pensions & Investments back in July, the average 2014 return for large endowments will be about 16 percent.  If that pans out, then it may be that Harvard is finally improving their relative performance among peer schools.  See: http://www.pionline.com/article/20140716/RCBLOG/140719903/equities-push-return-for-big-endowments-to-16-for-fiscal-year

And, all large endowments and foundations thus far have a one-year median return of 16.69 percent according to Wilshire Trust Universe Comparison Service.Among other major endowments reporting so far, in addition to Yale’s 20.2 percent, are Notre Dame with 19.7, Dartmouth with 19.2, and Penn with 17.5 percent; all well above Harvard.  We’ll be doing our annual roundup and in-depth analysis on major private-school endowments in a month or two as complete data is available.  As to Mr. Blyth’s appointment, we can’t fault it.  For one thing, Harvard’s persistent left-over problems are supposedly in the private equity portfolio; and Mr. Blyth, as a public-markets manager, can’t be connected with that unpleasantness.

He was one of their two most senior investment staffers, with the rank of managing director; the other being Andrew Wiltshire.  After an organizational revamp in 2010, those two were sometimes referred to as heads of Internal Platform and External Platform, respectively.  This distinction plays up the fact that Harvard runs a third of its total portfolio through its internal public-markets group.  Their “hybrid” model contrasts with an endowment like Yale, or most others, which depend almost exclusively on external managers.  Staffing that internal platform model is one reason why they need to pay near-Wall Street salaries.

The 2012 compensation for both men is displayed up above.

For us as recruiters it’s an admission against interest, as the lawyers say, to approve of internal promotions; but we do.

For an organization with the depth of talent that HMC enjoys, it would be odd if no one was deemed to be qualified for the top job.

Grooming a successor is one of the textbook tasks of a good leader and board.  The only danger, of course, is that a conspicuously well-groomed successor may have to hang around so long that he/she will be snatched away by a competitor.  Mr. Blyth is still a relatively young man and fortunately for him (and maybe for Harvard) the top job has opened up at just the right time in his career.

Harvard hired Mr. Blyth away from Deutsche Bank in 2006 (during Mohammed El-Erian’s run as HMC’s CEO), where he had been running DB’s proprietary trading desk in London.

He’s a native of the UK with a BA and MA in math from Cambridge (first class honors, Christ’s College).  Then he earned his PhD in statistics from Harvard, where he now has an appointment as a full professor of statistics in addition to his duties across the river at HMC.

So, what we have here is a bonafide quant.  He is the author, in fact, of An Introduction to Quantitative Finance, published last year by Oxford University Press.

Politically, the fact that he was not an import, but an established member of the Harvard family with a faculty appointment, will no doubt help his hire go down well with the broader university community.

We’re sure we’ll have more to say about Dr. Blyth in future letters.  Meanwhile, here’s a clip of him in action, discussing “The Quant Delusion: “The Rise and Fall of Financial Engineering.”  It’s brief; and it’s quite interesting to hear a mathematician explaining the practical limits of mathematical modeling in the real world.

https://www.youtube.com/watch?v=1IOPH3bQIDU

September 28, 2014