Performance for pay: Is your CIO cost-effective?

(Check the 3 charts below)

Measuring the value of an institutional chief investment officer

As an executive recruiter, I study investment talent and identify people who will bring the most value to my clients.
But how do you measure the value of, say, an institutional chief investment officer?  Talent, in the final analysis, is a commodity in the market like any other.  Employers have limited resources; they want the best talent they can find, but at a price they’re willing to pay.
If this seems cold-blooded, consider how the CIOs themselves evaluate their own external money managers.  CIOs watch the performance of their outside managers with a hawk-like gaze; or at least they’re supposed to.  And if the return drops relative to the fee charged, and a superior return-for-fee is available elsewhere? Well, then changes are made.
Welcome to capitalism.
For our internal use and to help our clients, we compile data and track the performance of hundreds of CIOs and asset managers.  Recently, we extracted and published a list of the 50 highest-paid nonprofit CIOs, which some readers seemed to like.
It’s still on our website, here:
This time, we’ve started with that same list and tried to answer the question: who among these well-paid managers provides the most performance relative to their paychecks?
Specifically, we looked at their investment returns over the most recent five years, computed how many basis points they earned per $100 thousand of compensation, and then ranked them all by that measure of performance-for-pay.
We’ll have more to say about what it all means further below.  But, without further ado, here’s the ranking of the highest-paid nonprofit CIOs according to the almost-famous Skorina Performance-for-Pay Index.
CIO Performance-for-Pay:
Basis Points of Return per $100K Compensation (FY2006 – FY2010)
Note: Blue highlighted CIO names indicate appointment after July 2007, serving less than 3 years of the 5-year FY2006-FY2010 period.
Performance for pay: What does it mean?
Surely at least some CIOs deserve their pay, because they produce consistently better returns than their peers. A shining example is Dr. David F. Swensen at Yale University. In the 21 years from 1985 to 2006 his team produced an average annual return of 16.3 percent, which is a truly distinguished record.
But was he really worth his pay? Most would say so.  In 2006, at the end of that great run, he was paid $1.6 million.  That’s a nice take-home; but paltry compared to what he could have made on Wall Street, as many have pointed out.
I was looking at those numbers and noticed I didn’t even need a calculator to divide (approximately) 1600 basis points by $1.6 million. I t’s obviously 1,000 basis points per $1 million of compensation.  Or, to get a more conveniently-sized statistic, we could say 100 bps of performance per $100K of compensation.  Now, that’s a nice, round number. Hmmm.
So, right there was a simple, objective measure to help judge whether a nonprofit CIO (or any other investor) is worth his or her pay.  How much performance (over some reasonable period) is their employer getting versus the compensation they pay to hire and keep him?
As we all know, things haven’t been quite so swell at Yale, and most other places, from 2006 to today.  Yale’s 5-year annualized return as of the end of FY2010 was 6.2%.  However, Dr. Swensen was making $3.8 million as of 2009.  Do the same math — 620 basis points divided by $3.8 million — and we see that over that more recent 5-year span, he was delivering only about 16 bps per $100K of comp.  The numerator goes down, the denominator goes up; and suddenly his performance-for-pay value doesn’t look quite so great.
But surely, if you stacked up Dr. Swensen’s performance fairly against his peers over that same difficult period he would still look pretty good on a relative basis.  Wouldn’t he?
Frankly, I had no idea.  So I decided to crunch some numbers and find out.
And, looking at the bar chart above, there’s Dr. Swensen, down toward the bottom.  Per my ingenious performance-for-pay index, he ranks 46th out of 50 among this group of high-paid CIOs.  Ms. Jane Mendillo at Harvard University, against whom Yale is naturally compared, was two steps lower: 48th out of 50 with just 10 basis points of return per $100K of compensation.
Now, if we cast our eye up to the number-one position, we find a CIO who doesn’t get as much ink: John E. Hull at the Andrew W. Mellon Foundation in New York.  He runs about $5.1 billion AUM and has earned an annualized 6.5% return for FY2006 – FY2010.  That’s very good in this period, but still only a little higher than Yale’s 6.2%.
Ah, but Mr. Hull is paid only $620 thousand, vs. Dr. Swensen’s $3.8 million.  He’s delivering 105 bps of return per $100K of compensation; while Dr. Swensen delivered just 16 bps/$100K in the same period, as we pointed out.  I think if I were sitting on the Mellon board, I’d conclude that Mr. Hull’s paycheck is a bargain relative to his performance.  In fact, he’s now performing better, in this sense, than Dr. Swensen did in his glory days: 105 bps/$100K vs. Swensen’s 100bps/$100K in that earlier period.
Dr. Swenson, on the other hand, has a lot of longevity, and you could argue that he’s being compensated in part for all those years of outstanding returns, when he could have picked up his phone anytime and doubled or tripled his pay south of New Haven.
Now, bps/$100K is just a ratio, and you can interpret it any way you like.  Looking just at 2006-2010, you might argue that Dr. Swensen is overpaid; or maybe Mr. Hull is underpaid; or both might be true.
Bps/$100K as an absolute number doesn’t mean much.  But I would argue that rank-ordering by such a measure over a reasonable span of time is both interesting and meaningful.
We are not, by the way, asserting that we have invented a master-key that unlocks the secret of evaluating investment managers.  Performance depends heavily on asset allocation, and that is at least partly in the hands of boards, investment committees, and consultants.  Governance matters, staff talent matters, and a little luck never hurts.  But we think our ranking is a useful tool to help understand a CIO’s value to his/her employer.
Here’s a table with more of our data for context; it’s a companion to the bar-chart.  The first three columns rank each CIO by performance for pay, then their five year institutional return, and then their ranking by total compensation.
CIO Performance-for-Pay Ranking
including 5yr absolute returns and total compensation
50 Highest-Paid Nonprofit Chief Investment Officers
(bps/$100K of compensation: 2006-2010)
Note: Blue highlighted CIO names indicate appointment after July 2007, serving less than 3 years of the 5-year FY2006-FY2010 period.
This list is slightly different from the list of 50 highest-paid CIOs we published back in November, but it contains most of the same names.
You can read off the 5-year return and total compensation.  Divide the former by the latter and, voila: out pops our bps/$100K statistic.  Sort the list by that value and you have the ranking above.
In most cases the funds self-report their 5-year returns; or at least their annual returns, from which we calculated the 5-year geometric mean.  In a few cases they are not so obliging, and we have had to hand-calculate a return from published financial statements.  There’s a note further below about how we did it if anyone’s interested, or thinks we got one wrong.
The Winners:
Who are the people on top of our list, and why are they producing better returns relative to their pay than most of their peers? We’ll take a quick look at the top five.
1. John E. Hull, Andrew W. Mellon Foundation
Mr. Hull was previously CIO of a public pension — New York State’s $100 billion CRF fund – from 1985-2002.  The most recent incumbent there, Raudline Etienne, made about $280 thousand in 2010.  We doubt if Mr. Hull was making much more than $200K when he left in 2002.  So, the job at Mellon would have been a big pay-hike for him.  We can assume that he is a happy camper, making more than all but three or four of the highest-paid public pension managers in the country.  And, without having to face the political sturm und drang that goes with being a public pension exec.
2. L. Erik Lundberg, University of Michigan Endowment
Mr. Lundberg was University of Michigan‘s first CIO, arriving in the fall of 2007.  The endowment was previously overseen by an investment committee, and the results were only so-so.  In 2006 they earned 16%, ranking Michigan 22nd among the 50 for return, but well behind the Ivys (Yale made 23% that year).  And, make no mistake, Michigan wants to be thought of in the same bracket as Harvard or Yale; except with a real football team.
In the two fiscal years that can be attributed to him — FY 2009 and FY2010 — he did pretty well.  In FY2009, Michigan lost 23.4%.  Not good, but better than Princeton, Yale, Duke, Stanford, or Harvard; not bad for his rookie year.  In FY2010 Michigan earned 12%, which moved Mr. Lundberg up to 22nd ranking among this group of 50 for annual return.  And, again, he surpassed Yale (9%) and Harvard (11%).  On the whole, this was a very respectable performance which put Michigan at the number 20 spot for 5-year return among the 50, behind Yale, but ahead of Harvard and Stanford.
Mr. Lundberg was recruited from Ameritech, where he’d spent 19 years as a manager for their corporate pension and possibly concluded that he wasn’t going to get the top job, especially after Ameritech was acquired by the much larger, Texas-based SBC in 1999 (and was re-branded AT&T in 2006).  This was a jump that probably made sense to Mr. Lundberg in 2007, even though he was starting at around $500K, low for a major endowment.  He’s only about 45 years old and, as the school’s first CIO, can expect to catch up to his peers in pay over the next decade. Meanwhile, Ann Arbor has a good CIO at a very moderate salary.
3. Robert J. Manilla, Kresge Foundation
Robert Manilla, at the Kresge Foundation in Michigan, was another late arrival, succeeding Ed Hunia as CIO in December, 2008.  Mr. Hunia was a top performer himself.  Over 2004-2008 he achieved the best return of any endowment or foundation in the country (he received a Lifetime Achievement award from Foundation and Endowment Money Management as he retired).
But Mr. Manilla didn’t disappoint.  Presiding over Kresge’s high-performance portfolio (with an Ivy-like 50% allocation to alternatives) he earned 15% in 2009 and 12% in 2010.  Kresge is now ranked 4th among our group of 50 for 5-year return.  So the numerator on our ratio is pretty high.  How about the denominator?  How did they get a very capable successor to Mr. Hunia (who had total comp of about $780K in 2008) at around $700K?
Well, they didn’t interview at Goldman Sachs. Kresge Foundation is located in Troy, Michigan; for starters, which isn’t exactly Wall Street.  Or even Ann Arbor.
Mr. Manilla went to work for Chrysler right out of college (he attended Oakland University, just outside Detroit), which probably seemed like a good idea at the time.  He picked up an MBA from University of Detroit along the way.  After 23 years at Chrysler, he was running the corporate pension.  In 2008 the company was bleeding money and headed directly for Chapter 11, which it achieved just a few months later.
 In the chaos of 2008 it even seemed quite possible that the Chrysler DB pension would end up in the hands of the Pension Benefit Guarantee Corp, which would have left Mr. Manilla out of a job.
As an old Chrysler hand and a finance guy, Mr. Manilla could have clearly foreseen all this.  It was an excellent time to pull the ripcord: and a chance for Kresge to acquire a valuable talent at a good price.  And that puts Bob Manilla at no. 3 on our performance-for-pay hit parade.
4. Srinivas Pulavarti, Spider Management Company
Srinivas Pulavarti is CIO of University of Richmond and also president of UR’s semi-autonomous Spider Management Company.  He’s a full-on quant who earned a BS in math and physics at Bangalore University, then an MS in financial math at Marquette University.  He worked at the Johns Hopkins University endowment and then managed $14 billion in global pension assets at Citigroup before he moved to Richmond.  He has the second-highest 5-year return in this group – 7.7% — behind only the impressive 7.9% Nirmal P. Narvekar earned for Columbia.  (Note: Mr. Narvekar is president of Columbia Management Company.  Strictly speaking, the CIO, Peter Holland, is his subordinate; a distinction which we will ignore.)
So, the two CIOs with highest absolute returns had similar backgrounds (both worked at another endowment: Johns Hopkins and University of Pennsylvania, respectively) both worked on Wall Street (at Citigroup and JP Morgan, respectively) both started their jobs at about the same time (Mr. Pulavarti in 2001 and Mr. Narvekar in July, 2002).  But Mr. Narvekar makes $3.5 million at an Ivy school, while Mr. Pulavarti, with about the same return and longevity, makes just $820 thousand at a major public university.  But Mr. Narvekar manages about four times as much AUM, and does it at an Ivy university. Maybe that makes sense.
Or, maybe not.  Seth Alexander (number 6 on our list) runs the MIT endowment, which is much larger than Columbia’s ($9.9 billion vs. $6.5 billion) and has an excellent 5-year return not far behind Mr. Narvekar (7.2% vs 7.9%).  Yet his comp ($890 thousand) is close to Mr. Pulavarti, and far below Mr. Narvekar, making Mr. Alexander sixth in our performance-for-par ranking.
Although MIT is not technically an Ivy school, can we seriously argue that Columbia commands a prestige-premium of that size?  There may be no simple or obvious explanation but, for whatever reason, Mr. Narvekar has been able to negotiate a more generous bonus arrangement with his board.  His bonus in FY2010 was $1.2 million.  Mr. Alexander’s board should appreciate that they are getting excellent value from their CIO.
5. Deborah Foyle Kuenstner, Wellesley College
Deborah Kuenstner succeeded Jane Mendillo at the Wellesley College 99999endowment in 2009.  She jumped from $470K total comp as CIO at the smaller Brandeis University endowment, to $620K at Wellesley, a nice bump for her.  Ms. Mendillo, who had been making almost $1 million at Wellesley, jumped to about $4.8 million when she was recruited by Harvard.
So, everybody’s happy: Ms. Kuenstner got a $150K raise; Ms. Mendillo got a $3.8 million raise; and Wellesley reduced the cost of its CIO slot by $380K.  Win, win, win.  We will note that Wellesley’s investment performance in its first full FY under Ms. Kuenstner was not outstanding. Wellesley earned 9%, ranking it at 45th among the 50.  But her relatively modest salary and the solid performance under Ms. Mendillo in 2006-2009 still gives Ms. Kuenstner a good performance-for-pay ranking, even if it’s mostly inherited.
…And, the non-winners:
It’s not our intention to embarrass anyone, but it’s hard to avoid noticing that David Clay, the veteran CIO (since 1990) at Grinnell College in Iowa holds down the number 50 spot with a 5-year return of 0.0%.  His thirty years of seniority partly explains why his salary is high enough to make our list.  And, of course, a couple of other CIOs generated only slightly higher returns.
Grinnell does not self-report their investment return that we could find, except for 2009; so the 5-year return is our estimate from their financials.  We’re pretty sure we aren’t off by more than 50 basis points; our estimate for 2009, for instance, exactly matched their self-reported -24% return.  And even a 0.5% return would still make them lowest in the group of 50.
It may well be that a 10-year or longer period (which we did not calculate) would make Grinnell look much better.  And it’s hard not to have some sympathy for Mr. Clay.  Warren Buffett sits on his board and seems to take quite an active role.  It can’t be easy for a CIO to do his job with The World’s Greatest Investor peering over his shoulder.  In any case, Grinnell is not hurting.  They have some generous alumni; and, on a per-student basis, they have one of the largest endowments in the country.
And now, the top three reasons why some may fault our study:
1. Your 5-year window is too short to evaluate performance!
If you insist that your fund will exist in perpetuity, then, logically, the relevant return-period is infinity; and even Excel can’t cope with that.
 Three-year returns are often reported, but we think that’s too short to be meaningful.  Ten years makes sense for some purposes.  Even the longest-term private equity portfolio, for instance, should have a definite payoff within a decade, and ten years usually brackets at least one full business cycle, if not two.  But for our purposes that’s too long.  Our research suggests that that 10-12% of CIO jobs turn over every year; so in ten years we’d have an entirely new roster and couldn’t meaningfully compare their performance as individuals.  We think 5-years is the Goldilocks choice for us: not too long; not too short.
At least some practitioners agree.  In their excellent recent book, Outperform: Inside the Investment Strategy of Billion Dollar Endowments, John Baschab and Jon Piot raise that question with several CIOs.
James Hille of Texas Christian University (who stands high on our performance-for-pay ranking) said, “This must be viewed within a reasonable time period, and we’re looking at more like, three- to five-year time frame for that.”
James Walsh, then the CIO at Cornell, said, “The important thing is to make the evaluation fully comparable by looking at a longer period of time…[three years] is better than one year, but it’s probably still too short.  It’s probably five years minimum.”
2. 2006-2010 was a weird and unique period, from which no valid inferences can be drawn about investment performance!
We took the most recent five-year period for which we could get complete data for most of the high-earning CIOs.  They all faced the same markets, and it’s their relative performance we were interested in, not their absolute performance.
Most of the private foundations had calendar-year fiscal years vs. the June 30 fiscals of the endowments and pensions, but this also makes little difference over five years.
Technically, the period brackets a business cycle: we went into a recession, then emerged from it – sort of.  It contained two good years, a bad year, a disastrous year, then a good year.
It could be argued that it’s exactly in tough periods like this when we see who’s earning their pay and who isn’t.
3. But, different funds have different risk preferences; you’re comparing apples to oranges!
We thought about that.  Since we have annual returns for 2006-2010 in our database, we can easily compute standard deviations and Sharpe Ratios.  If you’re willing to say that the ex post standard deviation of returns is an acceptable measure of risk and that the Sharp Ratio is an acceptable index of risk-adjusted return, then we can report that our performance-for-pay ranking doesn’t change very dramatically when we use the Sharp measure as numerator instead of 5-year return.
Our top-tier managers get re-shuffled a bit.  Mr. Pulavarti moves up from 4th to 1st rank; Mr. Hull moves down from 1st to 3rd, and so on.  But generally the CIOs who score high on absolute performance-for-pay also score high on risk-adjusted performance-for-pay.  And Mr. Clay, alas, is still ranked 50th.
In an appendix we have another table which includes standard deviations, Sharpe ratios, and a ranking of risk-adjusted performance relative to pay.
About those underpaid public pensions CIOs:
When we adjusted returns for risk, we did notice something interesting among the public pensions.  We expected that they would have lower-risk portfolios than the Ivys, and they do.  Georgia TRS, for instance, has an 11% standard deviation for the period, vs. 21% at Yale.  That makes sense.  Also, we often opine in our newsletter that public-pension CIOs are relatively underpaid.  So, we thought that they would look better on a performance-for-pay ranking after we adjusted for risk.  Not so; the ones in this group actually look worse.
Charles Gary, who was the CIO at Georgia TRS in this period (he has since moved on), actually moves down in the rankings: from 31st to 45th.  They had an absolute 5-year return of 2.5%.  Other funds had better returns relative to their risk and climbed higher in the rankings after the adjustment, pushing Georgia TRS down substantially.  They emphasize on their website that they are focused on conservative investing and preservation of capital.  It’s fine to be a conservative investor and accept a lower return, but their tradeoff doesn’t seem to have worked very well for them.  Their Sharpe Ratio was 0.01.
Emory University had similar risk (SD of 12%), but had a Sharpe ratio ten times higher: 0.11.  Emory’s CIO Mary Cahill had higher comp than Mr. Gary ($850K vs. $610K), but on a risk-adjusted performance-for-pay ranking she moves up slightly from 30 to 29, while Mr. Gary drops from 31 down to 45.
We should add that the four public pensions in our group of 50 are unusual by definition because their CIO comp relative to AUM is well above average among all public pensions.  Britt Harris, for instance, appears to be the highest-paid public pension CIO in the country.  We haven’t done the research, but we strongly suspect that most (lower-compensated) pension CIOs would look better than these do on a performance-for-pay basis.
Also, the publics are a different breed in many respects.  Their governance isn’t as conducive to effective portfolio management as that of endowments and private foundations, which are more insulated from politics and bureaucracy.  Still, based on our ranking, it appears that at least some of these “underpaid” public pension CIOs might not be underpaid enough.
Deep Thoughts:
We think this study is pretty cool — and even useful — but it doesn’t purport to explain why CIOs are actually paid what they are, or to offer definite guidance on what they’re really worth.  As we point out above, it’s easy to find inexplicable anomalies.  And we certainly haven’t grappled with the broad question of why compensation in different organizations is what it is; or what’s “fair.”  We will leave that to the academic guilds.  Somewhere, between the economists and philosophers, we’re sure they must have nailed this down.
I can certainly attest that many people believe they’re underpaid; but very few believe they’re overpaid.
CIOs are in the unenviable position of having their yearly performance set out to the nearest tenth of a percent.  They’re a little shyer about disclosing their pay, but we try to dig that out in our newsletter.
There are all kinds of people in all kinds of organizations who make impressive amounts of money, even though their performance is almost impossible to measure objectively.
The political scientist James Q. Wilson has thought about this in his classic work on bureaucracies.  He says that in “production organizations” managers can evaluate (and pay) people on the basis of their contribution because it’s possible to measure both outputs and outcomes.
Then there are “procedural organizations” where people are more likely to be assessed according to their compliance with rules and procedures.  Processes are visible, but outcomes are not.
Worst of all are “coping organizations” in which effective management is almost impossible, since neither the processes nor the outcomes can really be observed or measured.
In the real world, I suspect that most organizations are blends of all of the above, but it’s an interesting typology.  We also suspect that pay and performance in public pensions are partly explained by the fact that they sit closer to the “procedural” box of Prof. Wilson’s matrix than to the “production” box.
[See: James Q. Wilson, Bureaucracy: What Government Agencies Do And Why They Do It (Basic Books, 1991).  Prof. Wilson focused on the public sector, but his analysis can be extended to organizations in general. Perhaps even yours.]
While we’re meditating on that, allow me to wish all of our readers a very happy and very prosperous 2012.  And we’ll leave you with some observations by a great American businessman on the subject of performance and compensation.
In 1922 Babe Ruth was demanding $52,000 a year to renew his contract with the New York Yankees, a colossal salary for the time.  He said: “A man who knows he’s making money for other people ought to get some of the profits he brings in.  Don’t make any difference if it’s baseball or a bank or a vaudeville show.  It’s business, I tell you.  There ain’t no sentiment to it.  Forget that stuff.”
In 1932 he was holding out for $80,000, and a reporter asked him how he had the nerve to ask for more than President Hoover was making.  “Why not?” asked the Babe.  “I had a better year than he did.”
Appendix I: Estimated 5-year returns:
A few private foundations with calendar fiscal years had not yet published FY2010 financials, so 5-year returns could not be calculated.  They had to be dropped from the original list of 50.  We just reached down a little deeper in our database to get the next-highest-paid CIOs for whom 5-year data was available.
In a few cases, mostly among the private foundations, no investment-return numbers are self-reported.  For those we were forced to hand calculate a return based on their audited financial statements and/or their 990 or 990PF filings.  We freely admit that our home-made returns probably aren’t exactly the same as the numbers they use internally.  A fund’s custodian bank normally pushes all of their transactions through an algorithm which yields a proper “time-weighted” internal rate of return (aka to finance geeks as the Dietz algorithm).
Using only annual statements obviously reduces the information content and introduces some error with respect to the “real” return.  There were still other vagaries among the financials, with different funds classifying items differently, but we did our non-CPA best and will spare you the details.
We were able to benchmark a couple of these numbers just by calling up someone we knew at a fund and asking if our number was close to their unknown-to-us internal number.  In each case our error was only about 20 basis points.  For this exercise, where we’re more interested in the rank-ordering than in the absolute values, we decided that if we could hit the “true” value within 50 basis points, it was good enough. iven that the range of returns is from 0% to 7.7%, an error of 0.5% wouldn’t change a CIO’s rank very dramatically, and we’re reasonably confident that we stayed within that limit for the handful we had to calculate.
In the bar chart we noted in blue those CIOs who were on the job for less than three out of the five years 2006-2010.  Obviously, if a CIO didn’t set up shop before the middle of 2007 (given that most fiscal years started the period in July, 2005), it would be unfair to attribute all of that performance to him, whether it was good or not-so-good.  Also, CIO names in italics indicate that they have recently left the job, although they were on duty in 2006-2010.
Appendix II: Performance-for-pay rankings using risk-adjusted returns:
Risk-Adjusted CIO Performance-for-Pay Ranking
50 Highest-Paid Nonprofit Chief Investment Officers
(Sharpe measure/$100K of compensation: 2006-2010)
Note: Blue highlighted CIO names indicate appointment after July 2007, serving less than 3 years of the 5-year FY2006-FY2010 period.
6080 N. Sabino Shadow Lane | Tucson, AZ 85750 | 520-529-5677
Design: QB Media