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Harvard University paid five managers of its endowment more than $107-million last year, an amount that is excessive even in an era of reckless compensation at the top. Some alumni have complained, and one has started a campaign to withhold donations until the university agrees to seek competitive bids for managing the fund, the nation's largest such endowment. Yet Harvard officials are oddly unconcerned, and that could be a mistake. Already aroused by corporate abuses of executive compensation, regulators are starting to take a closer look at the financial decisions made by nonprofit institutions.
Donella Rapier, Harvard's vice president for alumni affairs and development, defended the pay decisions, noting that the university has to compete with private sector salaries and that the managers were rewarded for delivering superior investment returns. Measuring nonprofits by rules from the for-profit world is not always appropriate, however.
University endowments comparable to Harvard's are getting the job done for less. While Harvard money managers did beat a benchmark of conservative bond market returns last year, so did their counterparts at the University of Texas, which has the second-largest university endowment. Yet the cost of the entire Texas endowment operation was about the same amount Harvard paid just one of its money managers.
Such extravagance caught the eye of Dr. Terry Bennett, an alumnus who gave the Harvard medical school $4-million a decade ago, its largest gift ever at the time. Bennett told the New York Times that he considers the pay plan wasteful and is urging his classmates through an e-mail campaign to force the university to act responsibly by withholding their donations. "The managers of the endowment took home enough money last year to send more than 4,000 students to Harvard for a year," he said.
In fact, Harvard students face a 5 percent tuition increase next year, which will generate revenue equal to the amount made by just two of the university's highest-paid money managers. Alarmed alumni argue that a Harvard education is increasingly unaffordable to many families. They say the university should use more of its endowment for scholarships and relief of student loans.
Harvard officials would be well served if they listened. The IRS announced recently that it will be asking hundreds of nonprofit organizations about their pay practices and could audit some of them. And some state legal offices are expected to follow the example of New York Attorney General Eliot Spitzer, who is suing former New York Stock Exchange chairman Richard Grasso for more than $100-million in pay from the nonprofit exchange.
There is no reason Harvard should face outside scrutiny if it will just put some reasonable restraints on its compensation to endowment managers. Considering the generations of business executives and government officials educated at the university, it shouldn't be difficult to find talented money managers who are also sensitive to the public service nature of the job.