New Findings Question Value of Harvard, Other CIOs

(January 10, 2012) — Is Jane Mendillo, the chief investment officer of Harvard University’s endowment — the largest in the United States — paid in line with her performance?

Perhaps not, according to recent research.

A study by Charles Skorina, an executive search consultant, reveals that Mendillo’s value may not be as stellar as one would think. 

Skorina aimed to determine performance for pay by looking at the investment returns of CIOs over the most recent five years, computing how many basis points they earned per $100,000 of compensation, and then ranking them all by that measure of performance-for-pay. In Skorina’s latest newsletter, the study showed that Mendillo along with her popular CIO counterpart David Swensen of Yale University ranked highest on Skorina’s list when ranking purely by pay. Yet when ranking by performance-for-pay, the two CIO honchos stood at the bottom of the list — with Swensen in 46th place and Mendillo in 48th place, out of a total of 50 spots. 

Skorina told aiCIO: “It’s logical when you think about it: their performance was pretty good relative to these other high-paid CIOs, but their pay was much higher. A moderate numerator over a big denominator gives you a low value.”

In theorizing about the reasons for Mendillo’s low performance-for-pay ranking, Skorina said that one of the potential reasons may be due to her relatively short tenure at the fund, totaling about three years. In addition, he noted that Harvard’s board consists of exceptionally “strong-willed people, and thus achieving consensus is often difficult.” 

While Skorina noted that at least some CIOs deserve their pay because they produce consistently better returns than their peers, he continued: “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.” 

The key takeaway, according to Skorina, is the fact that it’s possible to hire a very good CIO for much less than Harvard and Yale are paying. John Hull at the Andrew W. Mellon Foundation, Srinivas Pulavarti at the University of Richmond, Seth Alexander at MIT, and James Hille at Texas Christian University make much less than Mendillo or Swensen in the period analyzed, and have had better returns. 

He added: “But these considerations don’t explain all the differences, and we don’t pretend to know what’s ‘fair’ or who should make how much. We’re just reporting some numbers we think are accurate and speculating about them just like everybody else.”

Some industry sources, however, express skepticism over Skorina’s research, highlighting his position as a headhunter while claiming that he would therefore benefit by greater CIO turnover. 

One endowment head, Jim Dunn, CIO at Wake Forest University, told aiCIO that value among investment heads should be placed on making good decisions along with avoiding bad decisions — and thus true talent should be measured in conjunction with risk-taking. “I’m the only CIO I know who gets paid on Sharpe ratio. Talent comes from not taking big bets, so risk-adjusted return is the driver here,” he said.  

He continued: “There is also a ‘ARod’ bias here. Like the Yankees, having the highest paid payroll doesn’t guarantee a world championship. Looking at the CIO in isolation would be short sighted and arrogant…there is no prize for first place. I have no intention of being the best CIO in the country, just the best CIO for Wake Forest.”