Balancing the Equities
To The Faculty Newsletter:
The recent letter on the state of the Institute from President Susan Hockfield has gotten me thinking about fairness in the sacrifice of various stakeholders as we adjust to new budget realities. Executive compensation is the topic of concern and conversation today and it is timely to take a look inside MIT.
In her letter President Hockfield mentions that about 100 employees (all non faculty) have been laid off across the Institute. For these individuals this is a big hit to their economic status and wellbeing.
Now for a thought exercise: Why were these employees let go? Answer: the MIT endowment has declined significantly. And who was responsible for this happening? Certainly the state of the economy is a main culprit, but also the managers of the endowment bear some responsibility.
This prompts a series of questions:
- Were our fund mangers exercising any independent judgment or just following the lead of other fund managers who were riding the bubble as it grew bigger and bigger?
- Given the fact that many of the holdings in the MIT portfolio are not liquid and hard to “mark to market,” is it possible that the pricing of these assets was inevitably inflated? Prudence would suggest that such assets should be assessed in a very cautious way when computing the value of the endowment and when rewarding its managers.
- In view of the large bonuses that were paid to MIT’s fund managers (for example, in one recent year income to the lead fund manager topped $1.5 million) can we now say in hindsight that there may have been over payment?
The most important question going forward is whether the compensation policies for the stewards of our assets are structured in a way that rewards them for true long-term appreciation and not what in the short term are only capital gains on paper.
Robert B. McKersie
Sloan School of Management