A slightly lower-than-expected performance of the endowment in 1995 left most of the highest-paid fund managers at the Harvard Management Company, Inc. (HMC) with lower incomes during the 1996 fiscal year, according to federal tax returns.

The highest paid manager received more than $4.7 million, and others in the top five received between $1 and $2 million in compensation.

The president of HMC earned $897,523, down from more than $1.2 million in 1995.

HMC is a University-managed, non-profit corporation that manages Harvard's endowment. The salaries of its best fund managers, which dwarf those of senior administrators and faculty, have drawn criticism from campus activists who bemoan such a wide income disparity at a non-profit institution.

But HMC officials defended the income levels.

"For anybody to earn anywhere close to what their managers are, performance has to be excellent," said Jack E. Meyer, president of HMC.

Compared with other schools, most of whom hire outside management firms, Harvard's endowment fared well in 1996, with its 26 percent growth rate beating the average university's of roughly 17 percent.

Compensation of managers is based in large part on the performance of each financial manager's class of endowment funds--domestic and foreign securities, emerging markets, high-yield securities, etc.--relative to an internal benchmark, known as the Policy Portfolio.

Part of the decline in salaries is linked to the endowment's disappointing performance in 1995. The endowment performed .4 percent below the benchmark; in addition, bonuses paid because of exceptionally high performance in 1994--paid gradually over several years--are tapering off, according to Meyer.

Together, these two resulted in a reversal of a six-year trend of increasing compensation.

With 1996's yield almost four points above the benchmark, compensations can be expected to rise this year. But Meyer said that HMC suffers somewhat of a political injustice because of its efforts to save money through internal management.

Campus activist are critical of HMC compensations as high as $4.7 million, particularly at an institution where the President's salary is about $250,000 and the average tenured faculty member receives about half that.

"I find it amazing that they can pay that much and then say that they don't have the money to tenure new professors, especially minorities and women," said Megan L. Peimer '97, former co-president of the Radcliffe Union of Students.

"It substantiates my view that Harvard sees itself as an organization that grows for the sake of growth," she added.

Campus activists also point to the benefits scuffles between the administration and the Harvard Union of Clerical and Technical Workers as well as the recent hiring of UNICCO, an outside custodial contractor, as examples of the University's priorities.

"It's that and the failure to treat investment as a political and moral issue...that's really upsetting," said Jedediah S. Purdy '97.

He points to studies where random stock selections have outperformed crack stock investors as evidence that such salaries are unwarranted.

"In an industry where monkeys throwing darts do better than paid professionals, it's not clear that they couldn't get the same performance with a truckload of bananas," Purdy said.

In 1995, the endowment's return of 16.8 percent was more than nine points below the Standard and Poor's 500, a widely recognized benchmark of stock market performance.

However, Meyer said that in 1994, the endowment beat the S&P by more than the nine points it lagged in 1995, and defends HMC's management approach as more stable.

"We cannot take as much risk as in the S&P 500," Meyer said. "We have to have a more diversified portfolio."

Harvard's five-year return rate from 1992 to 1996 is ahead of the S&P, which wasn't true for the previous five years.

"If you assume that Harvard can spend roughly 4.5 percent of its endowment on its operations, Harvard has about $58 million more per year," he said.

He claims that Harvard pays less than half of what it would were it to contract to external managers as most universities do.

The result is money saved on what he calls "back-office, non-productive expenses" such as marketing that private, corporate management firms entail.

But Meyer said these savings come at the cost of political expedience, for as non-profit institutions, HMC and Harvard must report the earnings of their top employees when filing tax returns.

"While it might be politically expedient to use more external management, it would not be less expensive," reads an HMC press release