Why
They Should Not Have Done It: Professor Responds
To the Editors:
The letter to the OC community sent by Trustees Perlik and Klutznick
on 9/6 is a lengthy defense of the deferred compensation given to
President Dye by the Board. The basic terms of the plan earn her
$600,000 if she stays another six years and $1,000,000 if she stays
a total of ten years. The document offers a number of specific reasons
for their action, all of which I find dubious. My doubts fall under
the categories of Strategy and Substance. I shall discuss them in
that order.
Concerning the Board’s strategy, three issues immediately
arise: timing, secrecy, and wisdom. It seems inconceivable to me
that Perlik and Klutznick could justify the timing of the announcement
on any reasonable grounds. In the midst of a purportedly serious
financial crisis facing Oberlin College and the prospective budget
cuts, rises in health care costs, hiring freezes, etc. attending
it, the college community received notice of an unprecedented rise
in presidential compensation. This was a public relations fiasco.
These enormous planned bonuses come on top of a salary that is already
unprecedented, even if we adjust for inflation. Why the president
of a college of 2,860 students should receive a salary comparable
to that of the presidents of Ohio State and the University of Michigan
is never explained.
Furthermore, according to Perlik and Klutznick’s
opening statement that the information on presidential compensation
was “personal” and “confidential,” the Board’s
initial strategy evidently involved no such public announcement.
Finding out about this event would have taken interested parties
approximately two years, since the IRS Form 990 that the College
is required to file would have been the only source of public information.
Thus, it seems the announcement was forced upon Perlik and Klutznick
by newspaper accounts. This raises the obvious question: if the
Board was so proud of the package and the recipient so deserving,
why opt for secrecy in the first place?
The third problem with the strategy, involves its
preemptive nature. It has been conceded by those involved that President
Dye was promised the deferred compensation to discourage her from
leaving, in the absence of any current job offer. This raises serious
questions concerning the wisdom of the deal struck. As an economist
I am astonished that the Board ignored the value of alternative
positions available to President Dye, which in ordinary circumstances
should have determined the magnitude of any additional financial
arrangement made with her. This seems to me to be extremely unwise
and at the moment quite profligate. What evidence was there that
any lump-sum was necessary? What is the evidence that a salary of
$323,000/year was not enough in itself to keep President Dye in
Oberlin? Since it was free to make any counteroffer it pleased,
the Board thus promised a maximum of one million dollars more than
was justified by the market, i.e., they wasted one million dollars.
Finally, this strategy locks us into an arrangement which will likely
preclude us from entering that market for ten years. Why reduce
our options?
Moving on to the substance of their defense leads
us to the overt reasons for their extraordinary action. The document
makes the assertion that “... President Dye’s excellent
performance has justified . ... compensation that places her among
the most highly compensated executives in her peer group.”
What follows is a listing of “quantifiable accomplishments”:
“the student body has grown substantially stronger...; ..faculty
salaries have become significantly more competitive ... ; student-faculty
ratios have improved....; Oberlin has attained a gratifying improvement
in the performance of its endowment relative to its peer institutions...
; And we are in the final phase of a major capital campaign that
will raise claim to twice the highest campaign total in Oberlin’s
history.” Absolute gains such as those claimed in the first
three and the last of purported accomplishments are not worth much
in the usual CEO payoff game if no competitive advantage is gained
when rivals do at least as well. The claim about the endowment is
irrelevant for the president’s compensation because the responsibility
for the endowment’s performance lies with the Board, and its
inclusion in the list of presidential accomplishments is strikingly
odd. The claim seems to be false as well. Unfortunately, since Perlik
and Klutznick provide us neither with comparative data in areas
of presidential responsibility (which would include a well-defined
peer group) we must provide them ourselves to see if Oberlin made
relative gains during the Dye era. Let us examine the claims in
order.
Stronger student body: As far as I can tell from the US News and
World Reports rankings, the claim of “substantially”
better students cannot be justified. It is true that by criteria
such as “acceptance rate” and “selectivity”
Oberlin’s ranking rose over the period 1995-2002. These admission
criteria are quite sensitive to demographic trends, and a wave of
applicants broke upon our shore as it did everywhere else. Having
more people to choose from got us a relative gain, but the leap
from that to “stronger students” is a large one and
must be carefully reasoned. Evidence on the negative side of the
argument for the same period is that Oberlin students scored below
the SAT average of the top 25 schools in every year, the shortfall
increasing slightly over this period. Whether our students are absolutely
stronger, given the “recentering” of the SAT test, is
neither knowable nor relevant for this argument. Using the criterion
“freshman in top 10 percent of HS class” as a strength
indicator, Oberlin reports a rise from 65 percent in 2001 to 66
percent in 2002, hardly “substantial.” In the previous
six years that number was between 40 percent and 51 percent. Given
the large and growing proportion of high school applicants who do
not or cannot report class rank, the criterion has become less useful
over this period, Stronger students? Hard to say, but probably not.
More competitive faculty salaries: According to
the USNWR Oberlin College faculty ranked 30th in 2001 and 33rd in
2002 in total compensation. It is not clear what data Perlik and
Klutznick use for their contention, and it is true that at the lower
ranks we have made some relative gains. But those gains began from
our position at the bottom of our “normal comparison group”
(the 16 institutions beginning with Amherst and ending with Williams
which we consider our peers), and put Oberlin around the mean. This
rise took the better part of two decades and did not accomplish
the goal publicly set by Mr. Perlik in the ’80s to have salaries
rise in all ranks to the top third of this peer group. Total compensation
is by far the better measure of our faculty’s economic condition,
however, and no claim for relative improvement there can be made
persuasively.
Student-faculty ratios: USNWR reports 9/1 in 2001 and 10/1 in 2002.
In the previous six years the ratio is 10/1 for four and 11/1 for
two - not much of a downward trend.
Performance of endowment: Using the normal comparison group once
more, we find (according to data from www.nacubo.org) that in the
period 1995-2001 Oberlin’s endowment performance ranked 11th
in this group of 17. Using individual-year rankings, Oberlin was
never higher than 8th or lower than 10 th . For endowment performance
data for the COME comparison group see the letter and accompanying
graph sent to the Review (9/20) by John Scofield. Both data sets
reveal no relative gains for Oberlin’s endowment.
Capital campaign: There is substantial murkiness here. What does
“doubling” mean? Are Perlik and Klutznick referring
to nominal values or real values (dollars adjusted for inflation)?
Finally, exactly what numbers are they reporting? There are two
kinds of money raised in capital campaigns: delivered money and
promised money. The latter may (or may not) arrive, since the future
is unknowable. That’s why economists discount promises of
future money to compute the value of those promises today. Unless
they tell us precisely how much is “in the bank” and
how much promised, we cannot make much sense of Perlik and Klutznick’s
evident pride in the endowment’s performance, since we cannot
compute correctly what in total has been raised. I believe that
the promised gifts have not been discounted, so that the totals
are inflated. I am told this is the way most campaigns are evaluated,
but that does not make it correct.
An additional comment on this point: USNWR uses
a criterion called “financial resources” in ranking
colleges. This is the average educational expenditure per student.
Our ranking by this criterion was 52 in 2001 and 2002. I suggest
Perlik and Klutznick’s pride in capital campaign performance
be postponed until such time as enough is raised to filter down
to students to raise our ranking to at least our overall position
in the national college list: currently tied for 23-24 as opposed
to our previous position last year -- tied for 22-23. Since they
do not speak to these rankings anywhere in the document, this “quantifiable
lack of accomplishment! ‘goes unrecognized.”
What sense, given the above, can we make of the
quite unusual financial arrangement the Board has made with President
Dye? Since I believe the Board to be rational, they must be rewarding
her for perceived value delivered. Since this value does not seem
to reside in any of Perlik and Klutznick’s elaborate justifications
I have discussed, it must reside elsewhere.
Perlik and Klutznick are distinguished and devoted
alumni, having attended Oberlin in its glory days of consistent
distinction (top ten), a position we seem to have permanently lost
by 1988. It is no accident, I believe, that our long period of true
distinction coincided with a strong, influential, independent faculty,
which Perlik and Klutznick may remember. In this view, it is not
a coincidence that our slide to the bottom of the radar screen coincided
with an associated reduction in faculty influence over academic
affairs. I do not detect much concern in the Perlik and Klutznick
document over either trend.
– Robert Piron
Professor of Economics
|