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

October 4
October 11

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