The student newspaper, Daily Pennsylvanian, reports that the president of the University of Pennsylvania, Amy Gutmann, had increased her 2013 salary to $2.82 million from about $2 million the year before, and about $767,000 from her first year in office in 2005 (Grabarz 2014). The question which needs to be asked is whether she deserves to earn so much money. While some would argue that she earns it, I argue that she does not. Gutmann is not the only high-earning executive, but the fact that a non-profit organization is following the same trends as for-profit corporations is a highly worrisome trend, which will add to the current development toward growing inequality. (The top earner is University of Chicago president Robert Zimmer, who collects almost $3.4 million. ibid.)
There are principally two arguments that are used in order to defend her growth in income. The first is what I would call the productivity argument and the other is the competition argument. I will describe both, and refute them.
The productivity argument is best captured by a quote from the chair of Penn’s Board of Trustees, David Cohen, “We believe this compensation structure has given us the most effective university leadership team in the country… We have people here who are smart and competitive; people who want to succeed and are willing to be judged by the outcome of their work. That is a formula that breeds success.” (ibid.) Cohen essentially argues that Gutmann is paid so much money, because she is responsible for raising so much money for the university. (That is only an inference of his statement, but how else would you define “effective leadership”, “success” and “outcome”?) In 2013, it had been reported that the “Making History” donation campaign had exceeded all expectations by raising over $4.3 billion as opposed to the estimated $3.5 billion (Zweifler 2013). Universities are not suffering from poverty, especially not the Ivy Leagues, who certainly benefit from the wealth effect of having so much pre-existing wealth to invest, as Piketty (2014) showed in his analysis. So this trend is hardly something that a president of a university can be largely responsible for.
In fact, it is questionable whether Amy Gutmann is exclusively responsible for these favorable financial results for the top university. The university employs a staff of 20 or 30 people or so in the Alumni Relations Office. Their duty is really to convince alumnis to donate as much money as they can to the university. I doubt that any of the lower level bureaucrats, who are so essential to the organization, have received $2.8 million in annual compensation.
What certainly helps with donations is the fact that the Wharton Business School is pretty much the most prestigious business school in the world, such that many of the Wharton alumnis can return back to Philadelphia to make connections with new business partners, and write big checks for their alma mater. And the Wharton alumnis are certainly not poor, because most of them are picked up by banks, insurance companies, private equity, consulting firms, and other areas of high income occupations. Those groups’ income has soared over the last few years thanks to financial deregulation and lower taxes on the rich. Again, these are structural trends that quite clearly show that the university president does not deserve a much larger share of the pie, but that instead she uses her powerful position in agreement with other well-paid high officials to pay herself more income from a pie that is undoubtedly growing. The productivity argument can not justify Gutmann’s high compensation. It could, however, justify (a) more job creation, and (b) higher incomes for lower-level employees (adjunct teachers, janitors and food service workers, anyone?).
The second argument about competition would even concede that Gutmann may not deserve such high pay, but that because other universities in the industry are increasing pay at the same high rate, Penn has to do the same thing, or otherwise she will be hired away by another university or institution that pays more. For me the second argument is also quite absurd as the first argument, because if that logic held, then the sky is the limit. If some universities raise the president’s salary, then other universities do it too, but probably higher than the previous one. What next happens is a further escalation of salaries, of course, never to the point that it bankrupts the university, but always consistent with revenue growth. In that case, the competition argument is an ideological justification for raising executive compensation (“Nr.1 deserves the most pay.”) rather than competition being an important factor explaining a rise in executive pay.
Besides, the same logic about competition is never used for lower-level employees in the company or organization. For lower level employees, the presumption is that their work is less valuable, such that there is no great need to compete for them. (Not true, of course, because much valuable labor is uncompensated, e.g. child care by stay at home mothers.) But let us take other jobs in high demand, such as engineers. Engineers have a relatively rare skill, and they are in high demand, such that their income is usually above the median income of the region. But their income is by far lower than what an executive would get paid. So what explains their difference? The variable that can explain high executive compensation can not be “competition”, but rather “power”. An executive is simply more powerful than an engineer, because he/she coordinates the financial flows of the company, and some or much of the flow can really end up in his/her own bank account rather than in the paycheck of lower-level employees.
I would argue that especially at a non-profit institution we should be able to find competent and passionate educators, who lead these universities for no more than $500,000 annual compensation, which beats any professorial or other administrative work. Whoever earns more is really suspicious, and I had already rejected the productivity and competition argument as invalid. In the case of lower executive compensation, the university would be able to hire a whole department of 50 people or so. If we trim the compensation of other university leaders, that would be another 100 to 200 people, who could be employed at lower salary levels.
Some people would argue that the president deserves to be paid so much, because their role is so important that they can’t allow themselves to make a mistake, whereas low-level employees can easily be replaced and their mistakes are more an annoyance than an existential threat to the company. But how much more important are they? The president of the organization is certainly very important, but they should be paid only so much that one can fill this essential position. For that reason an executive needs to command a higher income than the average worker (say 10 times), but not 100 times more.
Amy Gutmann’s compensation is not the only problem, but it is emblematic of larger structural trends in society that point to a growth in income inequality. If we are really serious about addressing this issue, then the top executive compensation must be more critically objected to.