• April 18, 2014

Highest-Paid Presidents Face Backlash, Study Finds

When defending compensation of $1-million and more for college presidents, trustees and university officials often repeat a simple refrain: Attracting the best talent costs money.

In 2011 the 10 highest-paid private-college presidents cost their institutions an average of about $2.3-million each. Some trustees would say that's a bargain compared with the amount a high-caliber president can bring in through fund raising. But the actual cost to a university of having one of the highest-paid presidents in the country may be more than just salary and benefits, according to a new working paper.

Institutions whose presidents appear in The Chronicle's top-10 list of highest-paid private-college executives receive between $2.8-million and $4.5-million less in donations the following year than their peers whose presidents are outside the top 10, according to the paper.

The difference is donor awareness of executive pay levels, said the paper's authors, Brian D. Galle, an associate professor of law at Boston College, and David I. Walker, a law professor at Boston University.

From 1997 to 2009, the period the professors studied, The Chronicle published lists of the 10 highest-paid presidents at doctoral, master's, and baccalaureate institutions; the rest of the presidents and their pay were listed alphabetically by college. So it was easy for a potential donor to see who was the ninth-highest-paid president in the country, but it was much more difficult to find out who was the 11th. But whether an institution's president was ninth or 11th—therefore falling on the list or off—did not reflect a meaningful difference in pay, the researchers said.

"Presidents who are seventh, eighth, and ninth are very, very similar to the presidents who are 11th, 12th, and 13th," Mr. Galle said.

The implication is that when potential donors know that an institution's president is among the highest paid in the country, they are less likely to donate. The difference in donations, the researchers found, came despite the fact that institutions with the highest-paid presidents had, on average, increased spending on fund raising in the year after their leaders made the top-10 list.

At New York University, where President John E. Sexton has appeared both on The Chronicle's top-10 list and just below it several times over the past decade, the data show a slightly more complicated picture. After Mr. Sexton was listed as the fifth-highest-paid president of a research university in The Chronicle's survey in 2008, donations dropped by about one-third, or more than $100-million, tax filings show.

But the following year, contributions rose about 20 percent, even though Mr. Sexton again appeared on the top-10 list.

In an email, John Beckman, a spokesman for NYU, noted that the 2008 fiscal year was in the midst of the recession, a factor that may have played into the drop in donations that year.

Backlash against the highest-paid presidents can also come from their own boards of trustees. In the year after appearing on The Chronicle's top-10 list, a president's salary increased at a slower rate than that of their peers who were not on the list, the researchers found. While pay for other presidents rose 14 percent on average, pay for those who appeared on The Chronicle's top-10 list rose by an average of only 4 percent.

But increased disclosure of compensation doesn't necessarily lead to lower pay for executives, Mr. Walker said. While he and his co-author believe that openness about compensation is better than obfuscation, he cautioned that disclosure has been found to lead to ratcheting up of compensation in what is known as the "Lake Wobegon" effect, referring to the public-radio program about a fictional Minnesota town where "all the children are above average."

"All presidents are seen as above average, and no one wants to be seen as paying their president below average," Mr. Walker said.

Whether public awareness of executive compensation pushes pay up or down, Mr. Walker and Mr. Galle say it would be healthy if more information about college leaders' pay were made available. That, the researchers said, might lead donors, students and the faculty to push for more constraints on executive compensation at nonprofit institutions, similar to how shareholders have put pressure on public companies to rein in executive pay.

The paper didn't analyze the period after 2009, when The Chronicle made it easier to find the salaries and rankings of presidents outside the top 10 through interactive online features and top-100 lists. That might change how much attention gets paid to the compensation of presidents lower down on the list, Mr. Walker said.

"The underlying story that donors care about pay and that donors respond negatively to pay in the aggregate," he said, "will probably continue to be true."

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