Do You Want a 43% Pay Raise?

How would you like your employer to increase your compensation package by 43 percent? 

If you would, just follow these two steps:

1. Become the President of the University of Pennsylvania.

2. Negotiate the deal with the Board of Trustees

That’s exactly what Amy Gutmann did.

The University of Pennsylvania increased Gutmann’s compensation package from $1,462,742 in 2010 to $2,091,764 in 2011, according to a recent report in The Daily Pennsylvanian.

Penn President Amy Gutmann by University of Pennsylvania

Amy Gutmann, President, University of Pennsylvania

The report is based on the University’s most recent tax filing. Gutmann’s 2011 compensation package marks more than a 170 percent increase since 2005, the year Gutmann became President.

Let’s put Gutmann’s compensation into perspective.

The New York Times reported in 2011 that, “in the decade from 1999-2000 to 2009-10, the average presidential pay at the 50 wealthiest universities increased by 75 percent.”

Among Ivy League university Presidents, Gutmann has consistently ranked third in recent years, behind Columbia University and Yale University. However, in 2010, Gutmann was the 12th-highest-paid private university president in the nation, according to a report in The Chronicle of Higher Education. That was not good enough according to David Cohen, Penn’s Board Chair and Chair of the Compensation Committee. Here’s what The Daily Pennsylvanian reported:

After seeing that report, Cohen said, the compensation committee was struck that Gutmann had not placed in the top 10. Given the scale and complexity of Penn, as well as Gutmann’s performance, he said, the compensation committee believed it needed to adjust Gutmann’s compensation to bring it more in line with her peers.”

For whatever reasons the Penn Board did not believe that being ranked 12th in presidential compensation was good enough. Penn needed to be ranked among the top 10.

To look at Gutmann’s compensation package from a different perspective, let’s look at what the average professor at Penn earns. In Fiscal Year 2011, the average Penn full Professor earned $177,139. That means that Gutmann earned nearly 12 times what the average Professor earned, an unusually high differential. (By the way, the compensation of Penn Professors ranked seventh among private colleges and universities nationwide.) By contrast, the typical college or university President earned 3.7 times as much as the average pay and benefits of a full Professor at the same institution, according to a 2011 report in The New York Times.

On average, since 1990, Penn’s tuition has gone up by about twice the rate of inflation, according to Philadelphia Magazine/The Philly Post. The maximum total cost for an undergraduate to attend Penn in 2011-12, was $53,976, including tuition, housing, board, and fees, according to The Daily Pennsylvanian. Gutmann defended Penn’s tuition increases, citing the fact that “costs go up faster than tuition.”

I tend to agree with Harvard’s Dan Pallotta, who has long said that nonprofit organizations should be evaluated based on outcomes rather than costs. He has also advocated for paying nonprofit executives fairly based on the outcomes they have and will achieve. People should not have to work for less just because they work in the nonprofit sector.

Gutmann has achieved great things at Penn, for example: The University recently completed a $3.5 billion capital campaign. Penn’s student applicant pool grew by 9,000 from 2009 to 2011 and has held steady ever since, according to Philadelphia Magazine/The Philly Post. Penn placed number seven among national universities in the latest US News and World Report ranking.

Given that a sizeable portion of Gutmann’s compensation package is incentive-based, part of the compensation growth she has seen can be attributed to her accomplishments.

Some of the questions for nonprofit organizations include:

  • How much is it appropriate to pay staff?
  • How much more than other staff should the CEO be paid?
  • What percentage of pay increase is reasonable?
  • If the CEO can earn a bonus, should other staff have a similar opportunity?
  • What activities should be incentivized?
  • How should a nonprofit set employee compensation?
  • When setting CEO compensation, how can nonprofits avoid the cronyism that we have seen among boards and CEOs in the for-profit sector?
  • Should nonprofit employees be paid on a comparable basis as their for-profit counterparts?
  • How does nonprofit compensation affect the public’s perception of nonprofit organizations?

I don’t know what the answers are. I would like to hear your thoughts.

Specifically regarding Gutmann’s 43 percent raise, please respond to the following poll to tell me what you think:

 

That’s what Michael Rosen says… What do you say?

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10 Comments to “Do You Want a 43% Pay Raise?”

  1. Gosh, Michael, this is a tough one!

    A part of me wonders if her compensation would come into question had she been a man but this is a whole other topic! – smile

    It appears that her performance is in line with her compensation and comparable with her peers, but I would also argue for equal consideration for her top adminstrators – the ones who have assisted her in her achievements – if not already under consideration. Of course, her staff”s increases would be contingent upon their stellar performanace, both as producers and leaders of their teams.

    Finally, is this raise on the backs of students and their tuition or is it from endowment or investment revenue? The latter would certainly be more appropriate.

    • Michelle, thank you for sharing your thoughts. When I told my wife, a Smith College alumna, about the topic of this post, she was also concerned about the gender issue. She wondered whether the compensation hike would have been news if Amy Gutmann were a man. While I can’t speak for the mainstream media, I can tell you that gender was not the issue for me. That’s why I looked at how Gutmann’s compensation compares to her peers and to the University’s Professors. My conclusion was that this is a story about a university President. For me, it still would have been a story if Gutmann were male.

      You’re right, this is a tough one. I’m all for paying folks what they’re worth. However, what troubles me about the Pennn situation is 1) the size of the increase; 2) like you, not knowing whether other staff received similar raises or bonuses; and 3) the difference between the President’s compensation compared with Professors.

      I’m not quite sure how Gutmann’s raise will affect students. However, I can tell you that the amount of the increase is about $65 per student. The raise amount is well less than one percent of the University’s budget.

      The situation at the University of Pennsylvania certainly raises a lot of questions that I think are worth discussion in our sector. Thank you for taking the time to be part of the conversation.

  2. In response to your question in the title, Yes! I do, because I’m worth it, and thank you very much for asking.

    In response to your poll, I am (currently) among the minority, having voted “Yes.”

    I appreciate your mention of Dan Pallotta, as I am convinced I would have voted “No” had it not been for my recent viewing of his TED talk given this last March. It has completely altered my thinking towards not-for-profits, and has made me an apostle of sorts of his philosophy. Here is a link to that talk:

    He, far more eloquently than I, lays out the rationale for why I voted, “Yes.”

    For those who are not among the 2 million plus viewers of this talk I offer the following caveat:

    Be prepared to have your views on not-for-profits change dramatically—because I know mine did.

    • Scott, thank you for commenting. I hope you get that raise you deserve. Good luck!

      I also thank you for sharing the link to Dan Pallotta’s TED Talk.

      Despite being a Pallotta fan myself, the University of Pennsylvania story still left me feeling uncomfortable. I’m concerned by the size of the increase. Was it done for the right reasons, or did the Board increase the compensation for some weird ego reason and a need to have the Penn President ranked among the top 10 in pay? Amy Gutmann did not achieve her goals on her own. So, were other staff members given significant raises and/or bonuses? My other concern is the above-average disparity between what the average Penn Professor earns v. what the University President earns.

      The Penn situation is complex. If it were just a matter of whether or not Gutmann should get a raise, it would have been a non-story. However, because this case is complex, it raises several important questions, not just for Penn but for the entire nonprofit sector.

  3. Michael,

    There are many in the nonprofit sector that say nonprofits need to be more like the business sector, but in my opinion, excessive pay for the CEO is not what they are thinking. Double digit increases for leadership compensation while professors and other staff is much lower will lead to problems, and it exacerbates the issue of wage disparity which is a common topic of those in the nonprofit sector. I like the great selection of questions for your readers to ponder.

    • Richard, thank you for your comments. I believe that people should be paid what they’re worth. Folks should not have to take a pay cut to work in the nonprofit sector rather than the for-profit sector. If the nonprofit sector wants to attract and retain top talent, the sector should be prepared to fairly compensate those people. However, as you’ve suggested, this needs to be done wisely. When I hear people say that nonprofits should be run more like businesses, I often wonder which businesses they’re talking about: Enron? AIG? BP?

      The nonprofit sector should set an example by being sensitive to the issue of compensation disparity, avoiding cronyism, and by fairly linking compensation to outcomes.

  4. Rather than discussing Amy Gutmann’s salary, I’d prefer to address Dan Pallotta’s arguments in favor of increasing compensation in the nonprofit sector and evaluating nonprofits based on outcomes rather than costs.

    There is much merit, I think, in his arguments. I have spent 2/3 of my life working in the for-profit sector and now 1/3 in the nonprofit. The lower salaries and less demanding working conditions in the nonprofit sector can breed a culture of mediocrity, where one is evaluated more on tenure and personal connections within the institution than on performance. In fact, benchmarking against the “outside” world is resisted, and loyalty to the institution and sheltering within one’s job description while resisting change can become the norm. Many nonprofit employees feel quite justified in these attitudes, I think, believing that this is a fair trade for the higher salaries they could have earned in the for-profit sector. But the cost to the institution is significant, and is reflected both in low productivity and in low morale (which, for each employee, tends to fall over time as he/she becomes more ensconced in this position and attitude).

    By making these comparisons I don’t mean to argue that these negative attitudes and behaviors are absent in the for-profit sector, but just that they are more prevalent in the nonprofit sector.

    While the pay differential between the sectors is not the sole cause of these problems, I believe it is a significant one, perhaps the most significant one. So, should we applaud raising pay and demands and making the nonprofit sector more like the for-profit sector?

    There is a huge risk in moving that way: As nonprofits we depend, to varying degrees, upon the goodwill and generosity of our donors. Donors give for many reasons, of course, and their perception of our need may not be the principal reason for most gifts. In fact, Harvard, Penn and the like might be able to bring their cultures much closer to that of the for-profit world. And though they might, in the process, lose some donors who no longer feel the case for support of (among other things) such well-heeled staff quite so compelling, I personally imagine that most donors to those institutions are no more motivated by a perception that the place needs their money than were donors to medieval churches.

    But what about the rest of us? If you, gift officer, are making as much as the trader or investment banker or lawyer (forget about the hedge fund guys) you are talking to, do you think he/she is going to find your pitch as compelling? When it becomes a pure business proposition, why should a donor move assets out of his/her column and into yours? Is your college, for example, really going to be perceived by donors as being that good? Can it ever be? Isn’t this a prescription for widening the already yawning gap between rich and poor institutions?

    I don’t know about you, but it worries me a lot. As much as I’d like to see my institution get stronger, better and more efficient, I think it would be risky to bet it all on adopting the pay and practices of for-profit institutions. Not only would most of us lose donors, I think, but eventually we might lose the tax status altogether. Neither the public nor the Congress has shown much taste recently for nuanced arguments, and the need for tax revenue is not likely to abate in the near future.

    • Kyle, thank you for commenting and for taking the conversation in a worthwhile direction. I agree with you that simply increasing nonprofit compensation levels based on for-profit benchmarks could be disastrous for the nonprofit sector. Just think of the for-profit executives who received massive bonuses after achieving massive losses for their companies. Think of the corporate CEOs who received spectacular compensation packages from their buddies who just so happened to dominate the board. Think of the enormous disparity in some companies between what the CEO earns and what other employees earn. No, these are not the standards that the nonprofit sector should adopt.

      When Dan Pallotta talks about increasing nonprofit compensation, he’s not talking about doing so just for the sake of doing so. He believes that compensation should, in some way, be linked to outcomes. In other words, people should be paid what they are worth.

      If a major gifts professional can achieve above average results, s/he should receive above average pay. If we want to attract and retain top talent, then we need to be willing to pay for it. If our donors get annoyed by the staff compensation, we need to justify it by pointing to outcomes.

      This discussion reminds me of a situation involving the Philadelphia Orchestra many years ago. Riccardo Muti was the Music Director. He is a fantastic artist who helped the Orchestra regain its position as the world’s greatest or one of the world’s greatest. When his contract came up for renewal, the board negotiated a deal that made Muti one of the highest paid conductors in the world. The Philadelphia media and audience were outraged. Even some board members were angry and prematurely leaked the information to the press. After a time, things quieted down. Philadelphians appreciated having such talent on stage in our city. When Muti’s new contract expired he chose to return home to Italy. Philadelphians were now angry with the board for a different reason: How could they let Muti go!?!

      The point of my Orchestra story is this: If donors recognize that the organization is getting tremendous value for the dollars it is spending, the donors will understand and be supportive. In the Orchestra’s case, the public did not fully appreciate the Orchestra’s decision until Muti was gone. By the way, his first return performance in Philadelphia was nothing short of historic.

  5. Interesting post, Michael. I think another piece of information that might be helpful is what the average salary/wage is for a UPenn employee and how much has that increased over the same period of time. This might provide some more context.

    Personally, I think a 170 percent increase in eight years is quite excessive. Especially since most employees at non-profits scrape by with a three to five percent annual raise, if even that.

    • Publicus, thank you for commenting. You’re right. The additional information would put things into better context. Unfortunately for us, Penn is a private institution and, therefore, getting such information is not easy. However, for context, I was able to learn that the Penn President is earning about 12 times what the average full-time Professor earns; this is an above-average disparity. And I learned that, even among wealthy universities, the rate of compensation increase for the Penn President seems extraordinary. Yet, this does not tell the complete story. Amy Gutmann has been quite a good, accomplished leader for Penn. We need to factor that in when considering context.

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