Compensation Clawback Might Help Fix Higher Ed

Executive-pay reforms might be a piece of the answer in turning around American higher education. That’s because after the financial crisis of 2008, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, setting a precedent that could be extended to the current crisis, too.Among its many provisions was section 954, “recovery of erroneously awarded compensation.” It requires publicly traded companies to implement policies that would claw back from former executives “incentive-based compensation” that was received based on “erroneous data.”It took the Securities and Exchange Commission 12 years to adopt its own rule implementing the law, but when the commission did so, in 2022, its chairman, Gary Gensler, said the rule would strengthen “the accountability of corporate executives to investors.” The law set a three-year lookback period.The violent and disruptive anti-Israel disturbances that have plagued college campuses since the Iran-backed attack on Israel of October 7, 2023, are the higher-education equivalent of the financial crisis of 2008, exposing rotten risk-management practices, poor judgment, complacency, and corruption.It turns out that incentive-based compensation is prevalent in higher education, too, including among some of the institutions that have been in the headlines and hauled before Congress as a result of their underperformance.The University of Pennsylvania reported $1 million in “bonus and incentive compensation” for its outgoing president, Amy Gutmann, on its most recent publicly available tax return, part of $22.9 million in total compensation for the year. For comparison’s sake, the chief executive of Bear Stearns was paid a $17.8 million bonus in 2006 and the chief executive of Lehman Brothers was paid a $6.4 million bonus in 2006, according to a 2009 paper by Lucian Bebchuk, “The Wages of Failure.” Ms. Gutmann also reportedly got a $3.7 million loan from Penn at a 0.38 percent interest rate to help her with her transition out of the Penn presidency. She’s now the American ambassador to Germany.Columbia’s departing president, Lee Bollinger, got a $6 million loan from the university to help him and his wife buy an $11.7 million three bedroom, four and a half bathroom apartment in the Beresford at 211 Central Park West. Mr. Bollinger also reported $700,000 in “bonus and incentive compensation” as part of an overall $3,879,804 compensation package. Columbia’s tax return says the $700,000 included “payments under a performance-based bonus award.”I emailed Bollinger’s office to ask what he thought of the idea of applying a Dodd-Frank-style compensation clawback for higher education executives whose institutions plunge into crisis. Mr. Bollinger’s assistant replied that the president emeritus is on sabbatical and not available to comment.Harvard’s latest publicly available tax return doesn’t list any bonus or incentive pay as part of the $1,330,300 in total compensation for Lawrence Bacow, its president who left in June 2023. Harvard’s then-provost, Alan Garber, is listed as having received $40,000 in “bonus and incentive compensation” as part of his $946,159 in overall compensation. Dr. Garber is now the interim president. Harvard’s then-dean of the Faculty of Arts and Sciences, Claudine Gay, earned $20,000 in bonus and incentive compensation as part of total pay of $879,079. Harvard’s tax returns explain that “the university offers incentive compensation for outstanding performance.”Defenders of Presidents Gutmann, Bollinger, and Bacow might claim that they deserve plenty of pay for staving off the worst problems while they were in office. Critics might contend that they left their successors with grave problems by admitting students and hiring professors who have contributed to the outbreak of campus antisemitism. Call them the après moi, le deluge class of higher education executives.Sure, higher education isn’t exactly the same as investment banking. It may be worse. At least at Lehman Brothers and Bear Stearns a lot of the executive compensation came in the form of stock that lost a lot of value. At the universities, an institution’s reputational decline can damage the prestige of a former president, but the compensation tends to be in the form of cash or housing.Why not put the former presidents on the hook for paying some of it back? They might contend they had no way to predict a war would break out in the Middle East with devastating consequences on American campuses. That’s like the investment bankers telling Congress they had no way to foresee trouble in mortgage-backed securities. It’s not a great answer.Perhaps if the college presidents had better personal incentives to watch out for the risks, they would have made different, and better, choices, and their campuses today would be in better shape.A college president compensation clawback law wouldn’t solve all of higher education’s problems, any more than Dodd-Frank will prevent another financial crisis. Yet the principle that performance takes at least a few years of perspective to evaluate fully applies just as equally to higher education as it does to business. The law might as well reflect that reality.If Congress doesn’t see fit to mandate such provisions, trustees may want to try to negotiate for them in crafting employment agreements with the new permanent presidents who will eventually replace Ms. Gay at Harvard, Elizabeth Magill at Penn, and Peter Salovey at Yale. The concept of “erroneously awarded compensation,” after all, isn’t limited to Wall Street.

Compensation Clawback Might Help Fix Higher Ed

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