Letter from Jerry Kirkpatrick – to Edith Packer and George Reisman

October 26 1993

Edith Packer and George Reisman
Board of Advisors
The Ayn Rand Institute

Dear Edith and George:

As a contributor to the Ayn Rand Institute, I would like to respond to Mike Berliner's October 19 memorandum concerning "Faculty Salaries at the Objectivist Graduate Center (OGC)."

First, what strikes me most about this proposal is the glaring illegality of paying the Board of Directors to teach at OGC. I have attached copies of pages from a book entitled The California Nonprofit Corporation Handbook, 6th ed., by Anthony Mancuso (Berkeley, CA: Nolo Press, 1991). On page 2/8, Mancuso states, citing nonprofit corporation law, "at least 51% of the board of a public benefit corporation [which the Institute is] cannot be 'interested' persons." An "interested" person is one who "receives any money for services rendered the corporation in any other capacity." At minimum to remain legal, the Institute must immediately increase the size of its Board of Directors to five. This is an action which I think should be done in any event to provide more varied knowledge on the board and, especially, to imbue the Institute with some professionalism about business management. (The lack of business professionalism in the operation of the Institute is something that other contributors and I have noticed and talked about.)

Second, I am disturbed that a subcommittee from the Board of Advisors was chosen to determine faculty salaries when it is the contributors' money that is going to be spent. I do not think many contributors would agree to spending approximately $6400 per student as this proposal suggests. (The figure is based on a starting class of seven students and includes the proposed expenses for the two faculty.) On an annual basis, this amounts to $12,800 per student! The California State University (CSU) – an educational system not known for frugality – spends only $7500 per student annually. Why was not a committee of contributors chosen to determine not just the salaries of the faculty but the financial soundness of the whole operation? Or at least chosen to advise the subcommittee? It is elementary capitalism (and Objectivism) to consult one's investors before spending their money.

Third, speaking of frugality and capitalism, it is elementary business knowledge that start-up entrepreneurs do not win the confidence of venture capitalists and bankers by proposing to pay themselves large salaries with the start-up investors' money. Proposals to pay oneself minimum wage (or an adjunct professor's salary), to rely on mass transit rather than rental cars, and to sleep and eat in someone else's home are what venture capitalists and bankers look for to convince them that the start-up entrepreneurs are not just going to line their pockets with the new-found money. If the present proposal were approved, and the directors were to accept its recommended salaries, this would smack of self-dealing and self-aggrandizement, and make a mockery of entrepreneurial capitalism.

Fourth, the logic of the subcommittee's proposal is skewed. The subcommittee bases the suggested salaries on what is being paid at private schools, but the operation of OGC will be more like that of a state college. Students at private universities pay tuition amounting to 50-80% of their total educational costs (a "bottom-up," market-based approach to financing education). OGC students, however, will be paying nothing, and the approach to financing the operation is "top-down," in the way that state legislatures allocate money to each of the state's colleges and universities. This means that the standard of determining salaries should be more akin to the "full-time equivalent" (FTE) approach of state colleges. The full-time equivalent student is an annualized weighted average of the number of students attending a college times the number of hours for which each student is registered. State colleges are allocated money on the basis of an FTE formula; in the CSU system, I believe that the colleges are allowed one full-time faculty member per 25 FTE students (and a full time student is one who takes 15 semester hours per term). But say the formula calls for 20 FTE students per instructor. Using the subcommittee's base salary figures and this FTE formula, the salaries for Dr. Binswanger and Mr. Schwartz should be adjusted downward as follows:

FTE student hours per year = 15 hours per week x 32 weeks x 20 students = 9600
Total student hours for Dr. Binswanger = [105 hours x 7 students (the minimum)]+ 82.5 tutorial hours = 817.5
(817.5 divided by 9600) x $44,690 = $3806 FTE salary for Dr. Binswanger
Total student hours for Mr. Schwartz = 80 hours x 7 students + 80 tutorial hours = 640 (640 divided by 9600) x $31,923 = $2128 FTE salary for Mr. Schwartz

This FTE approach to determining faculty salaries, I submit, is much more in line with the interests of contributors. It provides at least some modicum of a benchmark with which to measure return on money contributed. To keep a further perspective on faculty salaries, let me point out that one Objectivist philosopher, who holds a master's degree in philosophy from Harvard University, will be teaching three courses of 40 students each next semester for three hours a week per course for eighteen weeks and will be making a total of $6000, no expenses. The contact-hour approach to determining faculty salaries is a notorious bureaucratic technique – and labor union bargaining chip – by which to increase the administrative expenses (the fixed costs) of a college education, at the expense of students, taxpayers, and contributors.

By the nature of a non-profit organization operating in a mixed economy, no objective standards deriving from the marketplace – in this case from a free market in education – exist to guide the Institute's decision making. For this reason, the Institute – especially its directors, and especially the directors of an institute that promotes Objectivist philosophy – must bend over backwards to ensure that it operates in the best interests of its contributors. The Institute, after all, and, again, especially the directors, are agents of the contributors, charged with achieving the maximum long-term advancement of Objectivism for the least dollar contributed. For this reason, I urge that the Board of Directors be expanded by at least three members who are contributors to the Institute and who also have substantial knowledge of, and success in, "real world" business and finance. I would hope that a new Board of Directors would immediately begin a dialogue with contributors in the form of quarterly and annual reports – balance sheets and income statements being one of the simplest and quickest ways to grasp how one's money is being spent.

The present proposal, I submit, borders on the abuse of contributor trust, or at least has resulted from flagrant context-dropping, specifically, the context of just who does pay for Institute activities, including salaries and expenses of its directors. I am one who does pay. Please pass this message along to the leadership of the Institute.

Sincerely,

Jerry Kirkpatrick, PhD
Professor