Are College Presidents Paid Too Much?

In a typical week, I get four or five inquiries from media relating to some higher education issue. Five years ago, perhaps five or ten percent of those inquiries related to university executive compensation, especially the salaries of presidents. Now, probably 40-50 percent of the queries are on that topic.

The public is increasingly interested in and incensed about sharp increases in the pay of top university officials. Those increases seem hard to justify at a time of high tuition fees, when more colleges face a shaky financial future as enrollments level off or decline and taxpayer and philanthropic contributions stagnate, and with a national economy whose growth is trending sharply downward (annual output rose around 3.6 percent annually in most of the 20th century, compared with about 2 percent now).

A friend of mine, a former president of one of the nation’s leading universities, the University of Michigan, told me that he made $196,000 in his last year as president, 1995-96. Seven years later, Mary Sue Coleman became Michigan’s president at a salary of $450,000 a year; in her last year there, 2013-14, she made, with various supplements on top of a $600,000 base pay, nearly $1 million.

Michigan’s new president starting in 2014-15, Mark Schlissel, was given a $750,000 base pay (25 percent more than Coleman), with all sorts of additional perks, such as a $100,000 annual “retention bonus.” I am jealous—I am in my 52nd year of teaching at Ohio University and yet have never received a retention bonus.

Oh, and Schlissel received a nice raise for the year just ended (to $772,500 base pay).

Compare that with the typical American worker. From 1995 to 2014, the Michigan president’s salary, correcting for inflation, rose over 151 percent; the average American worker’s compensation rose less than 25 percent. The salary differential between the president’s salary and the ordinary worker’s pay more than doubled.

The Michigan experience is quite typical. Governing boards are in a frenzy to raise pay of top executives across the country. A recent report by the Chronicle of Higher Education found that the most highly paid college president in the country is Renu Khator at the University of Houston. She receives $1.3 million in total compensation. Four other presidents bring in more than $1 million.

The Board of Governors of the University of North Carolina approved nice raises for the chancellors of the various UNC campuses about nine months ago; now, for most of the chancellors a second raise within a year is forthcoming—in some cases, the percentage increase is double digits. (See this Pope Center article for the details.)

Moreover, this discussion probably understates compensation increases. Many university presidential contracts today have buried within them sizable deferred compensation payments coming at the end of the presidency. For example, when Richard Levin retired from the Yale presidency a few years ago, he received a walloping $8.5 million as a goodbye present.

One might argue that these lofty earnings are justified because university presidents have stressful jobs, that a successful president can bring in millions more revenue for universities, and that presidential pay is a trivial factor in explaining tuition inflation. (Schlissel at Michigan or Margaret Spellings at North Carolina earn an amount far less than $20 per student.) Moreover, it is true that university presidential pay pales in comparison with that of major corporate CEOs, and running a university is almost as complicated and daunting a task as running a large business.

Here’s an alternative perspective.

Universities are given a privileged status in our society—they receive tax receipts rather than make tax payments. For all the publicly provided privileges they receive, their leaders are expected to act like public servants serving the public good—deriving considerable satisfaction from providing public service while living a very comfortable material life.

The salary of the Pope or the U.S. President has not gone up in recent years, and we still have little trouble filling those positions (although arguably the quality has deteriorated a bit). The commandants of our prestigious military academies make a small fraction of what the new breed of million dollar presidents make—yet they serve proudly.

Also, there are considerable negative spillover effects of paying university presidents a lot. First, there are domino effects. If trustees give the university president a big raise, they feel the need to do the same for the provost, the chief financial officer, and other key officials. A $100,000 presidential raise will end up costing several times that amount.

Probably more important, big raises to university presidents annoy and anger key supporters.

Regarding public universities, legislators and governors who make relatively modest salaries are angered by big presidential pay increases. It may not be a coincidence that the decline in state legislative support for universities over the past decade has occurred simultaneously with big increases in presidential pay. Why should state officials give universities more money if they are going to use some of it to engage in aggressive rent-seeking and paying people more than necessary for them to do their job?

Is there any correlation between university presidential pay and university performance? Not that I can ascertain. The University of Houston pays its president roughly double what the University of California does—double the pay, one-half the reputation or responsibilities.

My hero among university presidents, Mitch Daniels, did something interesting when he assumed the presidency of Purdue University in 2013. He asked the governing board for a contract with a smaller salary than his predecessor, but with several opportunities for bonuses if he achieved certain performance objectives.

Other governing boards should consider that idea. If fundraising increases or if the president presides over a school whose reputation is generally rising or per student costs are falling, a bonus is in order—but it requires achievement.

A big problem with performance-based compensation, however, is measuring presidential achievement. There is no good bottom line. Did the University of Houston do well in 2015-16? How would you know? Are the students getting better? Are they learning more? Indicators of performance are few.

Furthermore, presidents control information flows to their governing boards, giving them lots of good news but often suppressing it if bad things are happening such as the decline in magazine rankings, evidence of mediocre employment figures for new graduates, etc. The board is led to believe that its president is uniquely able to shape the institution positively, on time and under budget. Most of the time that is simply not the case.

Another problem is that new presidential pay is often inflated because lazy governing boards rely too much on search firms, firms that are sometimes paid a fraction of one year’s presidential salary.

I do not have easy solutions. As long as governments drop money out of airplanes over campuses and trustees receive only Pollyanna-ish disinformation on the state of the university, the trend will continue. Few university presidents are truly superstars, well above average in their performance, but many are paid as if they were.

  • John Willson

    Perhaps we should start someplace else. It is said that when Bear Bryant went to Alabama as football coach and they asked how much he wanted to be paid, he said, “How much does the president make?” They told him, and he said, “I’ll take that.” It was lately published that there are, this year, nine football coaches at Alabama who make over $575,000 per year, including a “strength” coach. It would not surprise me if the entire English Department will not be paid what the head football coach makes. Before we worry about presidents (most of whom are not paid very much), should we not get the internal (relative) hierarchies right?

    • George Leef

      I see no reason to start at any particular place in paring down unnecessary and unjustifiable college expenses. I agree entirely that sports coaches are overpaid, but why not criticize them along with all of the college presidents who do have opulent contracts?

  • Glen_S_McGhee_FHEAP

    I noticed the RPI is on the US DOE watch list and has to post a letter of credit with the government, and I remember reading a series of stories about its president’s prodigious capacity to spend money on herself. Much of this money goes into mansions and estates, just like the MacMansions of the last century. It is a status-competition, both for the presidents and their boards. The more they spend, the higher their status among peer schools. No one wants to fall behind, students be damned.

    • George Leef

      Very illuminating comment, Glen — thanks for that astounding illustration of needless spending.

      • Glen_S_McGhee_FHEAP

        Yeah, bodyguards! Worse yet, RPI is on USDOE watch list, has to pay for massive letter of credit.

        All this is only the tip of the iceberg. The blogger at edububble.com complied massive amounts of data, including this gem:

        Last time I looked, 1,300 professors made more than the Governor. University of Maryland’s staff completely dominated the rosters of public servants.
        http://marylandreporter.com/2011-maryland-state-employee-salaries-100000-and-larger/
        IHE apparently found this link so offensive, they removed my post.

        ====================================
        Universities and colleges are more or less in the business of building, maintaining and increasing their status, prestige and reputation. It is an arms race, that should be understood as a status competition that includes recruiting fund-raising presidents, or presidents with legislative connections, mega-star faculty, international and/or high-wealth students, research grants, and alumni contributions. All these activities cost
        money, and the mark of a higher-status institution is the ability to pull down more resources than the next school. In fact, this is generally recognized as success and prestige.

        The arms race itself involves layers of congressional lobbying (one congressman was even a provost), powerful associations that have defended “academic freedom” for more than 100
        years, and accreditors that act as an institutional buffer for the entire sector.
        Note: Val Burris explicitly works this out in The Academic Caste System: Prestige Hierarchies in PhD Exchange Networks http://www.cunyawards.org/wp-content/uploads/2015/07/Burris-2004.pdf

  • mitchelllangbert

    The measures the universities use to justify higher CEO pay are financial and have little to do with student engagement or learning. See http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2089641 : OLS estimates suggest that institutional size, performance and prestige are linked to presidents’ compensation. Pay is for performance. Externally recruited presidents are paid more than those promoted from inside, which tends to confirm the relationship between pay and performance. Non-denominational institutions tend to pay more than religiously affiliated ones. There is some evidence that large class sizes and low alumni giving rates are negatively associated with compensation. The impact of tenure is positive and significant, but its magnitude increases greatly if a quadratic term is added. In order to deal with potential simultaneous equations bias, the model was re-estimated with two-stage least squares. Using this method, the impact of enrollment on earnings rises and the effect of a peer assessment index on earnings is largely unchanged. The impact of various school characteristics on longevity as president is also investigated. Probit models indicate that the acceptance rate is negatively associated with the probability of remaining in office.

    • Glen_S_McGhee_FHEAP

      You are quoting the abstract, but let’s look at the study a little more closely.

      One of the drawbacks of this study is the lack of specification of compensation: “we do not have information about details of the compensation arrangements.” Details of the ways in which true or actual remuneration occurs would require its own study, indicating that the results of this performance measure study less reliable.

      Performance models are full of dodgy proxies that do not relate directly to the individual, or their in-coming team. College presidents all to frequently fire and hire those they want or need, and performance model studies do not reflect this kind of management team.

      Performance models of compensation lack transparency and make it impossible to tell exactly how the inputs influence the output. Although boards rely on performance dashboards as a way of eliminating human biases, there is no evidence that this is successful.

      Performance measures such as revenue per student, class size, SAT scores, and factors such as the age of the school, alumni giving rate, national university status, and peer assessment cannot be meaningfully tied to a single college president, and it is foolish to think that they can be.

      “Performance measures, such as size, SAT scores, and revenue,” which have next nothing to do with college presidents, and everything to do with geographic location, the institution’s history and immediate environment, local demographics, government lending policies and programs, and, of course, job demand and the economy. Prestige and status of the school is hierarchical and historical, and compensation reflects that, and it also reflects prior hiring history as mediated by boards.

      As the study notes, “it is plausible that college presidents may be able to manipulate some of these performance measures. If so, the results obtained in this study and earlier work may be flawed,” limiting generalization. A good example do this is to “expand early decisions programs … thereby reduce the percentage of applicants accepted, thereby creating the false impression that they have become more selective.” Or they may use “a related strategy by encouraging relatively weak students to seek admission, which in turn will allow them to reduce their acceptance rates.”

      In addition, “colleges can choose to make it optional for applicants to indicate their SAT scores. This in turn will induce only those who did well on the test to provide this information, which in turn will artificially raise average test scores. This strategy may also induce students with lower SAT scores and perhaps inferior academic credentials to apply, which in turn will allow these schools to raise their rejection rates and appear to be more selective.”

      When this happens, performance models are not just flawed, but literally fraudulent.

  • Stephen Combs

    A couple of years ago as a faculty senator at the community college where I teach as an adjunct, I was invited to attend a union organizing meeting for adjuncts. I dutifully attended and listened. The meeting was convened by the Faculty Forward adjunct union. One of the leaders was complaining about the president’s salary and comparing it with ours — less than half, on a course-by-course basis, of what a new public school teacher makes with a bachelor’s degree in education and zero experience, teaching or otherwise. I think our president was making about $350,000 at the time. I was making $17,000 teaching the same number of courses as a high school teacher starting at $35,000. (That is another argument for another day.) One of my colleagues, an economics adjunct (who attended with the same skepticism as I), tried to explain to our organizing colleague that our president knows how to do things we can’t do — like squeeze money out of the legislature. He tried giving our friend a high school-level lesson in supply and demand, to no avail. That is part of the problem when trying to discuss matters like this with uninformed — or worse, misinformed — people. They just don’t want to hear it.
    I have no doubt that many college presidents are overpaid, as you lay out in this piece, clear and convincing. I speculate that readers of this forum understand the complexities and can separate envy from economic reality. It’s just puzzling to me that so many of my classroom colleagues, by definition well-educated, can be so ignorant about economics.
    Nick Saban had a 2015 contract for $6.9 million plus a bonus of up to $700,000 as Alabama’s football coach. Alabama’s president earns $535,000 this year, said to be $2 million less than Auburn’s president, according to the Chronicle of Higher Education. I wonder if it’s because Auburn produces veterinarians and Alabama produces NFL players (This is the smart remark of an Auburn parent). But it reminds me of Babe Ruth being asked why he made more that the President of the United States. “I’m having a better year,” he is reported to have said.

  • bdavi52

    College presidents are paid big bucks for the same reason CEO’s are — the Board is desperately looking for a Miracle Worker, a RainMaker, some Genius who will cut costs massively while simultaneously generating world-class output, super-righteous publicity, and uber-happy students. These magic beans (and subsequent beanstalks) will then, in turn, pull in more & better candidates and more & richer alumni…..and fill the coffers full to overflowing. Everybody wins!

    And obviously the need for such a Magician, is greater now than ever (because operating margins are tighter now than ever).

    Of course such magic is extraordinarily hard to generate…and true Magicians are notoriously difficult to find (and even if found, just as hard to recognize).

    So — instead — we do the next best thing: we tie a big bag of money to the end of our line, hand the pole to a very well paid consultant, and go fishing in the pool of leadership frogs — all eager to jump to that next Big Dollar opportunity. Sometimes we get lucky. Most times we just get a very well paid mediocrity.

    Oh well, cut bait, pay them off, tie a bigger bag of money and try again.

  • Jane S. Shaw

    Insightful, amusing, and fair.