Monday, November 12, 2007

Excessive College President Pay? Not Really

From today's NY Times article "Increased Compensation Puts More College Presidents in the Million-Dollar Club":

Soaring compensation of university presidents, once limited to a few wealthy institutions, is becoming increasingly common, with the number of million-dollar pay packages at private institutions nearly doubling last year, and compensation at many public universities not far behind.

Presidents at 12 private universities received more than $1 million in the 2005-6 school year, the most recent period for which data on private institutions is available, up from seven a year earlier, according to an annual survey of presidential pay to be released today by The Chronicle of Higher Education (subscription required). The number of private college presidents earning more than $500,000 reached 81, up from 70 a year earlier and just three a decade ago.

The survey also found that the number of public university presidents making $700,000 or more rose to eight in 2006-7, the reporting period for public institutions.

From The Chronicle: Among private institutions, the median compensation of leaders of research institutions rose 37% in the last five years of the survey, from $386,631 in 2001-2002 to $528,105 in 2005-2006 (see chart above, click to enlarge).

From The Chronicle's salary database, the highest paid private college president in 2005-2006 was Donald Ross, who earned $5.7 million at Lynn University. The highest paid public university president was Purdue's Martin Jischke, who earned $880,000 in 2006-2007. Note also that almost all college presidents get a free house, free car and expense accounts, in addition to deferred compensation, retention bonuses, performance bonuses, retirement pay and club dues.

MP: Since administrator pay has increased at a rate far above pay increases for faculty and staff pay increases, income inequality in higher education has increased significantly in recent years, perhaps just another industry-specific example that reflects an overall, general pattern of rising income inequality in the U.S. in many/most industries.

I really don't have any problems with college presidents' pay, just like I don't have any problems with Bill Clinton's speaking fees, or rising CEO pay, or the rising number of millionaires in China or India, or rising income inequality in the U.S., etc. See this previous CD
post where I suggest that the more competitive and dynamic the economy, the greater the natural amount of income inequality.

Bottom Line: College presidents are academic CEOs who are often managing very large organizations in an increasingly competitive environment, operating in an increasingly globalized market, facing declining public support for higher education, etc. Rising college president salaries are a reflection of an increasingly dynamic and competitive market for academic CEOs. Not to worry.

7 Comments:

At 11/12/2007 11:59 AM, Anonymous Anonymous said...

When does a half a million a year mean not excessive. It is not just the amount its the spread between the common man.

 
At 11/12/2007 12:34 PM, Blogger Walt G. said...

There’s nothing wrong with executive pay, even humungous pay, as long as the true costs are revealed to the shareholders (the public in this case). However, having friends determine your pay thereby driving average executive compensation up (the customary executive compensation determinants), and undisclosed backdating of stock options are problematic and just plain wrong.

Free markets cannot operate without proper information/transparency. That’s often not the case nowadays: That needs to change.

 
At 11/12/2007 7:30 PM, Anonymous Anonymous said...

Walt, I'm confused as to why you insist that "friends" always determine CEO pay. Are you infering that all CEO's were friends with the board members before being promoted or hired into their positions?

I just don't see that as being as widespread as you think, at all.

 
At 11/13/2007 7:09 AM, Blogger Walt G. said...

Anonymous:

Thanks for asking. Let me expand a little bit to answer your question.

You might want to do a little research into who makes up the executive compensation committees that determines CEO compensation. Like I said, though, my big problem is lying to the shareholders about actual executive compensations costs. If you are into academic research, here’s an example of what’s out there. You make up your own mind, but I think you can you safely assume “well-connected” and “social network” means friendships to people like us. Here’s an abstract from: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=966555


“This paper argues that tied social networks of directors among the corporate elite affect CEO compensation. Using data on 25,621 unique directors who served on the boards of S&P 1,500 firms between the years 1996-2004, we map the social network of directors, and generate three different measures that account for each director's importance in the network. We find that firms that have more connected directors, i.e., whose directors are more central in the network, award their CEOs higher compensation. Controlling for firm size, investment opportunities, industry, and performance, a CEO of a firm in the top quintile of connected firms receives salary and total compensation that are 11% and 13% higher, respectively, than those of a CEO of a firm in the bottom quintile of connected firms. Moreover, the well-connected directors are more likely to be awarded more directorships in the future. These results highlight the impact social networks can have on the inner workings of boards and in turn on firm governance.”

 
At 11/13/2007 10:33 AM, Anonymous Anonymous said...

I would think that the stockholders in an undergraduate institution are the parents of students who are footing the bill for their kids to attend. In that regard, it's not clear to me that students with undergraduate degrees are commanding greater salaries on the market relative to the increasing cost of an undergraduate education. It's like saying CEOs should get paid more for declining stock value.

 
At 11/13/2007 11:00 AM, Blogger Walt G. said...

I believe that the wage premium for a college education is far outpacing the escalating tuition costs. I would be willing to look at data that show otherwise.

From everything I've seen, a college education is a very wise investment even at the current cost.

 
At 11/14/2007 6:23 AM, Blogger juandos said...

walt g. says: "From everything I've seen, a college education is a very wise investment even at the current cost"....

Hmmm, good point...

One question and I know it would be a guess but I'm wondering if some of the once proud ivy league universities have lost some of their sheen when in comes to their graduates making a good buck in their first jobs as compared to some of the smaller state universities and maybe even a few junior colleges?

 

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