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Monday, August 05, 2013

Should we care about college administrator pay & perks?

University presidents do not get paid like Fortune 500 CEO’s.  If your alma mater’s president threw herself a birthday party featuring a replica of a Michelangelo, it’s probably just because she held it at the campus library.  It’s true, a decent number of presidents these days are taking home more than $1 million, and that’s just the pay that’s reported -- it probably doesn’t include perks like “medically necessary” business-class airfare.  But as a fraction of university revenues, we’re talking about chicken feed -- on the order of $100-$200 per student; that’s less than the transcript fee at some places.

Lots of smart people think university executive compensation, and CEO pay in the nonprofit sector generally, is not worth worrying about.  Most people who run a large nonprofit organization are talented go-getters who could pull down big bucks somewhere else.  They’re taking a pay cut to work at a mission that matters to them.  And, since there is little close supervision by any stakeholders, they run the show.  Why would they steal from their own piggy bank?  And so why invest, say, the board of directors’ time and resources monitoring their pay?

I am not one of those smart people.

But, happily, I live a T ride from an executive pay guru, BU Law’s David Walker.  When David explains to me why *he* cares about for-profit CEO pay, he says something like, “it’s not the money, it’s the management.”  That is, the raw amount of cash a crafty CEO can pay herself in backdated options or wild parties isn’t a big deal for a large-cap firm.  The problem is that the money is a big deal for her.  And that means she has incentives to run things in a way that pays her more, or that at least gives her opportunities to pay herself more. 

In our paper, we argue that this may also be true at nonprofit firms.  Suppose---and for now let’s just assume for the sake of argument that this could be true---that it’s easier to raise your own pay out of tuition dollars than it is to grant yourself a raise with money some donor just handed you in a sack.  And suppose presidents know that. 

The implication would be that presidents have incentives to raise tuition, in order to facilitate their own rewards.  Or, at least, to emphasize tuition over other, more constraining, sources of revenue. 

That would be a worry, except that….presidents are giving up big bucks to carry out their mission, aren’t they?  Does it make sense that they would give up monetary rewards, and then run their nonprofit in a way that lets them get more monetary rewards? 

Maybe.  But this being prawfsblawg, there is a good chance that you, reader, made a similar tradeoff.  Suppose someone leaves a brown paper bag full of cash on your front doorstep.  I can’t say that I would turn it upside down and cast Benjamin Franklin to wherever the winds take him.  Not without thinking long and hard, anyway.  You?            

Next time: some evidence.

Posted by BDG on August 5, 2013 at 10:42 AM in Corporate | Permalink

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Comments

"Most people who run a large nonprofit organization are talented go-getters who could pull down big bucks somewhere else."

Is this true of university presidents? Both John Sexton (NYU) and Lee Bollinger (Columbia) were promoted from within, both starting out as law professors and then working their way up the administrative ranks. They maybe could have gone into BigLaw and become partners at fancy firms earning $1M+ per year, but they also could have been the victims of attrition a few years in and landed at much lower paying jobs, so it's hard to say just what big bucks they're turning down. And given that a tenured law prof earns at the 75th percentile of JD holders, they're still pulling down big bucks. Not to mention that being a university admin can open the door to big bucks later on. Bollinger's predecessor, Erik Rupp (a theologian), went to run a non-profit after leaving Columbia, and got paid $395,000 a year for it; I think that's considerably more than Rupp would have earned as a Presbyterian minister.

When looking at the motivations of university admins, I think it's worth asking why someone who gave up a (potentially) lucrative career in private practice in order to be a professor would then largely give up teaching in order to be an administrator. It's not as though you hear many professors talking about how they wish they'd be given a greater amount of administrative duties.

Posted by: Derek Tokaz | Aug 6, 2013 12:38:45 PM

No, the hidden premise of the hypo isn't that the marginal negative value of mismanagement is negligible for an administrator. The hypo didn't say anything at all about mismanagement by administrators. The hidden premise of the hypo is that the marginal value of money for university presidents and academics generally is zero. And that is why I called it a strawman.

Your main claim--that the private costs of mismanagement are small and may be outweighed by the private benefits--which in economics parlance is essentially an externalities claim--is not a strawman. But that is also not what I was criticizing.

Posted by: TJ | Aug 5, 2013 4:50:58 PM

Thanks, TJ. You're right that the hidden premise of the hypo is that the marginal negative value of mismanagement, if you want to call it that, is negligible for the administrator, or at least less than the marginal value of additional cash. Perhaps that's a strawman, but I don't think it is, and we have a bunch of arguments about why not in the paper. E.g., even if the administrator perfectly internalizes all the firm's costs (which, since the quality of its outputs is essentially a public good from the point of view of the stakeholders, is unlikely), it doesn't seem too implausible that the marginal cost to the firm of, say, $1m is much, much lower than the marginal gains of the same amount for the employee.

Posted by: BDG | Aug 5, 2013 4:18:29 PM

I don't get that last hypo. The fact that we chose academia (with its relatively low pay) doesn't mean that we don't care about money at all so that we'd throw out a bag full of cash. It means that our revealed preference is to prioritize the benefits of being an academic--whatever they are--over the cash that we could have made in practice. So the argument is not that university presidents don't care about money, simplicitur. It is that they prioritize other things (like the satisfaction of being the president of a well-regarded university) over money, and that running the university badly in order to increase their own compensation gets in the way of those other things. You can contest what those "other things" are and whether running the university badly in fact will get in the way of those things, but the hypo itself strikes me as attacking a strawman.

Posted by: TJ | Aug 5, 2013 3:33:08 PM

A few comments:

1) What 'smart people say' isn't that good a guide. Remember, a whole bunch of really, really, *really* smart people decided to deregulate the financial industry back in the 1990's, and the very, very smart people (who paid off the first set of smart people) then proceeded to loot until it crashed.

2) Running a large non-profit organization also likely has benefits, which the people running them know. As for them being able to make large sums of money running for-profit corporations - the door is open, they are free to leave. Sort of like law professors - how many tenured law professors do you know who've quite to move to private practice?

Posted by: Barry | Aug 5, 2013 11:51:17 AM

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