CategoryUniversity News

The Art of Presidential Pay

CEOs of for-profit companies are paid handsomely for their nifty management skills and for creating shareholder value. According to Associated Press study, the median annual CEO pay for S&P 500 companies in 2016 was $11 million (average pay was even higher at $14 million). When compared to the value created by these companies, the pay appears economically insignificant and immaterial. In 2016 alone, nearly $1.5 trillion of shareholder wealth was created by the S&P 500 companies.

What about the pay of the top bosses in nonprofit organizations like academic institutions? Much less. The average pay of a University President is less than $0.5 million. Therefore, S&P-500 CEOs get about 30 times more than a typical University-CEO.

The Art of Presidential Pay

The highest paid academic top gun was not from an Ivy League institution but a leader of an arts college in Georgia. According to the Wall Street Journal, in 2014, Paula Wallace, the president of the Savannah College of Art and Design (say what?), earned a whopping $9.6 million in 2014. That is, the pay was about 20 times a traditional academic presidential pay.

Ms. Wallace earned a base salary of $859,000 and a bonus of $1 million. In addition, the board/trustees of Savannah College of Art and Design voted to pay Ms. Wallace supplementary deferred compensation of $7.5 million as a cumulative reward for her prior 14 years of service (this is in addition to the annual salary she drew over the past 14 years).

Deferred compensation refers to the portion of an employee’s compensation that is set aside to be paid at a later date in the form of retirement plans or pension plans. In most cases, taxes on deferred compensation are delayed until income is paid. In common parlance, deferred compensation is the ability to provide for a “highly prosperous retired life” by leveraging current position and power.

Stellar Savanah College

Ms. Wallace is one of the founders of the college. Her achievements include overseeing enrollment growth, and the expansion of academic majors and branch campuses. According to a consulting firm retained by the arts college in Georgia to approve presidential pay, “the compensation is fitting given her four decades of contribution towards the success of the institution.”

Reality Bites

Tuition, fees, and living expenses can exceed $50,000 a year. Students at this institution collectively received about $115 million in federal student loans. Among nonprofit art and music colleges, students of Savannah College of Art and Design rank among the top quartile for graduation rates and earnings. About two-thirds of full-time students graduate within six years, and their students receiving financial aid reported median earnings of roughly $35,000 a decade after entering.

Scarcely stellar when you consider that a representative student can potential rack-up federal loans of up to $250,000 to get this coveted arts and design degree from Georgia.

Raymond Cotton, a lawyer who advises university boards on presidential pay, called Ms. Wallace’s compensation “..such an outlier in the world of higher education; it’s really incredible.”

Benchmark: Harvard’s Presidential Pay

How does this pay compare to the Presidential pay at country’s leading academic institution with a largest endowment?

Harvard University’s President, Drew Faust, earned a $811,000 salary and received a meagre total compensation package worth $1.2 million.

Social Narrative

Nonprofit organizations are organized for a public or mutual benefit other than generating profit for owners or investors. Because a nonprofit company’s intent is to increase the welfare of society, the government sponsors those objectives by defraying some of the nonprofit’s costs by exempting nonprofit organizations from paying taxes.

If Presidential Pay at academic institutions mimic CEO-pay at S&P 500 companies because academic institutions draw inspiration from for-profit companies, why the big need for subsidy from the federal and state government?

Midnight in the Garden of Good and Evil!

Chatham; April 17, 2017

https://www.wsj.com/articles/art-colleges-president-draws-lucrative-pay-package-1488811143

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Academic Justices

Academic tenure is a contractual right that grants a professor permanent employment or a legal protection against summary dismissal without just cause. Principally, the status of a tenured professor is analogous to a Supreme Court Justice—a lifetime of employment guarantee. Less than one-third of all college and university faculty members are tenured in the US.

Tenure may be revoked if there is evidence of incompetence, unprofessionally behavior, or when an academic department/school is in serious financial difficulty. Nationally, about 2 percent of tenured faculty are dismissed in a typical year.

Why Tenure?

The notion of academic tenure dates back to the early part of the 20th century when tenure system was erected to protect professors from the abusive power of University Presidents and Trustees who were free to fire professors for their socio-political views. According to NEA, academic freedom via tenure is valuable because professors can then assert their independence. Scholars can challenge conventional wisdom, discuss and debate controversial ideas without having to worry how such exchange may affect their jobs.

Curtail Tenure

  • Florida, Missouri, North Dakota, Iowa

Faculty at State College of Florida hired after July 2016 no longer qualify for tenure-like protections. In Missouri, North Dakota and Iowa, Republican lawmakers are introducing bills to eliminate tenure. In North Dakota, the state board of higher education is considering reducing to 90 days from 12 months the amount of time administrators need to give tenured faculty before they can lay them off. The state’s 11-school college and university system is bracing for steep layoffs this year after cutting about 500 full-time positions last year. A Missouri bill would prohibit any public institution of higher education from awarding tenure after Jan. 1, 2018.

  • Wisconsin

While not eliminating the status of tenure, Wisconsin’s state legislators voted in 2015 to weaken state tenure law. Consequently, state universities in Wisconsin had to grapple with sharp reduction in budget (around $250 million) and deal with lower tenure protections. In response to the State law, Wisconsin’s University Board instituted “independent and substantive reviews” of tenured faculty once every five years. Tenured professors who are deemed as lacking in productivity have three to four semesters to improve else their tenure is revoked. The Governor of Wisconsin, Scott Walker, recently declared plans to cut tuition by 5% across all University of Wisconsin System schools while instituting “faculty accountability policy” which aims to monitor the time professors spend in classrooms.

Steep jumps in tuition, students have to accumulate large amount of debt to get quality education, and higher wage inequality may have magnified the scrutiny on the business practices of universities including questioning the concept of permanent employment of professors.

 Defense of Tenure

According to NEA, there has been a temporal decline in the proportion of tenured professors. For instance, in 1975, 45% of faculty at public and private schools was tenured or tenure-track, however, by 2014, that number had dramatically declined to 29%.

Defenders of tenure claim that state that disallow granting of tenure will be unable to attract high quality talent. Such states also risk losing valuable grants which is often linked to the human capital and innovative abilities of tenured professors. Another prediction is that salaries are expected to increase dramatically as professors would demand a higher wage rate in the absence of tenure.

Prospect Theory

Tenure at most prestigious and nationally visible universities is granted after an exhaustive and critical review. The longer the tenure clock, the more stringent is the granting of tenure. Given these parameters, most, if not all, tenured professors are eminent and productive scholars with a shared passion for teaching. 

Market theory suggests that, because tenure has endured for more than a century, the benefits must outweigh the costs from having a tenure system. While the experiment of not having a tenure-system is counter-factual in the US, one can draw on the experiences from other countries without a tenure track system. The consensus is that higher education has lagged behind in quality, scientific research and intellectual advancement in countries without a tenure system. More so, countries that have moved to a tenure track system (e.g., schools in mainland China, Hong Kong, Australia, and Europe) have seen a rise in the quality of their advanced level education.

While distinguishing the benefits of tenure, one cannot help underscore that there are some apparent costs including a classic moral hazard problem leading to potential misallocation of resources because of inadequate monitoring.  

Future of Academic Justices

Will the US tenure system survive the current predicament? Will tenure endure a refurbishment? Some states have made their decisions. Other states can only resist or follow suit. 

Chatham, February 24, 2017

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Finlandia’s Excellence in Education

FinishFinland has emerged as a superpower in primary and secondary education. This small Nordic country has captured the imagination of the world because of its innovative approach to primary and secondary education. Relative to other ranked countries, Finnish schools tend of assign much less homework. Their primary school curriculum revolved around creative education.

PISA Survey

According to the PISA survey conducted once every three years by OECD, the test scores of 15-year-old Finnish students have been consistently ranked at or near the top in reading, math, and science competencies since 2000. The other countries in this category include South Korea and Singapore. More recently, students from Shanghai, China, have been reporting the best test scores.

A noteworthy feature about the Finnish school experiment is that much of the education is publicly financed. Consequently, students are not expected to pay any tuition fees for their education. Only a handful of private schools exist in Finland, which suggests that much of the excellence in tests scores is the by-product of the public school experiment.

The Finnish Model

Since the 1980s, the main driver of Finnish education policy has been that every child should have the same learning opportunity regardless of family background, income, or geographic location. From a public discourse viewpoint, education is perceived as a gateway to level social inequality. Regardless of our predisposition on our definition of the “right” education model, we all can agree that the Finnish schooling model is based on a powerful and desirable social construct.

In Finland, teachers need a master’s degree to enter the profession. Their teacher’s training programs are among the most selective professional schools in the country. Pay is reasonably high for Finnish teachers and administrators and they are given considerable responsibility. If a teacher performance is sub-standard, the principal is responsible for rectifying the situation. The main driver of the education policy in Finland is cooperation, and not competition, between teachers and schools.

US Model

Much of the primary and secondary education in the US is also based on the public school model, which is similar to the Finnish school model, but with a fundamental difference. Although US public schools also do not charge any tuition from school children, the funding is largely based on a portion of the revenues earned from property taxes in those neighborhoods. Therefore, more affluent neighborhoods with high real estate values generate more taxes which allows for more funding for their school systems. In sharp contrast, less affluent school districts are unable to match the resources afforded by the more affluent neighborhoods, which means the quality of education tends to  suffer in less affluent neighborhoods. Even though the state provides additional funding, the allocation of funds needed in a large number of school districts is typically insufficient to produce high quality education. Holding other factors constant, researchers find that the amount of school funding explains a large portion of the school-performance.

The PISA tests confirm that Finland is able to generate and sustain academic excellence through its particular policy focus on equity.

Finland, April 3, 2016; 11.48A

Finnish Lessons: What Can the World Learn from Educational Change in Finland? Pasi Sahlberg, Director of the Finnish Ministry of Education’s Center for International Mobility

 

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Economics of Higher Education

Aloke Ghosh BlogDo top schools need money to retain their celebrity status or does money follow the celebrity status? The causality remains to be resolved.

See the top 10 University rankings by US News and World Report as of 2013. If your University does not appear in the list, click on the link below to get the data on the   rankings and endowments of your University.

 

 

10. University of Notre Dame                             ( 6.9 Billion)
9. University of Pennsylvania                              ($7.7 Billion)
8. Texas A&M College Station                              ($8.0 Billion)
7. Columbia University                                               ($8.1 Billion)
6. University of Michigan                                          ($8.2 Billion)
5. Massachusetts Institute of Technology ($10.8 Billion)
4. Stanford University                                                   ($18.6 Billion)
3. Princeton University                                               ($18.7 Billion)
2. Yale University                                                               ($20.7 Billion)
1. Harvard University                                                    ($32.6 Billion)

http://www.usnews.com/education/best-colleges/the-short-list-college/articles/2015/01/13/10-universities-with-the-largest-financial-endowments

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