Pay Daze

By Richard Vedder

Just over 50 years ago, in 1955, David Dodds Henry was made the President of the University of Illiinois and was paid, if I recall correctly, $25,000 a year. Fast forward a half of century: in the past school year, the President of that estimable university, Joseph White, received $525,000. Correcting for inflation, the initial pay of President Henry is equal to about $175,000 2005 dollars. Thus the University of Illinois tripled the pay of its leader over one half century. In pointing that out, I am not picking on the University of Illinois, a fine institution from which I have two degrees. Nor do I have a grudge against President White, who I met once at the Chicago Federal Reserve Bank and who is very impressive (as was President Henry). What has happened at Illinois is rather typical of universities nationwide.

You might say, "we would expect real compensation to rise a lot, because economic growth has made most of us better off." True to a point. Yet President Henry earned 11 times the per capita income of Illinois residents in 1955, while President White earned well over 15 times the comparable statistic in 2005 -- the gap has grown considerably (nearly 40 percent).

University people have traditionally been considered public servants, working for non-profit organizations. Historically, they have been paid well, but not extravagantly. That is changing, and a large number of presidents make double or more what President White makes (and 20 or 30 times the average compensation levels of employees in the surrounding community). That is not true for all forms of public service. In 1955, President Henry made only one-fourth as much as the U.S. President, Dwight Eisenhower. Today, President White makes more than 30 percent more than President Bush.

Some would argue that universities have evolved into big businesses, and that they should be paid more in line with corporate standards. Want to emulate corporations in compensation packages for leading administrators? Then also make other changes to be more like corporations:

1) Instead of providing massive tax subsidies to universities, tax them; make them operate on a "for-profit" basis like the University of Phoenix; end tax deductions for private donations to universities;

2)Make colleges adopt and publish uniform financial standards similar to the SEC regulated accounting rules;

3)Force them to create and publish a discernible "bottom line".

There are a myriad of other things I could mention -- like using buildings year-round, abolishing tenure for most of the staff, etc. If universities are to argue they need to follow the corporate salary model, they also need to face the same accountability standards faced routinely by America's largest corporations.

I am no bleeding heart liberal who gets angry that some Americans make much more than others (on some days, I am more to the right of Genghis Khan after a bad hangover). I also believe in markets -- and there is some truth to the notion that the rise in general salary levels for top university administrators forces lowering paying schools to get in line if they want to be competitive for top-flight talent. But the huge influx of third party funds into universities is funding the salary expansion. As people drop money out of airplanes over college campuses, it is human nature for the campus leaders to want to keep some of those funds for themselves. Why should we grant tax-exempt status to universities when they use some of the funds that tax exemption provides to provide economic rent (payments beyond those necessary to perform a service) for favored university personnel?

In the longer run, universities are using up some of their reservoir of good will. We tax used car dealers, but subsidize universities, becuase we think universities are doing something special, and that they are ethical people who are responsible with the public's money. When university presidents hire French chefs and get multi-million dollar golden parachutes, then public trust declines, and universities start to look a bit more like user car dealers (who, by the way, are generally good business persons who provide a real service to the American economy -- just like universities).