The AIG Bonus Scandal and Universities

By Richard Vedder

Politicians from the President on down are furious at $160 million in bonus payments being made to AIG employees in the midst of abject failure and huge federal bailouts. It infuriates people that their money is being used to reward people who made bad business judgments.

Yet, on a smaller scale to be sure, the same thing has been happening all the time in higher education. Big payoffs are being made to high level managers and decision-makers at a time when performance is often declining or showing little improvement; these payments often come from taxpayers. Deju vu all over again, as Yogi Berra once said.

Let me give a case study. Ohio University by most accounts has been in a bit of a decline over the past five years. A well intentioned, decent alumnus of the university was named president, but most knowledgeable persons (including students and faculty) think he has done a mediocre job. The school's US NEWS & WORLD REPORT ranking has fallen by 16 during his presidency --a pretty hefty slide for four years.
Now one may argue that this ranking is highly imperfect (I have made that case once myself), but it is a reputational measure widely observed by the higher education community.

Yet, using a detailed data set, CCAP Whiz Kids ascertained that the top 25 paid persons --all administrators or coaches --received on average 19 percent higher compensation over the past five years (adjusting for inflation) --compared with less than a three percent increase for lower level administrators and a similar single digit increase for faculty. The institution was struggling --yet it gave its people at the top big raises while the rank and file showed little increase. Not terribly different than AIG since Ohio University derives a huge portion of its income from government in the form of state appropriations and federal research grants.

Up the road at Ohio State, a similar salary explosion at the top is occurring, although in this case the external evidence hints that the school is in a period of advance, and that its reputation is rising. Throughout the land, university presidents and other top officials have received huge increases relative to other employees or the public in general. The recession will certainly slow this trend down, but I doubt it will end it permanently.

Nearly eight decades ago, Adolph Berle and Gardiner Means wrote a path-breaking book arguing that the divorce of ownership from control of modern corporations was troublesome and could lead to some bad things --such as executives implementing policies bad for stockholders. That problem continues to some extent in corporate America --but it may well be even much greater in universities. It is hard to measure outcomes in higher education (or, more accurately, we choose NOT to measure them), so bad performance often goes partially or fully undetected for years. There are no stockholders, and the only group to which administration reports is typically a board of trustees that seldom meets and is often co-opted by the administrators over which they are nominally superior.

The first step to changing this is to demand that universities provide measures of performance, and that these get widely disseminated. Despite some nice rhetoric and even some minor amounts of action, however, universities have resisted providing the needed information ---so they largely escape the accountability that even AIG ultimately had to face.