The Department of Education recently released details of its negotiated rule-making for higher education panel that includes proposed legislative changes. The 100+ page document contains several proposals aimed to reduce "improprieties" (could be read as competitiveness) of the for-profit higher ed sector. Central to these is proposed legislation to eliminate the 12 so-called safe harbors for incentive-based compensation. Rather than pragmatically examining the effects of each individual "safe harbor" in order to come to a reasoned conclusion about the consequences of each, the ED aims to strike all 12 exceptions to incentive-based compensation.
I concede that some for-profit schools employ overly aggressive recruiting tactics that is likely a result of a performance-based culture that is not present in the public and not-for-profit sectors. However, career colleges are engrossed in serious competition for students, and the ability to enroll them is critical to the survival of such schools due to the reliance on tuition and absence of direct public subsidies, mammoth endowments and research funding. This means that institutions driven by the profit motive must meet enrollment objectives to remain financially viable, and the market-based nature of the for-profit business model suggests that incentivizing the employees charged with filling seats is the most productive method of achieving these goals and remaining competitive.
Now, here comes the ED with an attempt to eliminate incentive-based compensation and thus, reduce the competitiveness of the entire for-profit sector. The proposed legislative changes are the ED's starting position for negotiation and likely will be significantly watered down by the time any such legislative change is effected. The for-profit sector will likely wage war against these changes. Of particular concern should be the ED's proposal to strike down safe harbors:
(2) Enrollment in programs that are not eligible for title IV, HEA program funds.Eliminating this exception would be an intrusion of the federal government into territory that it has no direct interest. The only federal funds that for-profit institutions garner is that provided by title IV funding, or federal student aid. Students enrolled in programs not eligible for federal aid fund the education by private means, perhaps with the aid of local or state retraining programs. In the latter case, such legislation to restrict incentive compensation should be left to the respective states whose funds are expended, rather than a top-down command from the federal level.
An institution may provide incentive compensation to recruiters based upon their recruitment of students who enroll only in programs that are not eligible for title IV, HEA program funds.
(4) Profit-sharing bonus plans.Profit margins in higher education are strongly related to enrollment figures. This means that recruiting plays a significant role in the profitability (hence, viability and competitiveness) of an institution. The market system relies on incentives to boost productivity. One of the most common incentive instruments is profit-sharing or bonuses. Eliminating a private companies ability to incentivize its employees would be a critical blow to its level of productivity. Organizations that don't offer compensation incentives (e.g. government) are plagued by low levels of employee productivity.
Profit-sharing and bonus payments to all or substantially all of an institution's full-time employees are not incentive payments based on success in securing enrollments or awarding financial aid. As long as the profit-sharing or bonus payments are substantially the same amount or the same percentage of salary or wages, and as long as the payments are made to all or substantially all of the institution‟s full-time professional and administrative staff, compensation paid as part of a profit-sharing or bonus plan is not considered a violation of the incentive payment prohibition. In addition, such payments can be limited to all or substantially all of the full-time employees at one or more organizational levels at the institution, except that an organizational level may not consist predominantly of recruiters, the admissions staff, or the financial aid staff.
(9)Profit distributions.If profit distributions to owners are restricted, then investors will tuck their tails and head for the hills. This will essentially eliminate the entire sector, as for-profit institutions would squander away all of their excess revenues in a manner similar to the public and non-profit private sectors. If this were to occur, then for-profits would converge to the status quo non-profit model of higher education, and squelch the opportunity for much-needed innovation and transformation that is being tested in the for-profit sector.
Profit distributions to owners are not payments based on success in securing enrollments or awarding financial aid. Therefore any owner, whether an employee or not, is entitled to a share of the organization‟s profits to the extent they represent a proportionate share of the profits based upon the employee‟s ownership interest.