Rent Seeking Presidents

by Jonathan Robe

Awhile back, Andrea Fuller reported in a Chronicle piece that for calendar year 2008, there were 30 chief executives at private colleges and universities who received total compensation packages in excess of $1 million, up from 23 for fiscal year 2008 (the IRS recently changed the reporting requirements from the fiscal to the calendar year). While I'm not, as a matter of principle, necessarily opposed to high college executive pay, I do think that it's reasonable to say that high pay should not be awarded unless it is first found to be justifiable. That any actual economic justification is mostly absent from this story provides us, I think, with an excellent reminder of the odd economic structure pervasive within American higher education today.

What are the most important factors for setting college executive pay? Within the broader labor market, it's generally understood that wages reflect productivity, that is, a worker is paid commensurate with the output she provides. In most industries, output is readily observable and measurable, though in the service industries this is a rather difficult task. Within higher education this difficulty is even more pronounced because there isn't any agreed upon measure of performance within the industry (this is one reason, by the way, why college rankings have played a critical role in some university planning decisions). It’s difficult, therefore, to know with reasonable certainty whether a particular university president in a particular year performed well or not. We can't say that the president of such and such a school did a great job running the school because X number of students this year were able to learn Y% more than they did last year. We simply don’t have that kind of information. Sure, the president might appear to be successful in bringing $3 million of donations or in raising the school’s rank by 10% but that doesn't necessarily translate into success regarding the institution's educational mission. In fact, the very opposite could be the case.

Unfortunately, some within higher education try to side-step the difficulty of providing a robust economic justification for these examples of high executive pay. For example, Raymond D. Cotton, a lawyer specializing in executive pay and who was quoted in the Chronicle story, said that large increases in executive pay, especially in cases involving large retirement payouts, can be troublesome because of the role favoritism plays between boards of trustees and presidents. Yet he defends the general high compensation of college executives because it is, as he puts it, the price set by rapidly rising demand and limited supply.

There are, however, several problems with Cotton’s analysis. While I agree that favoritism occurs in some circumstances and is a problem when it does happen, it’s merely the symptom of a much larger problem. In other words, it’s the distorted economics of higher ed which allows favoritism to occur. Thus, even though it might appear that supply and demand set college presidents’ salaries, it’s really distorted supply and distorted demand which are at work to set those high salaries. Colleges don’t necessarily hire executives who will do a good job in improving the educational output of the students; they tend to hire those individuals who would further the institution’s reputation, whether or not that means the students wind up receiving a better education as a result.

But even given these market distortions, there are some instances in which high executive pay is just bizarre. Take the example given in the Chronicle story of the late Bernard Lander, the founder and president of Touro College (it’s not my intention to pick on the late Mr. Lander; I’m just using this as an example for how the distorted market works in practice). The College trustees decided in 2008 that they had underpaid Mr. Lander over the years, so they awarded him a compensation package in excess of $4 million. And how did they know he had been underpaid? The trustees decided “that Mr. Lander had been undercompensated compared with presidents at similar institutions.”

Is that the real standard by which college executive pay is to be judged? No wonder why college cost continue to rise faster than family incomes, inflation, etc. And no wonder administrative costs at colleges are skyrocketing. Calling this the “academic arms race” seems to be very much appropriate. Colleges spend money, look around at their neighbors and see them spending more, so they turn around and increase spending just to keep up with Joneses. And the vicious cycle repeats. Of course, it doesn’t matter that the Joneses might have spent some or all of their money irresponsibly; all that matters in the “arms race” is that they were spending more, so everybody needs to spend more to avoid being left behind. I know the higher ed market is peculiar but this is normally called “economic rent-seeking.” When is it all going to end, or is it just going to spin out of control?

Administrative Bloat in the Motor State

by Daniel L. Bennett

James Hohman of the Mackinac Center for Public Policy, writes today that the state of Michigan is contemplating spending $1.63 billion on higher ed appropriations, noting that this amount

is more than what the Michigan Business Tax has brought in to the Treasury so far this year. But few ask what taxpayers get in return for this annual appropriation, and fewer still ask whether the state can get more for less.

Hohman indicates that while the state of Michigan has been in economic peril the past few years, the colleges and universities have fared much better in becoming bloated:

The number of administrators and service staff in Michigan's 15 state universities increased from 19,576 in 2005 to 22,472 in 2009. And in addition to all the new employees, average compensation increased by 13 percent as well.

Total noninstructional, nonresearch expenses in Michigan's public universities increased $683.7 million since 2005, though appropriations remained fairly constant.

He also cited one of my favorite higher ed writers in suggesting that

Michigan is not alone in the rise of university overhead. A report from the Center for College Affordability and Productivity shows a 20-year rise in administration and support staff. When asked about what students get out of increased administration and support staff, CCAP analyst Daniel Bennett responded: "higher costs and more bureaucratic red tape."

Consolidation of College Bureaucracy: Effecting Change and Innovation

by Daniel L. Bennett

Every now and then we hear some positive news that is near and dear to us, something that we in some way had an indirect effect in making happen. Today is one of those days for me at CCAP. I read today (HT: Tim Ranzetta) that the University of Akron and Lorain County Community College are launching a

pilot project that the two schools hope will lay the foundation to create a standalone administrative services center that could provide back-office functions to more schools and possibly other organizations as well.

Given that the majority of students attend a public institution of higher education, it makes economic sense for these schools to consolidate, or even outsource, many of their back office functions. A report that I authored earlier this year, as well as an article that I wrote for Forbes, have helped raise awareness of the serious problem of administrative bloat on our nation's college campuses that has contributed to continual tuition hikes.

Now it seems that the public's awareness of this issue is leading campus officials to seek new strategies, along with the help of the Lumina Foundation's Productivity Grant Program, which provided the seed capital to launch the UA-LCCC pilot project. According to UA President Luis M. Proenza:

The UA/LCCC model of shared services defines how administrative services will be delivered in the future. Our institutions of higher education must work closely together to attain academic and operational successes that align with the goals of excellence, effectiveness and efficiency identified in the University System of Ohio’s 10-year Strategic Plan. The shared services initiative is an innovative approach that will help to meet those goals

The goal of the project is to promote shared administrative services among Ohio's public colleges via a central office. Generally, I get spooked by the term "centralization", but it has helped many organizations improve their operational efficiency through a consolidation of processes. According to James L. Sage, U of Akron's CIO:

Providing these required services centrally will eliminate the need for each institution to operate many of their own administrative services units, and improve the breadth and quality of services while significantly reducing administrative costs. Money saved on administrative services can be redirected to our core mission, which is teaching. This centralized shared services approach is used extensively in private industry and is being adopted by the federal government

This is a good start for what will hopefully become a trend to reduce the size of the campus bureaucracy.