College President’s Pay for Performance

More and more colleges are paying their presidents “incentive pay”, pay tied to performance factors, such as graduation rates, savings, closing achievement gaps and fund raising.  This sounds well and good, but we’re taking this with a grain of salt.

It reminds us of how Bill Clinton tried to limit executive compensation with his first budget submitted in 1993.  A provision in the 1993 IRS code stated that companies could deduct only the first $1 million of compensation of its top five executives to discourage paying them in excess of $1 million.  This only applied to traditional pay, such as salaries, bonuses and stock grants.  It did not apply to stock options, options that vest over time, and are considered “performance pay”.

Consequently, the axiom that “employees are a company’s greatest asset” changed in the mid-’90s to “shareholders are a company’s greatest asset”.  Between 2007 and 2010 55% of deductible executive pay were stock options.

While attempting to tie incentives to performance for college presidents sounds appealing, it will only be beneficial if performance isn’t manipulated by reduced standards for graduation, increased tuition rates and other college expenses to “increase” savings.  The median grade at Harvard is already an A-.

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