Why the Huge Payouts to College Ex-Presidents?

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Brandeis University gave a surprising good-bye present to former president Jehuda Reinharz: a post-retirement compensation package of $600,000 a year for little apparent work. Indeed, Reinharz is earning another $800,000 annually in a full-time job for the Mandel Foundation (a Cleveland-based charity that has generously supported Brandeis). These kinds of deals are increasingly common in higher education. When Gordon Gee left the Ohio State presidency this summer, he received a five-year compensation package valued at $5.8 million, including a direct cash payment of $1.5 million, $400,000 annual salary payments, large research grants, and even some funds for federal tax obligations. To be sure, he is doing a lot of post-retirement work for those funds (full disclosure: I am working with Dr. Gee on some Ohio higher education issues), but the implicit per-hour compensation rate is extremely high. Similarly, Lawrence Bacow of Tufts received $1.7 million “end of service compensation” when he retired as president.

Not Like Priests Any More

It used to be university presidents were a bit like priests or governmental officials-they were relatively modestly compensated, given their talents and magnitude of responsibilities, for a lot of work.  Now, their compensation, counting the value of post-retirement pay, is increasingly in the seven digits, vastly more than that of classroom professors. Throughout the 50 states, the most highly paid public official is typically the president of the flagship state university or the football coach.

Three questions immediately arise. First, are such huge post-retirement deals necessary-what would have happened to the quality of education at Brandeis, Ohio State, or Tufts if these payments had not been distributed? Second, are these high compensation arrangements confined to university presidents -or is the problem more widespread? Do they contribute meaningfully to rising tuition costs? Third, given the tax-exempt nature of donations to universities, not to mention public subsidies and other privileges, are universities abusing special privileges granted them by society?

There are actually good arguments for granting deferred compensation to presidents. They are a means of evening out the income a president receives over a lifetime, and income deferral usually also lends tax advantages as well. If, when Jehuda Reinharz was hired as president, he was told “we are going to pay you less than we think you are worth now, but we will make up for it with a big post-presidency financial windfall,” the post-retirement deal with Brandeis might make sense.  But I bet that the size and nature of the post-graduate arrangement was not fully negotiated earlier, and that at least some of Reinharz’s payment is what economists call economic rent –payments made eliciting absolutely no increased work.

Do these payments really amount to more than a pittance in a huge university budget? Actually, sometimes they do. Brandeis has fewer than 6,000 students, so $600,000 a year in post-presidential compensation is $100 per student. Over four years in college, a student might be paying $400 of tuition fees in a “Reinharz tax” to fund this postretirement benefit.  The $1.7 million goodbye gift for Lawrence Bacow approximates $150 for each of Tufts’ students.

More for Other Top Administrators Too

In addition, big pay and benefits for presidents lead to bigger compensation for other senior administrators. Returning to Ohio State, until 2010 the school had a respected former state budget director as the chief financial officer, who was paid around $300,000 a year. He retired, and was replaced by a man making over double that amount, a person with a penchant for spending large sums annually on first-class international travel (compared with less than $2,000 a year for his predecessor). Add in provosts and deans and you have potentially large incremental sums spent on administration. The gap between the pay and perks for the president and his senior advisers cannot be too large, so big salary (including deferred compensation) payments at the top usually are multiplied by increases down the line. Potentially, at even a big school like Ohio State, these additional costs amount to several hundred dollars per student a year. Money is being transferred from students and their parents to university administrators. Often federal student loans help finance this transfer of income and wealth. Add to that the exploitation of star football and basketball players at high profile athletic powers, and you can make a case that higher education increasingly involves unnecessary and morally dubious transfers of money from relatively innocent and defenseless youth to adults they wrongly trust.

If universities are going to act like profit-making corporations in paying their leaders, then maybe they should be taxed like them too. The tax-exempt status of universities was created when schools honored the notion that academic leaders are quasi-public servants who should be compensated enough to allow them to live comfortable lives, but not ultra-luxurious ones.  Why should individuals pay lower income taxes in return for university donations helping support luxurious life styles for university bureaucrats?

Market forces may be starting to put a crimp on the academic arms race leading to these salary shenanigans. Enrollments have peaked, tuition increases are easing, and slow economic growth is constraining philanthropic giving.  Revenues fueling these salary explosions are not rising like previously. Governing boards approving deals like that at Brandeis should wake up to the new reality.

(Photo: Jehuda Reinharz. Credit: Boston.com)

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