Universities would likely fail corporate governance tests on vice-chancellor pay

Pay awards to vice-chancellors would not meet the requirements laid down in the Corporate Governance Code, says Stuart Farquhar

December 14, 2017
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The remuneration of vice-chancellors and other university senior management has been the source of much negative publicity. While the pay of the vast majority of university staff has seen a fall in real terms since the financial crisis, senior management pay in universities has seen significant rises.

Since the advent of the £9,000 tuition fee era, university income has grown considerably, but the benefits of these higher revenues arguably have been seen most clearly in new university buildings and higher senior management pay. There has been no trickle-down effect to others in the higher education sector.

This has led to accusations from staff and students that this is because of the personal greed of senior management, or poor governance. In reality, it is probably a mixture of both. 

Vice-chancellors are apt to defend their remuneration on the grounds that they are in charge of large multimillion-pound organisations that employ tens of thousands of people and that their pay reflects what you would expect in companies of such size. The marketisation of higher education has had considerable side-effects, many of which were highly predictable.

Viewing education as a commodity and treating students – mistakenly – as customers have led to universities competing with one another for tuition fee income. This has, as journalist Kehinde Andrews pointed out, led to universities focusing on the financial bottom line, rewarding vice-chancellors and other senior management for staff cutbacks.

Unfortunately, these parallels with private sector organisations miss the point. Universities are usually charitable organisations with all the taxable benefits that this entails. Furthermore, private sector companies also face the requirements of the Corporate Governance Code, which guides boards of directors in the running of their companies. 

The current code has rigorous guidelines on the setting of remuneration for senior management, and its first main principle states that “executive director” remuneration should be designed to promote the long-term success of the company. Performance-related elements should be “transparent, stretching and rigorously applied”.

In addition, it identifies that “the remuneration committee should judge where to position their company relative to other companies”.

“But they should use such comparisons with caution, in view of the risk of an upward ratchet of remuneration levels with no corresponding improvement in corporate and individual performance, and should avoid paying more than is necessary,” it says. “They should also be sensitive to pay and employment conditions elsewhere in the group, especially when determining annual salary increases.”

The second main principle states that there “should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors”, and that “no director should be involved in deciding his or her own remuneration”.

Evidence suggests that pay awards to vice-chancellors would not meet such requirements laid down in the code. Some three-quarters of vice-chancellors sit on the remuneration committees that determine their pay. This is a clear conflict of interest, and even if they do not actually determine their own pay it gives them the opportunity to wield considerable influence and power.

Furthermore, the decisions of remuneration committees would not meet the transparency requirement in the code. The calculation of pay and, critically, the bonuses and pension contributions that vice-chancellors receive is usually done behind closed doors by the remuneration committee (without clear rules and guidelines available to the entire board – or other university stakeholders). Furthermore, with senior management pay rising much faster than that of other employees in the higher education sector, it would appear that remuneration committees and vice-chancellors are insensitive to the pay squeeze forced on their colleagues – including administrative, technical and manual staff.

Can vice-chancellors justify their pay when it is these staff who ensure the smooth running of the university and who have little direct impact on university activity? There are other issues to consider, too. 

First, university governors are often volunteers, as with most charitable organisations, and the selection of these governors is critical to good governance. Selection of outside “independent” governors is an area in which powerful vice-chancellors can acquire people of like mind and thus influence board decisions.

Second, there are limited rules governing the time period that “independent” governors can sit on the board, opening them up to capture by powerful vice-chancellors so that there is less critical questioning in the boardroom. Both of these issues suggest that the introduction of a “remuneration code” in universities, as universities minister Jo Johnson has termed it, could focus on the selection of governors, and the length of time that they are allowed to sit on the board as well as issues surrounding remuneration.

I would favour a rule preventing v-cs from sitting on nomination committees as well as on remuneration committees, and also one placing a maximum time limit on outside governors sitting on the board to reduce the possibility of capture.

However, even with such rules it is incumbent on vice-chancellors to show greater awareness of the damage that these arguments around senior management remuneration are doing to the university sector, especially in the uncertain times facing higher education in the UK, and to act responsibly in accepting any pay rise while the majority of staff get little to no pay rise. 

Stuart Farquhar is senior lecturer in the department of finance, accounting, systems and economics at the University of Wolverhampton.

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