Big bonus for Arizona State president (and he’s not the only one)

Michael Crow is among a growing band of US university leaders whose pay is performance-related

January 30, 2014

By many measures, Michael Crow is one of America’s most successful university presidents.

The high-profile head of Arizona State University has tripled the public university’s research income, put up countless new buildings on its sprawling campus outside Phoenix, established more than a dozen new divisions and centres, and elevated his institution’s standing in annual rankings.

And he’s richer for it.

Crow is among a growing number of US university presidents whose pay is being tied to their performance – in his case, with a $40,000 (£24,500) bonus given to him last year, plus the promise of another $40,000 bonus this year and up to $180,000 more next year, if he can meet specific goals such as increasing the number of applicants and graduates. All of this on top of the nearly $750,000 that Crow already receives in salary and other benefits.

“There is clearly a trend in public higher education to tie compensation to outcomes,” says Thomas Flannery, a partner in the international human resources consulting firm Mercer. “It is also pretty prevalent in the larger private institutions.”

Among public universities, the trend follows a broader shift in budgeting formulas, which are increasingly based on results and no longer only on enrolment.

“What we see developing over the next couple of years is those benchmark standards, which have to do with graduation rates, job placement, earnings five years after graduation, satisfaction, tuition loan repayment and default rates,” and other measures, Flannery says.

At private universities, the pay-for-performance craze is being driven by boards of regents and trustees whose members come from the private sector, where financial bonuses are commonplace.

“The boards are demanding it,” says Lyn Harper, senior consultant at Yaffe & Company, an executive compensation consulting firm that specialises in higher education. “They’re trying to figure out ways to incorporate the traditional for-profit business models that the boards are used to.”

Still, incentive bonuses for already well-compensated university presidents, including Crow, have provoked anger at a time of scarce resources and salary freezes for other campus workers. There are questions about whether those same boards of trustees – which often lavish bonuses on chief executives without a careful accounting of achievements – are using them to best effect.

Increasing rewards

About a third of private US universities offered pay for performance to their presidents, according to a Yaffe & Company survey. Of those, more than two-thirds last year received the maximum possible bonuses: a median of $34,000 each.

Bonuses are increasingly being given to other key executives, the survey found, including almost a fifth of provosts and chief financial officers.

The numbers are rising particularly quickly at public universities. Crow’s counterparts at the University of Arizona and Northern Arizona University, for instance, each got $40,000 bonuses last year and are eligible for up to a total of $220,000 apiece this year and next.

This year, for the first time, the chancellor and vice-chancellors of the nine universities and six health centres of the University of Texas System will be given the chance to increase their pay by up to 15 per cent by meeting goals relating to cutting costs, increasing research and philanthropic income, and boosting graduation rates.

Public university presidents in Massachusetts will be eligible for more modest bonuses of up to 3.5 per cent for improving graduation rates, tying educational outcomes to the needs of local employment markets and meeting other targets.

The president of Purdue, a public university in Indiana, has the potential to earn an extra $126,000 above his $420,000 base pay if he reaches targets such as lowering student debt. And the president of the University of Illinois will get up to $90,000 in bonus money for improving efficiency, cutting costs, boosting applications and financial contributions, and meeting other goals.

Student loan protestors

The incentive plan in Illinois replaces one that – as is typical in public higher education – rewarded longevity rather than performance by automatically increasing retirement payouts for every year chief executives stayed in their jobs.

The new plan “sets a tangible measure for performance and provides rewards based on achieving those goals”, said Christopher Kennedy, a member of the American political dynasty and chairman of the Illinois board of trustees.

But critics question whether bonus plans will create much change, except in presidents’ payslips.

In Arizona, for example, where Crow has also presided over large tuition increases – and where employees, including campus police officers, have had their salaries frozen – students and staff reacted angrily to the idea that he was now eligible for more than another $250,000 over three years.

“There are so many financial pressures that the perception of an executive taking a bonus, no matter how you frame it, when the rest of the employees are getting no raises or 1 or 2 per cent raises, is a hard thing to defend,” Harper says.

Are bonuses effective?

However, the real issue, both she and Flannery say, is whether pay for performance in higher education actually works.

Not unlike corporate boards that give executives huge bonuses even in years when companies lose money, university boards of regents and trustees are unaccustomed to punishing their presidents by withholding pay from them.

Historically, says Flannery, “Their definition of performance has been their gut sense that the president is spectacular and therefore should be paid high levels of compensation. The reality is that they really have had no metric other than, ‘Gee whizz, we think he’s doing a great job’.”

He adds: “You still have the halo effect, which is how the board perceives the executive. If they perceive the executive as being, in their minds, of high quality, then what you often see is a rationalisation around the other issues – ‘Yeah, our tuition may be high and our graduation rate is not that great, but we like our guy’.”

Instead, “the governance responsibility of board members really needs to be embraced in understanding that they have a responsibility not only to the institution but to the students and the faculty and the communities they serve”, Flannery continues. “That’s something that has started to take hold with publicly traded companies. It is something that’s taking hold in healthcare. And I think it’s going to have to take hold in higher education.”

There are other issues. Bonuses as small as 3.5 per cent, as in Massachusetts, for example, “are not enough to change behaviour”, Harper says.

Besides, she adds, unlike their corporate counterparts, most university presidents “aren’t in it for the money. They’re in it because they really believe in what they do. They’re educators.” Traditionally “there’s just been some resistance” in the academic world to tying salaries to standards, Harper continues.

That is changing as more university presidents come to their jobs from non-traditional routes, including finance, fundraising and law.

“In higher education in the past, people were hired because of their academic acumen and their presence in the field,” Flannery says. “You’re seeing a trend towards more professional higher-education administrators. It’s no longer about how much they’ve published, but how they’ve transformed the institution.”

That is because “the job is getting even more complex”, Harper says. “As presidents change, and as there continues to be a call for [a response to], ‘What are we getting for our tuition money?’, you will see it does drive more boards to move to variable pay.”

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