The Impact of Future Economic Conditions on Higher Education Presidential Compensation

In recent years, the economic landscape has presented numerous challenges for higher education institutions. As economic conditions worsen, one area that faces increased scrutiny is executive compensation, particularly among university presidents. This article aims to shed light on the evolving dynamics of presidential compensation within higher education, highlighting how economic conditions can influence these trends.

Economic downturns, market fluctuations, and budget constraints affect all sectors, and the Higher Education industry is no exception. Universities and colleges heavily rely on public funding, tuition fees, and endowments, making them susceptible to economic changes. During times of economic hardship, universities and colleges face reduced government support, declining enrollment rates, shrinking endowments, and increased competition for limited resources.

When economic conditions worsen, executive compensation often becomes a focal point of public scrutiny. University and college presidents, as the top-level executives, tend to receive the highest salaries and benefits within the institution. Consequently, their compensation packages are subject to intense scrutiny, especially during economic crises when significant budget cuts are implemented across various sectors.

Higher education institutions operate within a broader social context, where public perception and accountability play pivotal roles. As economic conditions deteriorate, stakeholders question the fairness and appropriateness of executive pay in the face of budget constraints, reduced faculty salaries, and rising tuition fees. This negative attention often leads to increased demands for examining administrators’ pay, and scrutinizing in the decision-making processes surrounding presidential compensation.

None of this changes the fact that presidents are extremely valuable employees that are incredibly difficult to replace. Presidents will pack their bags and leave if treated unfairly. They are very employable. Replacing a president can cost upwards of $300,000 just for the recruitment and hiring process. In addition, the school will be on shaky ground for years while the new president and all the stakeholders cozy up to each other. It is a process that takes more than one complete school year for many of the same reasons that school schedules are seasonal.

Universities and colleges must navigate a delicate balance between financial realities and market competition to attract and retain top-quality leadership. Hiring sub-standard talent to save money is never a good tradeoff for the top position. The stakeholders will be stuck with that individual for several years. If that person is not ready or equipped for the job all stakeholders suffer trying to make up for those items that do not get fixed. While it is crucial to address economic challenges and ensure responsible use of financial resources, universities and colleges also need to remain competitive in enrollment, sports, grants, fund raising, and all the other arenas in which institutions compete. Recruiting and retaining qualified candidates for presidential positions is the cornerstone of remaining competitive in every other competitive endeavor. Striking this balance requires careful consideration of market benchmarks, institutional goals, and the ability to justify compensation packages based on proven performance and leadership capabilities.

To address concerns surrounding executive pay and economic conditions, universities and colleges are increasingly turning to experts in the field of higher education executive compensation to maintain transparent and accountable compensation practices while staying competitive in the presidential job market. Establishing independent compensation committees, conducting yearly reviews of compensation structures, funding legal representation for the executive, conducting compensation studies, and creating a performance bonus structure for the higher levels of compensation are all tools to help Board members avoid undue entanglement. Additionally, universities and colleges focus on communicating the value and impact of effective leadership on long-term institutional success to stakeholders. It is not difficult to pay presidents what they deserve, but Board members should leave the heavy lifting to compensation professionals.

Universities have a real uphill battle when it comes to justifying presidential pay before the public. It is an obvious target of journalists who are honestly looking for ways the school can save money. Unfortunately, the public is unaware that there are already laws, regulations, and severe penalties in place to ensure transparency and accountability when it comes to executive compensation in higher education. The Internal Revenue Service has implemented regulations that require universities and colleges to disclose executive compensation publicly through Form 990 filings; Schedule J. This provides an avenue for stakeholders, including faculty, students, and the general public, to access information and gain a comprehensive understanding of how presidential compensation aligns with the institution's financial standing. Institutions would do well to keep a link to their latest 990 and financial statements on their website. That is an easy tool to use for journalists, consultants, recruiters, pollsters, as well as the curious.

The IRS imposes very serious penalties on the executive and the decision makers when the IRS finds that the university or college has not complied with the intermediate sanctions provisions of §4958 of the IRS Tax Code. Under the Internal Revenue Code Section 4960, a tax is imposed on applicable tax-exempt organizations if they pay remuneration in excess of $1 million to their president.  

The law specifically defines "applicable tax-exempt organizations" as those exempt from tax under sections 501(a) and 501(c) of the Internal Revenue Code, which includes universities operating as nonprofit entities. Therefore, university presidents fall within the scope of this provision.

The excess tax is imposed at a rate of 21% on the amount of remuneration exceeding $1 million, as well as any excess parachute payments. Parachute payments refer to the amount paid to a covered employee contingent upon their separation from employment and exceeding three times their base compensation. Universities and colleges are permitted to use performance-based incentives, deferred compensation, or other techniques to align compensation with organizational goals and avoid triggering the excess tax. These should be structured by a compensation expert in the field.

The provision for intermediate sanctions establishes a penalty that essentially involves the recovery of received benefits, along with an additional penalty and potential excise penalties exceeding 200% of the benefit received. The primary objective is to restore the organization, to the best extent possible, to its prior state before the excess benefit was obtained. After settling the penalties, the presidential contract may be modified to prevent any further excess benefits. In addition, individual Board members may face penalties of up to $10,000 and could be held jointly and severally liable.

The scariest penalty that can be faced by organizations failing to establish a rebuttable presumption of ethical compensation is loss of non-profit status. According to IRC §4958, the Internal Revenue Service (IRS) has the authority to revoke the non-profit status of an organization if it engages in excessive benefit transactions. For educational institutions such as schools, this would be a significant disaster as it would have far-reaching consequences. Losing non-profit status means the school would no longer enjoy tax-exempt status, resulting in the imposition of taxes on its income and assets. This would create a financial burden, potentially leading to budget cuts, increased tuition fees, and reduced resources for students and faculty. Furthermore, the loss of non-profit status could erode public trust and confidence in the school, impacting its reputation and ability to attract donors and charitable support. It is essential for educational institutions to adhere to the guidelines set forth by the IRS to maintain their non-profit status and ensure the continuity of their mission in providing quality education.

To ensure the avoidance of intermediate sanctions imposed by the IRS, it is imperative that any individual serving on the organization's governing body refrains from having a conflict of interest in relation to the transaction. In these situations, the use of consultants and attorneys is crucial to keeping an “arm’s length” approach to the transaction.

While concerns about rising executive pay in the face of worsening economic conditions are valid, it is crucial to recognize that the IRS regulations and public disclosure requirements have significantly enhanced transparency and accountability in this regard. These measures help ensure that executive compensation is subject to scrutiny and oversight by various stakeholders, fostering a more informed and responsible approach to setting presidential salaries.

However, ongoing discussions and evaluations of compensation practices in higher education are still necessary to strike a balance between attracting top talent and maintaining fiscal responsibility. If a president is making $500,000 per year and the US Dollar is diluted by 20%, then that is a loss of $100,000 to the president. Individuals have lives built around their means, and the institution of a president suffers as the president suffers. Therefore, regardless of the raw dollar amounts, reducing the president’s pay by several percentage points in pay is not sustainable for the school. The president will find greener pastures and the institution will be stuck hiring again under the new market conditions.

By engaging in open dialogue and utilizing available data, universities and colleges can continue to navigate the complexities of executive compensation while prioritizing the financial well-being of their institutions and the interests of their stakeholders. Organizations should ensure that they have a compensation committee commission a study on presidential pay to ensure they maintain a rebuttable presumption of ethical conduct. 

Boards should ensure the president is fairly represented in negotiations so that the president does feel taken advantage of, and start to get tempted by recruiters. Trustees and Supervisors must come to terms with the fact that the economy is only getting worse and people with talent will find cover. The best place for them to be covered is under of the roof of the house they are running with efficiency. It is up to the Boards to attract and retain university leadership. Reliance on consultants and attorneys in this process will prove invaluable.