The SanityPrompt

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Monday, May 09, 2005

How the Rich Get Richer

The Chronicle of Higher Education: 4/22/2005: Faculty Salaries Rose 2.8%, but Failed to Keep Pace With Inflation for the First Time in 8 Years:

Two important developments in Academe worth noting: 1st, faculty salaries did not keep pace with inflation last year. 2nd, and more importantly, administrative pay outpaced faculty wage growth.

Why should administrative pay outpace faculty pay? Are universities and colleges being manifestly better managed today than in the past? Are so many university managers likely to leave for the private sector? I can't imagine the private sector queue to hire outgoing academic heads Sheila Kaplan and Betsy Hoffman stretches for very long.

"The AAUP report notes that salaries for university presidents are a regular topic of debate, but the association argues that faculty salaries are rarely considered in such discussions. Pairing data from its own faculty salary surveys with information from reports by the College and University Professional Association for Human Resources, the AAUP created a ratio of presidential to professorial salaries.

"The report notes that between 1973-74 and 1981-82, presidential salaries increased more than the average professor's salary for most types of institutions. But the change was slight, and the ratio remained relatively constant. For instance, in 1973-74, at private doctoral institutions, the ratio of average presidential salary to average professor salary was 1.54 to 1. By 1981-82, that ratio had increased to 1.73 to 1.

"But by 1993-94, the ratio at doctoral institutions was 2.17 to 1. Over the next 10 years, it jumped to 2.68 to 1. The AAUP report contends that the change 'is one further indication that a more corporate organizational hierarchy is emerging in colleges and universities, in potential conflict with the mission of institutions of higher education to operate for the benefit of society.'"

I think this is less an example of the corporatization of higher education than symptomatic of a broader social moment. For whatever reason, organizational managers are more and more comfortable demanding extraordinary salaries and perks without feeling the necessity of demonstrating that this meets either a market test or some demonstration of objective performance. And for whatever reason, our society shows fewer and fewer qualms about granting this.

I call this a social moment because I believe this is more a phenomenon of sociology than economics. If it has to do with economics, it is that shady realm of information asymmetries and principal agent problems in which those who know what they are worth control the process by which decisions about their pay are made.

A recent report in the Rocky Mountain News captures this nicely:

"Perks poured into the corporate suite have risen along with total pay. Critics say a desire to keep pace with competitors forces compensation higher, even if performance hasn't improved.

"It's "the Lake Wobegon effect, where everyone is above average," said Alan Beller, director of the Securities and Exchange Commission's corporation finance division, according to a transcript of a speech he made in October.

"'Too many boards have apparently operated on the principle that compensation must be in the top half or even the top quartile of some benchmark group for the company to be competitive in attracting executive talent," he said. "Boards of directors ought to be able to do better than this.'"

If boards feel that the best benchmark for CEO compensation is whether or not it is in the upper half, then the most obvious result will be a spiral in executive compensation and perks and a divorce from any corresponding organizational realities such as performance. Outgoing Colorodao President Elizabeth Hoffman earned almost a half million dollars for her marvelous demonstration of how not to manage a public relations crisis. A lot of this has to do with the lousy state of US corporate governance. But as the spread of this phenomenon to higher education shows, it has as much to do with the expectations of a managerial class about the profits to which they are entitled, and a society which feels powerless or is powerless to intervene and demand some degree of accountability. The composition of boardrooms, boards of trustees, and executive ranks across the society ensures that there wil be few voices to express objection and the pervasiveness of the phenomenon provides that there will be little or no market test that would punish or reward companies that behave otherwise.

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