Few higher education governance topics generate more interest than the compensation of a college or university president. A poorly governed compensation process can result in front-page news, aggrieved faculty and students, and an inquiry from the state attorney general. Attorney Tom Hyatt, author of AGB’s The Compensation Committee, provides advice for boards.
Setting the president’s compensation is one of the board’s basic roles. Is it especially challenging these days?
More challenging than ever. Perhaps that is to be expected, since the job of being a college or university president is more challenging than ever, as well. A compensation committee has to determine the level of compensation and benefits that will successfully engage and retain top talent, maintain internal equity in the institution’s compensation plan, satisfy cost-containment measures, be compliant with the law, and operate under a transparent process that achieves the trust of stakeholders, regulators, and the public. No small feat.
What are some of the new trends you are seeing in presidential compensation?
Boards of trustees have faced a challenging economic climate for several years now, but at the same time, it has been a highly competitive market for leaders in higher education. As a result, they have been forced to be creative and even aggressive in finding compensation and benefits that will bring the best talent to the institution and keep them there. Multiple deferred compensation options and performance bonuses are increasingly popular. Most presidents will want to co-terminously serve as tenured faculty members, with the option to serve as top-tier compensated professors at the end of their presidency. With the increasing expectations of presidents to do substantial fundraising, the provision of well-maintained, on-campus housing for the president is a common benefit. On the public institution side, related foundations are increasingly assisting publics in funding compensation arrangements for presidents.
Where do boards go wrong in setting compensation? What are some common pitfalls to avoid?
The mistake that some boards make is to abdicate responsibility for setting compensation to the board chair or a small group of board members. That is a recipe for trouble. Reliance on an engaged compensation committee that reports its recommendations to the full board for final review and approval is the governance practice of choice. Boards also sometimes fail to use the “rebuttable presumption” process for demonstrating reasonableness of compensation. This process, involving review by an independent board or board committee, reliance upon current compensation comparables of peer institutions, and appropriate record keeping, is an effective governance practice and demonstrates legal compliance. Yet both the IRS and AGB have found from reported data that colleges and universities underutilize this practice.
What is the single most important thing every board member should remember in setting compensation?
Determining the proper compensation and benefits for a college or university president is the responsibility of the entire board. A compensation committee, or other committee charged with the task, will do the heavy lifting. But at the end of the day, it is each board member’s fiduciary responsibility to ensure that the process for determining compensation is an effective one and that the end result is consistent with fair market value, legal requirements, and common sense.
Most boards do not have a stand-alone compensation committee; instead, that task falls to the executive, budget, audit, or governance committee. What are the benefits of a stand-alone committee as a best governance practice?
The value of a separate compensation committee is clear. In an era of increased scrutiny from all stakeholders, demands for greater transparency, and rising expectations, best governance practice suggests that the work of setting leadership compensation and benefits should not be shared with the items on another board committee’s busy agenda. A stand-alone compensation committee can focus its efforts on this considerable task. It will also be easier to achieve the desired level of independence if a separate committee is created for this purpose.