Negotiating the President's Contract

By    //    Volume 23,  Number 3   //    May/June 2015

In the last issue of this magazine, the “Legal Standpoint” column addressed campus counsel’s role in reviewing institutional contracts. This column is devoted to the complexities surrounding one particular contract: the employment agreement between the institution and its chief executive officer.

Especially in the past, a surprisingly large number of presidents—as many as one-third of 165 presidents surveyed at public institutions, according to an article in the Chronicle of Higher Education seven years ago— have served on a proverbial handshake basis without any written contract. At some institutions, boards have wanted presidents to serve “at will” without the added protections that typically come with written contracts. Other institutions, particularly those subject to state open-records laws, have feared that details about presidential compensation will cause difficulties with faculty members, union leaders, and the public.

Still, there are compelling reasons to commit contract terms to writing. Employment contracts, particularly for well-compensated executives, tend to be complex. They venture into areas—incentive compensation, deferred compensation, imputed income associated with occupancy of an institutionowned residence—that have tax consequences. On sensitive matters, such as the manner in which the president will be evaluated and the circumstances under which the board can terminate the president, precisely drafted written terms are better than potentially ambiguous oral understandings. For all these reasons, AGB has long recommended that terms of presidential employment be incorporated into a formal written agreement.

AGB’s 2008 book Presidential Compensation in Higher Education contains helpful chapters on standard presidential contract terms. These include obvious terms, such as compensation, duties, and length of appointment. They also include not-so-obvious ones, like potential conflicts of commitment arising from paid service on corporate boards, conditions for appointment to a tenured faculty position (and serving in that position once presidential service is over), severance pay, termination for cause and not for cause, and fringe benefits such as country club dues, use of a motor vehicle, entertainment allowances, and supplements to standard health or life insurance plans not provided to other institutional employees.

A tricky question: Who should negotiate the presidential contract on behalf of the institution? I say “tricky” because at many institutions the official typically responsible for handling contracts—the general counsel—reports to the president and may be uncomfortable negotiating with the person who will subsequently be his or her boss.

One workable solution is for the board chair to handle negotiations with the institution’s lawyer serving as the chair’s counsel and interacting not with the president-to-be, but with the chair. Another workable solution, resources permitting, is for the institution’s lawyer to outsource the contract to a specially retained outside attorney who advises the board chair and keeps the institution’s lawyer informed but not actively engaged.

Attorney input is needed because presidential contracts typically contain provisions that raise tax concerns. Under the intermediate sanctions provision in the Internal Revenue Code, presidential compensation must be reasonable—meaning, as a practical matter, that it must be benchmarked against compensation packages for other chief executive officers. What gives the intermediate sanctions provision teeth is the Internal Revenue Service’s ability to impose significant penalties for so-called “excess benefit” compensation packages—penalties that can be levied not only on the institution, but also on individual governing board members who approve presidential compensation knowing it to be excessive.

Other common aspects of a president’s compensation package require familiarity with the tax code. Those include incentive compensation provisions, deferred compensation provisions, and tax-deferred annuity provisions, all of which must be drafted with care to avoid an unintended tax liability in a highincome tax year. The provision of a subsidized on-campus residence must also be handled with due regard for the potential for imputed taxable income.

Every institution has a chief executive officer. Getting the CEO’s contract right avoids recrimination, keeps the board happy, and—like any well-drafted contract—provides definitive answers to what-if questions without the potential disharmony that comes from resolving disagreements on the fly.

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