The CEO-ization of the President’s Contract

Over the next several weeks, universities will be concluding their presidential searches that began last fall. The press releases announcing the new presidents are being written. The news conferences are being planned.

Most of the news stories will follow a familiar script: a biographical sketch of the candidate, a quote from the chair of the governing board as well as one from someone at the president’s former institution. The new president will say something about how honored they are to have been selected. Many articles, but not all, are likely to mention the new president’s salary -- an amount almost surely greater than their predecessor’s.

But what will rarely be reported, at least initially, are the full terms of the new president’s contract. In fact, getting a copy of the new contract may be problematic in the case of public universities and virtually impossible at private universities.

But our most recent study of 116 public university presidential contracts provides some insights for presidents, governing boards, faculty members and the public about what to expect. What those stakeholders will find provides some interesting insights into the transformation of a university president from a role of service to a role as corporate CEO.

Last June, we presented the findings of our research at the annual meeting of the American Association of University Professors. The study included contracts for public university presidents in 47 states, including 44 flagship institutions and 30 public members of the Association of American Universities, as well as those of the universities that were part of our 2010 study funded by the Kauffman Foundation and 92 from an original 1998 study. A list of the institutions included in the study can be found here.

Our major conclusion is straightforward. Putting aside the dramatic increases in presidential salaries in recent years, the employment agreements for university presidents are becoming increasingly complex and bear little resemblance to the typical appointment letters for a faculty member, department chair, dean or even other senior members of the administration. The exceptions, as Randall S. Thomas and R. Lawrence Van Horn report in a recent study, are contracts for coaches. They concluded that there are “many commonalities between the structure and incentives of the employment contracts of CEOs.” Our data suggest that the same holds true for an increasing number of university presidents. We call this the “CEO-ization” of the university presidency.

In this piece, we will go beyond the typical compensation reports that are published each year and provide an overview of the structures and incentives we discovered in the contracts we analyzed. The data points for our study are the actual employment agreements for presidents of public universities. We collected these documents through open-records requests where we asked not only for the current agreement but also for any amendments and related governing board resolutions. As might be expected, not every institution provided what we requested in a timely manner. A few institutions denied our request since we were not residents of the state, some states provided incomplete or dated information and two claimed that there was no contract. Several “state-related” universities in Pennsylvania claimed an exemption from any open-records requests. For institutions in some state systems, such as the University of California, we had to supplement what was provided with publicly available policy documents that were referenced in the materials we received. In all, of the 142 requests we made, we received enough information from 116 institutions to include them in our study.

The presidential employment agreements we examined varied greatly in complexity. While the trend is certainly toward more corporate-like agreements, we found that some of the documents we received were simple appointment letters. They merely announced the individual’s appointment as president, stated a salary, specified the term and contained boilerplate language incorporating the rules and regulations of both the state and the university. Typically, these “simple” agreements were for institutions in states with statutes requiring presidents to serve at will as well as prohibiting such features as bonuses and postappointment employment.

At the other end of the spectrum were lengthy and detailed employment contracts. The most sophisticated were almost certainly drafted by a lawyer representing the president and included clauses covering virtually every imaginable aspect of employment: term, compensation, incentives, benefits, perquisites, outside activities, evaluation, termination and postemployment parachutes. While we are reluctant to classify such complex agreements as representing best practice, nonetheless, we think that describing these elements in a bit more detail may be helpful in understanding the trend toward the CEO-ization of the university presidency.

• Term: The vast majority of the contracts we examined included provisions for multiyear appointments. Other than those agreements that were structured as at will or one-year renewable, the term for initial appointments varied from three to five years. Renewal contracts were most often for five years.
• Compensation: Every contract in our study specified a base salary. In some instances, this was divided between a state-appropriated/university portion and private/nonuniversity funds. A substantial number of contracts also included deferred-compensation plans. The language regarding these plans varied from simply stating an amount to be deferred each year to very technical appended agreements, obviously drafted by a tax lawyer, with detailed references to various IRS regulations, stipulations on eligibility, investment accruals and more.
• Incentives: Since our last study in 2010, the number of employment agreements that include some form of incentive pay, the types of incentives and their value has increased greatly. Some of the incentives include signing bonuses, performance bonuses, retention bonuses and completion bonuses. The total value of the incentives per employment agreement varied from a few thousand dollars to over $1 million. We paid particular attention to so-called performance bonuses, especially the criteria upon which they were based. In most instances, the president proposed the criteria, the governing board approved them, and they did not appear to be public or stated in measurable terms. The one exception was Arizona, where it was clear that the governing board set the criteria in advance, incorporated them into the employment agreements and made them public and measurable.
• Benefits: All presidents received the standard benefits available to other employees of the university, and, in many instances, also received supplemental benefits. Sometimes, especially in the case of statewide systems, such benefits were available to all executives in the system. But in most cases, these supplemental benefits were distinct to the individual. Some of benefits in this category included additional life insurance, disability insurance and health benefits such as executive physicals. In addition, many presidents received special retirement benefits, such as supplemental annuities. In many of the cases where such benefits are taxable, language in the agreement requires the university to “gross up” the amount paid so that the president does not incur an additional tax liability. We even found one case in which the president was provided with funds to cover his children’s private K-12 schooling. (As a reminder, all presidents in our study are from public universities.)
• Perquisites: Many of the employment agreements require the president to live in the university’s official residence. In order for that to be a nontaxable benefit, it must be an explicit requirement. Where there is no official university residence, the president typically receives a housing allowance varying from $18,000 to $72,000 per year. Many presidents also receive a car or car allowance -- one president received $20,000 each year to lease a car. While those are the two most common perks, we found a wide range of other such benefits. A partial list includes travel and entertainment allowances, first-class and business-class travel for the president and their spouse or partner, access to private or chartered planes, financial planners or tax advisers, legal services, tuition assistance for family members, moving expenses -- not only for moving in but also for moving out -- storage fees, mortgage assistance, professional dues, social club and country club memberships (often with golf privileges), and telecommunications allowances for both equipment and monthly fees.
• Outside activities: Many agreements include specific language regarding outside activities for which the president receives compensation, such as speaking fees, royalties and remuneration for serving as a corporate director. In the latter case, we are finding an increasing number of agreements that either limit the number of directorships or require some sort of approval by the governing board.
• Evaluation: Quite a few of the agreements in our study address the issue of both annual and renewal evaluations. However, the language is quite general and typically involves the president proposing annual goals for the governing board’s review and approval. Often, the contract also includes language regarding time frames, especially with regard to renewal reviews.
• Termination: The termination clauses are often the most specific and carefully worded sections of these agreements. We found language concerning four types of termination: 1) for cause, 2) without cause, 3) resignation and 4) death. Except in the case of for cause, in virtually all instances the president was entitled to some sort of payout. At the extreme, some presidents received the full value of the remaining time on their contract. In other situations, the maximum payout was limited -- most often to one year. Deferred compensation, incentives, benefits and perks often depended on the timing and circumstances of the termination.
• Postemployment parachutes: With only a handful of exceptions, primarily in those states that prohibit presidents from holding tenure and/or that have some other limitation on postpresidential appointments, most employment agreements provide at least two basic benefits. In about two-thirds, the president holds tenure and may return to the faculty at the completion of the term. Often coupled with this is language that predetermines the president’s faculty salary. Nearly half of these contracts provided for a postpresidential sabbatical. This is most often for a year and at the individual’s presidential, rather than faculty, salary. We also found other benefits such as continuing administrative support, graduate assistants, discretionary funding, reduced teaching loads, move-out expenses, gifting or ability to purchase a car, a dedicated parking space, Medicare insurance subsidies, continued club memberships, certain survivor benefits and tickets to cultural and athletics events -- often with reserved seating.

Some elements included in presidential contracts do not fit easily into these categories. One example, although not common, is spousal or partner compensation other than that of a trailing spouse or partner. While that is typically in the form of a stipend, we found at least one instance of what we believe is a sinecure worth over $200,000 per year. Another example is pre-employment consulting agreements. Some contracts have clauses regarding indemnification and/or confidentiality, especially in circumstances where payouts for termination without cause are involved.

In later articles, we will explore some of those issues in more depth. Our concern is not whether these are good or bad contracts, nor whether such presidents are worth the monies they are paid. Rather, our purpose is to present the current state of the art so that other university staff members, boards and the public can determine whether this CEO-ization is appropriate and should continue or whether higher education should take a new direction with presidential contracts.

We leave you with one other thought: putting aside coaches, who we believe are really in the entertainment business, the presidents of public universities are almost always the highest-paid public employees in a state. In fact, every president in our study earned more than the highest-paid governor in any state, and many were paid more than the U.S. president. Further, most of their contracts included benefits, perks and protections not available to any other elected or appointed public official, faculty member or university administrator.

Governing boards maintain that today’s universities are not all that different from running a corporation and that such employment terms are necessary, if not essential, to recruit top talent. However, one recent headline in the Financial Times suggests that may not be the case: “How Paying Chief Executives Less Can Help Corporate Performance.” We’ll explore that in our next article.