Friday, August 29, 2014

University of Alaska President Retention Bonus Part 3: The Salary Survey

In response to my request the other day to Board of Regents Chair Jacobson, the UA Public Affairs  office sent me a page from the salary survey the Board used to determine President Gamble's salary.  I'm adding it at the bottom of this post, so people have more information with which to understand the Regents' decision.  I haven't had time to do research on the comparable universities, but I thought I should put it up so others could review it.

First, though, let me preface the data with a discussion of salary surveys and executive pay in general.

Salary surveys are routinely used by organizations to determine the 'market value' of  various positions.  This is then used to set the pay for the positions in the organization.

A"pay philosophy" is what the organization uses as a standard to determine how to use the salary survey to set pay for their positions.  These usually relate to how close to the prevailing wage they want to set their salaries.  Some want to be known as paying above the average, others below.  In the email to me, Kate Ripley wrote:
"The regents' goal for some time now has been to pay at 10 percent below the market median. "
For some job categories, where there are large numbers of incumbents who do relatively the same functions - like different categories of nurses -  surveys are pretty easy to do.  In cases like nurses, geographic area may be a key factor.

For job categories where the population is much smaller - like university president - nationwide salary surveys are more likely.  For executive jobs that are more unique, the trick is to compare institutions that are similar in important ways, where the job has more or less the same challenges.  For CEO's things get pretty tricky trying to identify comparable organizations with comparable CEO roles.

Even in one sector, like education, picking comparable institutions is not easy.  Some factors to consider:
  • Private versus public institutions.
  • Size of the student body and the makeup of the student body.
  • Institutional mission:  research or teaching or combo;  urban, rural; undergraduate, graduate;  fields (science, medical school, law school, etc.)
  • Role of the president:  external or internal;  importance of fund raising; etc. 
 Another question, that I think is worth considering, and seems to play a role in the criticisms the Regents are receiving, is the explosion of executive salaries in recent years that is self perpetuating when you use salary surveys to find an appropriate salary.  There's been a lot of media coverage of the wealth gap in the US and the growing economic power of the "1 percent."

From a 2010 Economic Policy Institute study:
The wages and compensation of executives, including CEOs, and of workers in finance reveal much about the rise in income inequality:
  • The significant income growth at the very top of the income distribution over the last few decades was largely driven by households headed by someone who was either an executive or was employed in the financial sector. Executives, and workers in finance, accounted for 58 percent of the expansion of income for the top 1 percent and 67 percent of the increase in income for the top 0.1 percent from 1979 to 2005. These estimates understate the role of executive compensation and the financial sector in fueling income growth at the top because the increasing presence of working spouses who are executives or in finance is not included.
  • From 1978 to 2011, CEO compensation increased more than 725 percent, a rise substantially greater than stock market growth and the painfully slow 5.7 percent growth in worker compensation over the same period.
  • Using a measure of CEO compensation that includes the value of stock options granted to an executive, the CEO-to-worker compensation ratio was 18.3-to-1 in 1965, peaked at 411.3-to-1 in 2000, and sits at 209.4-to-1 in 2011.
  • Using an alternative measure of CEO compensation that includes the value of stock options exercised in a given year, CEOs earned 20.1 times more than typical workers in 1965, 383.4 times more in 2000, and 231.0 times more in 2011.
Now, private sector CEO's get a significant amount of their pay in stock options, which is not the case for public sector CEO's.  However, the inflation of private CEO salaries surely has impacted public sector and non-profit CEO salaries as well.

Edward E. Lawler III , distinguished professor of business at the University of Southern California (USC) Marshall School of Business writes at Forbes:
"The standard justification for the high pay of CEOs and other top executives is that the market demands it. It is argued that if you do not pay CEOs at or above the market, they will leave and go to a competitor.
Which is exactly the argument that Board Chair Jacobson makes.  From the letter she sent to the faculty and staff Thursday:
Pat Gamble is an accomplished, nationally known and exceptional leader, who could readily take his skills elsewhere or simply decide to retire. The retention incentive approach addresses market issues while creating a powerful incentive for President Gamble to stay on board.
But Lawler continues:
There are a number of problems with this argument. Perhaps the most important one is that numerous studies have shown that CEOs rarely move from one company to another, and when they do, they are usually less successful than internal candidates. In short, at least at the CEO level, there is little evidence that an efficient market for talent exists that is based on compensation levels.
Market data are a constantly escalating and flawed indicator of what executives should be paid. Few boards are willing to pay their executives below market. There are several reasons for this. Board members typically want to be looked upon positively by the CEO and other senior executives in order to get on and remain on corporate boards. A board member who argues for paying individuals below the market is not likely to be a respected or valued board member, at least in the eyes of the executive team of the company."
Private sector and public sector CEO's are a bit different and the board dynamics are a little different.  Lawler argues that many board members are CEOs of other corporations.  As CEO's, they benefit when other CEO salaries rise.  That's not the case for the Board of Regents.  However, these other dynamics he mentions in the previous paragraph. apply to public boards, like the Board of Regents, as well.

Enough context.  But it helps explain why I'm just giving you the raw data they sent me.  And why I'm not analyzing it.  Because at this point I don't have enough information about the comparable institutions to evaluate how comparable they are.  The information they sent me did not explain how they chose these institutions or what their characteristics are that make them 'comparable.'  But maybe others reading this will have more information about the institutions they compared UA with.

It's a little small, but if you download it, you should be able to read it easily. And you can enlarge it, but it seems to be a little bigger where I uploaded it at Scribd.

Ripley's email said:
"Attached is a copy of UA peers for presidential compensation purposes. This salary information is collected in house on an annual basis by Human Resources and Institutional Research."  
 The colors indicate:

green - "Quatt identified presidential peers"  (Quatt is a DC based management consulting firm which lists the University of Alaska as a client on their website.)

blue - IR identified UA peers  (IR is University of Alaska Institutional Research)

orange - Quatt and IR identified

Other abbreviations:

Chronicle = Chronicle of Higher Education, the basic trade journal of higher education
CUPA = College and University Professional Association for Human Relations
SHEEO = State Higher Education Executive Organization
OSU = Oregon State University

All the organizations do salary surveys in higher education. 

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