Sunday, 22 March 2015

Are university vice-chancellors' pay increases justified?

In the UK, the pay of university vice-chancellors' (VCs, the equivalent to president of a U.S. college) has been in the news recently. For instance, from Times Higher Education:
University vice-chancellors were paid £260,000 on average in the last academic year, a pay survey by the University and College Union shows
Neil Gorman, who was then vice-chancellor at Nottingham Trent University, earned the most in 2013-14 with his total benefits amounting to £623,000...
Seven universities paid their vice-chancellor more than £400,000 in salaries, bonuses, other benefits and pension contributions, the union said...
Sally Hunt, the UCU’s general secretary, said that the “lack of transparency and accountability surrounding senior pay and perks [was] a national scandal”.
Do university vice-chancellors deserve their high pay though? Not according to research cited by The Guardian:
The research, by economist Ray Bachan, from Brighton Business School, also looked at the extent to which the pay awards of university leaders were related to university performance measures, to shed light on whether headline pay awards were justified. In particular, it analysed vice-chancellors’ success in increasing the number of students from comprehensive schools and low-participation districts, and their record in bringing in income such as grants for teaching and research and capital funding.
It found that, while some of the pay increase could be explained by improvements in these areas, a “significant proportion” of the rise in vice-chancellors’ pay bore no relation to performance. Bachan said: “significant proportion of the sizeable annual increases are not easily explainable in terms of university performance, and this raises some concern.”
The research suggests that the presence of other high-paid staff in an institution pushes up vice-chancellors’ pay. University remuneration Remuneration committees, which set pay rates, may also seek to set the salary at a level commensurate with comparable institutions, said the study, which was published this month in the Fiscal Studies journal.
Note that The Guardian's headline is "‘Eye-watering’ salary rises for university chiefs cannot be justified, says report". The journal article by Ray Bachan (University of Brighton) and Barry Reilly (University of Sussex) in Fiscal Studies is available here (I don't see an ungated version anywhere). The authors do say something similar to The Guardian headline in the abstract:
However, even after controlling for a rich array of observable and unobservable factors, there have been sizeable increases in real pay in recent years that cannot be readily explained.
Having read the paper though, The Guardian's headline and the authors' abstract are both overstating the problem. There is nothing in the journal article by Bachan and Reilly that suggests to me that the salary rises are unjustified. I would argue quite the opposite, in fact. The authors use institutional performance as a predictor of VC salary. All three measures of 'mission-based performance measures' had positive and statistically significant relationships with VC salary, as did one of the three 'financial-based performance measures'. Other than year fixed effects, the among of funding council grants received was the most statistically significant determinant of VC salaries. So, I don't think it's correct to say that the salary rises cannot be justified - they are actually linked to institutional performance.

Of course the model doesn't explain all of the increases in VC pay - it has an R-squared of nearly 0.7, so the model explains nearly 70 percent of the total variation in VC pay. That leaves some 30 percent unexplained. But for an econometric model, that is really rather good. You might argue that not being able to explain all of the variation in VC pay means that the salary rises are not justified by performance. However, the models are not complete - there may be performance-related variables not included in the model that are important and might explain some of the remaining variation in VC pay. Indeed, the authors note themselves that:
Modelling the relationship between CEO pay and performance in the public sector is not an easy task. Estimating the relationship between VC pay and performance is also fraught with difficulties given data constraints. Our results suggest that institutional performance, external benchmarks and internal pay structures or tournaments play an important role in the pay-determining process. Nevertheless, if more detailed data on internal university pay structures (such as the pay of professors or other highly-paid staff) are made accessible or if compatible performance data on other aspects of performance not covered in this research (such as teaching and research) become available, more fruitful insights into this pay–performance relationship may be gleaned.
One further point to note is that the authors find that the proportion of staff earning more than £70,000 has a large positive and statistically significant effect on VC pay. They attribute this to tournament effects, which we have just finished discussing in my ECON110 class.

With tournament effects, a small group of highly successful workers get paid high salaries (VCs in this case), while many others accept lower salaries in exchange for the chance to become one of the highly successful few in the future. The high salaries at the top need not be related to performance of those at the top - instead, high wages at the top incentivise those lower down (e.g. other top executives) to work hard in order to ‘win’ the tournament. So, high VC (and CEO) salaries may motivate pro-VCs (and deputy CEOs) and others further down the organisational ladder who aspire to reach the top. And if the salaries of those lower down the ladder are high, the VC pay would need to be even higher to create an effective incentive. Which is essentially what the authors found.

Of course, not all academics are motivated to become VCs. The academic tournament is somewhat different  than the tournament for academic administrators (and I've blogged on that earlier - see here).

So, are the recent increases in vice-chancellors' pay justified? The research doesn't really answer that normative question fully, but possibly yes - at least, the research shows that increases in pay are linked to increases in performance. As to whether the tournament effects are 'justified', I leave that up to you to decide.

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