NU’s Masters of the UniverseCity Use “Peers” to Inflate [Education] Executive Pay

September 24, 2012


WASHINGTON, D.C. – by Ivy Harper
I attended the now-infamous Sept. 5th 2008 Board of Regents meeting that had NU’s Regents cluelessly dithering about salary increases for the “hyper-trophying hordes” of overpaid public federal/Morrill Land Grant Act Chancellors, re-christened NU’s “Education Executives,” all the while our once-great nation was being brought to the brink of bankruptcy. Or to put it another way: NU fiddled – literally –  while America burned.
Several Regents – who supposedly “commissioned” a six-page, single-spaced UN-L CBA white paper seriously entitled “Education Executive Salary Parity Initiative” – spoke with straight faces about NU only being at a “mid-point” with respect to its “peers.” You could hear violins and see Regents in near tears talking about NU’s four, poor (of course, I’m being sardonic) Chancellors who – while admittedly they earned more than then-President of the United States George W. Bush – they made quite a lot less than that envy-inducing Ohio State Master of the Universe-City, the greedy Gordon Gee.
Well, now the verdict is in; please read the story below and just insert the word “Education” before the word “Executive” and you have precisely the same situation in America’s Ivory Towers.
INVESTMENT BANKING JULY 26, 2010, 3:12 PM5 Comments

Study: Boards Use Peers to Inflate [Education] Executive Pay


Corporate boards appear to routinely use compensation peer groups to artificially inflate pay for their chief  [Education] executives, helping to contribute to the cascading increases in [Education] executive compensation over the last several years, according to an academic study on corporate governance.

While the rate of pay increases was nearly 11 percent in one recent year, the study highlights one of the various ways that corporate boards go about determining huge compensation packages for [Education] executives.

[Education] Executive pay has increased substantially over the last few years. For example, in 1965 chief [Education] executives at major American companies earned 24 times more than a typical worker, while in 2007 they made 275 times more, according to the Economic Policy Institute. This sharp increase in income for chief [Education] executives, coming as wages for ordinary Americans remained relatively flat, has become one of the more perplexing questions in social science and business. Are chief [Education] executives that much more valuable now than they were 45 years ago?

Social scientists have looked at a number of reasons for the disparity in pay, with many believing that it has something to do with weak corporate directors simply giving into the demands of management, which are often leading the boards.

The common answer as to why chief [Education] executives are paid so much money is that boards want to “retain talent” and fear losing their chief executive to a competitor. Compensation committees on boards hire consultants to advise them on how much other chief executives at rival companies are paid to make sure that they are not undercutting their own top executives.

Michael Faulkender of the University of Maryland’s R.H. Smith School of Business and Jun Yang of Indiana University’s Kelley School of Business, sought to answer these questions in a new study examining the use of comparable companies in the role of determining chief [Education] executive compensation. The study, “Inside the Black Box: The Role and Composition of Compensation Peer Groups” (an abstract is available here), found that companies usually benchmark their executive pay with peers in their industry group, but that they also choose peers that pay more than others.

“Boards do look at labor market practices, so this is not an entirely corrupted process,” Ms. Yang told DealBook. “They do look at industry, they do look at size, the past talent flows, their visibility in everything, so that’s still the major part in the peer choices.”

“But on top of that, if you can choose between company A or company B, which are pretty similar except that A pays their C.E.O. a little bit more generously than B, the board members tend to choose the slightly better paid company as the peer,” Ms. Yang said.

The research showed that from 2006 to 2007 this selection bias toward the higher-paying peers led to a 10.7 percent increase in the median pay for chief executives for more than 600 companies in the Standard & Poor’s 500-stock index and S.&P. MidCap 400 index, equating to a median pay increase of $470,000.

“If we see this each and every year, the compensation is going to go up and up,” Ms. Yang said. “You can call this an upward spiral, you can call this ratcheting up, but yes, it is going to go up.”

The motivation of corporate boards to consciously chose peers that are more generous than ones that are very similar but are just less generous helps to explain, at least in part, the huge increases in chief executive compensation over the years. But this does not completely explain why boards believe that their chief executives are necessarily worth the extra cash.

In the end, the boards may feel that they must do whatever it takes to make their chief [Education] executives happy, which at the end of the day may or may not be in the best interest of shareholders [students & their families].

– Cyrus Sanati

Go to Abstract of Compensation Study via ScienceDirect »

    • Steve Soricelli
    • Enfield, CT

    Now I’d like to see a study on why the salaries of administrators, etc. at most colleges/universities is out of control. These institutions are just as guilty. Maybe it’s because the “products” they produce, the graduates, are the same ones running the major corporations today.

      • R. Law
      • Texas

      Perish the thought !

      You mean to say that the board which is hand-picked by the CEO (who often sits on the boards of those chosen) and from which the compensation committee is selected hires consultants and then skews compensation toward the high end of the consultant’s figures ?

      Really ?

      Who would have thought such a thing could happen ?

      In the board room ?

      Of U.S. corporations whose members will likewise be seeking recommendation to their own boards for their own compensation ?

      How can it be ?

      How could anyone have known ?

        • LOL
        • Massachusetts

        The root of the problem is the corporate board seats are occupied by the very people that are getting the outrageous payouts. The only group more corrupt then big business corporate boards is the federal government.
        We have all seen how the big egos sitting on the boards of these companies seem to have lost touch with reality and their outrageous salaries prove that. Pure insanity running a mok in corporate America.

          • E. Nowak
          • Chicago, IL

          Tell me again why these people need tax breaks?

            • Larry Eisenberg
            • NYC

            Inflated pay for CEO’s
            Is just how the ” Free Market” goes,
            Compensation peer groups
            Steer peer pay through the hoops,
            Very like Whales at sea, “thar she blows”!

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