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Deferred Compensation for College and University Presidents: Old and New Planning Techniques

As executive employment attorneys dealing with compensation issues for university and college presidents, we were aware of the pressures on presidential compensation even before the global pandemic. These pressures come from below and above.

From below, the faculty is critical that the president (usually a former faculty member themselves) receives a base salary which is meaningfully higher than the highest faculty salary. The faculty does not much care that the president is doing a far harder job, working nights and weekends all year round, with rarely if ever an uninterrupted vacation day.

From above, the (monetarily uncompensated) board of trustees of the college or university is often motivated to depress the president’s compensation. Fearful of media and government scrutiny, no board wants to wind up in the local newspapers let alone the national higher education press accused of having overpaid even a highly valued president.

As a result, when we seek to increase the president’s compensation for doing an extraordinarily difficult job, as executive employment attorneys we are often met with responses such as: “We would like to increase the president’s salary and other forms of compensation — he or she certainly deserves it — but we are concerned about the ‘optics’ of doing so.”

Compensation for chief executives of non-profit entities, including academic institutions, is reported publicly on the so-called Form 990, and this data is closely perused by peer institutions as well as the press and government officials, despite the fact that the information it contains is customarily one or two years old when it becomes easily accessible to the public. Between the dreaded ‘optics’ of overpaying the president, the board’s fear of looking as though it is captive to a powerful leader, and the desire of paid compensation consultants to depress the president’s earnings, few members of college and university boards of trustees are inclined to be overly generous. The world health crisis connected with COVID-19 has only reinforced this tendency.

So, what is the president’s executive compensation lawyer to do?

One answer to the concerns of both the president and the board of trustees lies in deferred compensation.

Assuming that the base compensation of the president of any given college or university is reasonably fair in comparison to that of the leaders of comparable schools (not always the case, but generally ascertainable), many presidents are far less concerned about their current base salary level (a meaningful part of which must be set aside for taxes in the year when earned) than they are worried about their own retirement resources.

This is particularly true because the days when one person can serve as the beloved president of some college or university for thirty, or even twenty years, are largely gone. Being a college or university president is an intensely demanding job, and academics rarely obtain these top positions before they are in their 40’s or early 50’s, sometimes older.

Accordingly, these days presidents who stay in the job for two five-year terms are viewed as quite successful, and many of them are hesitant to put themselves (and their families) through the stresses of more than a decade in the job. They may have some savings, and there may be some pension or 403(b) entitlement going back to their faculty days, but in our experience very few college or university presidents — fewer than business leaders in comparable positions of responsibility — envision that they will wind up still leading their schools in their 70’s and for decades beyond. Also, most everyone, in these days of increased life expectancy, is fearful of outliving the money they have earned during their working years.

The answer to both of these problems — the board’s hesitation about a significant boost to current compensation, and the president’s concerns about retirement — can be addressed by a number of deferred compensation planning techniques which we regularly utilize.

Frequently Asked Questions

1.     Q:     “Don’t the contracts of college and university presidents routinely provide for some level of deferred compensation?”

A:     Not always, but even many of those which do set deferred compensation or retirement entitlements at a minimal level. Without the intervention of a sophisticated executive compensation attorney, many college presidents are receiving only the minimum level of deferred compensation (currently less than $50,000 in total set aside annually) provided by standard 403(b) and 457(b) plans, both of which are subject to a not overly generous ceiling on tax-deferred contributions.

2.     Q:     “Can you negotiate for additional deferred compensation for the president which is not subject to such modest limits?”

A:     We frequently are able to negotiate for the president to receive meaningful additional deferred compensation through the mechanism of a 457(f) plan. Such a plan also benefits the institution by assuring the board that the president has an incentive to remain in office until the end of his or her full term in order to be eligible for a substantial deferred compensation payday.

3.     Q:     “Am I correct that even if the president is entitled to receive a payout of deferred compensation at the end of the president’s term through the mechanism of a 457(f) plan, doesn’t that one-time payout upon conclusion of the president’s term of service create a current tax liability in the year in which it is paid to the president? Can anything be done about this?”

A:     You are correct, and there is at least one deferred compensation planning technique which avoids this result. As executive employment attorneys we work with a team of leading insurance consultants who often can design a tax advantaged “split-dollar” insurance plan in lieu of a traditional 457(f) deferred compensation plan. Assuming that the circumstances associated with any insurance arrangement — age, health, employment (and dollars) pegged to actual need — are satisfactory, these split dollar life insurance plans, which are known and tax tested in a variety of business situations and increasingly accepted in the academic arena as well, can amply satisfy the president’s need for a stream of tax free income during his or her retirement years. It also meets the needs of the board of trustees for a mechanism by which to retain and reward the president while actually creating an asset on the books of the school rather than a liability on the Form 990.

About the Author

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George Birnbaum

Since 1980, sophisticated business people have relied on George to apply the meticulous preparation, attention to detail, and devotion to his clients he learned from fabled trial lawyer Louis Nizer. A graduate of Harvard College and Harvard Law School, George has over 35 years of distinguished deal-making, litigation, mediation and arbitration experience which he has used to negotiate high-stakes agreements for senior executives and select business clients throughout the United States.