Earlier last year, in anticipation of favorable legislation under a Republican administration, the consulting firm Korn Ferry (in an on-line Commentary dated June 11, 2017), in response to criticism that the gap between the compensation paid to top executives as opposed to “average workers” has risen over the past few decades, argued that most CEOs are not overpaid. Korn Ferry contends (1) that “a strong CEO can have a significant impact on growth” and hence is a key driver of “expanding shareholder value,” the prime responsibility of every for-profit Board of Directors; and (2) that the pool of “executives who can lead effectively at the highest level” is small, so CEO compensation must be competitive.
Korn Ferry also reported its finding that “two thirds of CEO compensation is composed of long-term incentives that pay out, on average, over a 3- to 10-year time frame” (emphasis supplied). This means that the (rare) do-nothing CEO, or one who doesn’t deliver results commensurate with the Board’s expectation of growth, is unlikely to be around for the length of time necessary to earn the largest portion of those significant pay emoluments proposed in the CEO’s carefully negotiated employment agreement. Although we have not replicated Korn Ferry’s empirical research, this latter point is certainly confirmed by our practical involvement in crafting and negotiating long-term and deferred compensation incentives for our clients in our work as executive compensation attorneys.
A similar public debate about the levels of CEO pay in the business world extends to the leaders of private institutions in higher education, another of our legal concentrations. An article in The New York Times from as recently as December 11, 2017, authored by Stephanie Saul, was headlined “Big Jump In Million Dollar Pay Packages for Private College Leaders,” and highlighted a rise in both average compensation as well as the number of private college and university presidents making more than $1 million per year.
The Times article went on to discuss the pay packages of a number of individual presidents, as well as the controversy over the size of such pay packages at a time of rising tuition costs, increasing student debt and the move to tax certain large university endowments, an idea which actually materialized in the recent Federal tax overhaul.
Of course, university and college presidents do not make the kind of money that the CEOs of large commercial corporations receive, and we have argued in an earlier post that the extraordinary demands placed upon today’s leaders in higher education more than justify their compensation.
The similarity — as the Times concedes — is that a significant portion of the compensation packages of top executives in higher education comes, as with business and financial CEOs, in the form of some type of deferred compensation. As such, it customarily requires the president to survive in his or her job for a meaningful number of years, thereby acting as a sort of “golden handcuffs” to tie a successful president to a single institution for as much as five to 10 years. This is a meaningful restriction on the mobility of a university president who may be in demand elsewhere, but is understandably hesitant to give up his or her deferred compensation package by “jumping ship” to go to a more challenging or enticing situation.
As executive compensation attorneys, we confront these issues routinely both in higher education as well as in the for-profit worlds of business, finance and industry. How to structure a deferred compensation package so that it balances the legitimate needs of the institution with the needs of our presidential client? Should we allow the executive to be bound to a single situation because of the executive’s own success? Can we negotiate a “make-whole” arrangement with a prospective new employer which will compensate a CEO or a college or university president for his or her loss — triggered by leaving a current employer — of a large amount of unpaid (or unvested) deferred compensation? When is a sign-on bonus and, perhaps even more controversially, a performance bonus appropriate for a leader in higher education? How to add value to a presidential contract in academia without pushing base compensation — which is often set by comparison with peer institutions and, if unreasonably beyond the parameters of the pay accorded to the leaders of those peer institutions — beyond the Board’s comfort level? Each situation presents a unique problem demanding its own unique solution, which is what makes our legal practice so challenging.