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Improving four-year graduation rates is a major strategic goal for University of Texas at Austin President William Powers over the next few years, and he's also likely to have money riding on it.

The finance committee of the University of Texas System’s Board of Trustees approved a proposal Wednesday to adopt an incentive-pay system for the heads of the system’s nine universities and six health centers, as well as 11 system administrators.

Under the plan, the system’s chancellor will meet with each individual administrator eligible for the incentive plan. With each he will develop three or four areas on which to evaluate that official's performance, on either one-year and three-year time horizons, and specific outcomes for which to aim. The chancellor would then send those goals to the board for approval.

An example plan included in the proposal measured performance on four areas: cost savings from shared-services initiatives, growth in sponsored research programs from the prior year, philanthropic funding as a percentage of institutional expenditures, and four-year graduation rates (all issues that have generated headlines at the University of Texas at Austin in the past year).

Incentive pay, also called performance pay and variable pay, is nothing new, but it’s the exception rather than the rule at higher education institutions, particularly at public colleges and universities. The fact that the University of Texas System -- one of the largest and most prominent public university systems in the country -- is moving toward such a structure is notable and could potentially drive others to adopt similar approaches.

But in a state that has seen numerous complaints in recent years about governing boards -- and the politicians who appoint them -- micromanaging university policies, many see the incentive-pay plan as another step for boards to dictate university policy rather than working collaboratively with campus leaders, which could lead to further confrontations between campuses and the system.

Politics and Pay

The proposal for performance pay grows out of the system’s “Framework for Advancing Excellence,” a plan proposed by system Chancellor Francisco Cigarroa and adopted unanimously by the board a year ago to improve accountability, outcomes and efficiency within the system.

Cigarroa, who dealt with performance pay for clinical faculty members as president of the UT Health Science Center at San Antonio, said Wednesday that a performance pay component fits within the structure the system is moving toward. “We have a framework and a dashboard that can help us measure progress and audit that progress, then why not establish a lineup based on the framework and link it to compensation?” he told the board.

The UT system worked with Towers Watson, a human resources consulting firm that traditionally works with private-sector organizations, to develop the proposal. Compensation experts said the Texas proposal resembles the types of plans used in the corporate sector.

Compensation experts expressed concern that the system's compensation plan is an opportunity for board members to get more involved in day-to-day policy making. “The role of the board ought to be to set the general direction of the university and leave it to the president to implement decisions on a day-to-day basis,” said Raymond D. Cotton, a Washington lawyer who specializes in presidential contracts.

Cotton said performance compensation plans that work are made in close consultation with campus leaders and tend to be general rather than prescriptive.

He and others say performance pay systems like the University of Texas plan are part of a national trend of governing boards getting more involved in policy making, often at the exclusion of or in opposition to campus leaders. That shift has led to numerous conflicts at public institutions, such as the headline-grabbing controversy at the University of Virginia in June.

While Cotton views any omission of campus leaders from decision-making to be a negative trend, others are much more upbeat. In an article in The Austin-American Statesman on Wednesday, Anne D. Neal, president of the American Council of Trustees and Alumni, a group that promotes greater board involvement in areas such as academic policy, applauded the board’s move, though she questioned why administrators should get extra compensation for responsibilities already fall under their job descriptions.

Start of a Trend?

Compensation experts say more higher education institutions seem likely to adopt performance pay structures.

A survey earlier this year by Yaffe & Company, an executive compensation consulting firm, of presidents' compensation at private nonprofit institutions, found that 39 percent of presidents had some component of their pay dependent on performance, which Rian Yaffe, founder and CEO of the company, said is an increase over a few years ago. The company does not do a similar survey of public institutions.

Several factors are driving the adoption of such systems. Board members, many of who come from the business world, have seen performance pay systems permeate that sector. The approach is also becoming more common in health care systems, and many board members draw parallels between that sector and higher education.

Budget constraints also make performance pay appealing. “In these times, especially when institutions are facing a lot of fiscal challenges, boards are saying that they would like some of your pay to depend upon accomplishing strategic goals,” Yaffe said.

They also don’t hurt with public relations. The current plan calls for no salary increases for the system’s presidents and administrators, which tend to draw negative headlines. Instead, the money for the raises would become the performance pay. The board discussed allocating less in salary increases and more toward performance-based compensation, potentially growing to 20 percent of the president’s base salary. “In the future you’re going to see salary increases moderate a little bit and more emphasis on these kinds of variable pay,” Yaffe said.

Performance is also easier to measure than in the past. Universities such as Texas system as setting up elaborate, publicly available dashboards that measure institutional performance on a variety of metrics.

What to Measure

Exactly what the metrics will be on which the system and board evaluate the president and administrators is yet to be determined, though board members said Wednesday they will try to keep the goals within the parameters of the Framework for Advancing Excellence. Scott C. Kelley, the system’s executive vice chancellor for business affairs, said at Wednesday’s meeting that each campus president and system administrator will probably have three or four metrics on which he or she is evaluated, and that one or two of those are likely to be qualitative, rather than specific measurable outcomes.

Determining outcomes for some positions might be harder than for others. Cotton raised questions about the types of metrics on which the board will evaluate the system’s general counsel or chief governmental relations officer, two positions eligible for the incentive pay.

There are also concerns about prescribing specific outcomes and goals for administrators and whether they might drive improper behavior. One area of concern is in fund-raising. The example plan included with the Texas proposal sets a target of fund-raising equaling 3.5 percent of the institution’s expenditures.

Fund-raising groups such as the Council for Advancement and Support of Education have consistently frowned on any form of bonus that looks like a commission, since such plans might drive fund-raisers to seek any gift, regardless of the cost, said Rae Goldsmith, the council's vice president for advancement resources. If it looks like the fund-raiser receives a portion of the gift, it might also make potential donors reluctant to give, Goldsmith said.

The council does not say that monetary goals should be avoided, but that they should be realistic and set with the institution’s values and other goals in mind.

Measuring specific outcomes in other areas could raise concerns as well. Focusing on the number of students who pass classes or the number of students who graduate could lead to a watering-down of standards, critics say.

Similar concerns have been raised about state plans that allocate appropriations based on institutional performance.

Members of the board's finance committee who approved the plan Wednesday said that there are likely to be some errors in establishing the correct metrics over the next few years, but they said they were confident the plan could be used to drive the system's desired goals.

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