Bonuses and Benefits

The ever-increasing salaries, bonuses and stock incentives for CEOs have become a virtual obsession in the business press and among shareholders. One recent headline in the Financial Times caught our attention: “How Paying Chief Executives Less Can Help Corporate Performance.” The underlying idea was fascinating. “One irony is that many of those bonuses, ostensibly granted for long-term performance, have worked against genuinely sustainable management. There is a massive amount of evidence now that they’re counterproductive.”

While the article focused primarily on the effects of long-term incentive plans in Great Britain, it made us wonder about the meaning of the data we collected for our recent study on the contracts of public-university presidents, particularly the information about bonuses and perquisites. “Executive greed,” as noted in the FT article, “has been indulged by boards nervous of losing top talent and an industry of remuneration consultants that has thrived on an arms race to design top-quartile pay packages.”

Can the same be said about university governing boards? As the new crop of university presidents is being announced this spring, we thought it an opportune time to look beyond base compensation being offered by governing boards to question “presidential greed.” We did identify various types of bonuses in our sample of 115 contracts of public university presidents that included 47 states, 44 public flagships and 30 public members of the Association of American Universities.

In those contracts, we identified three principal types of bonuses paid to university presidents. The most common type was what we called a performance bonus. One-third of presidents were eligible for such bonuses. The total eligible amount to be paid to those presidents was nearly $3 million per year and varied from $13,000 to $200,000 with an average of about $80,000. Most often these bonuses were expressed as a percentage of annual base pay, varying from 10 percent to 20 percent, rather than a set dollar amount. In some instances, all or a portion of the bonus was paid as deferred compensation, usually with that amount being invested in an interest-bearing instrument.

Since they were identified as performance bonuses, we reviewed the contracts to determine the criteria on which payments were to be made. What we found was, to say the least, interesting. Only six of the contracts included specific performance criteria, and half of those were from a single state. The remaining contracts did not specify the criteria but usually had language about how the criteria were to be established. In that group, just under half stated that the criteria were to be mutually developed by the governing board and the president. In a slightly smaller percentage, the language stated that the president developed the criteria and presented them to the governing board for approval. Only in a handful of instances were the criteria to be developed solely by the governing board.

The second most common type of bonus was for retention and/or contract completion. We identified retention/completion bonuses in 13 percent of the contracts, with a total of more than $4.2 million to be paid to presidents for retention purposes or for completing a contract. Such one-time bonuses varied from $50,000 to $1 million, with an average of nearly $97,000. It is important to remember that they were actual bonuses and not the value of a payout for accrued deferred compensation plans.

Signing bonuses were the third type we identified in the employment agreements. A common feature in coaches’ contracts, these are paid as inducements to close the deal. They were slightly less common than retention/completion bonuses and were included in 9 percent of the contracts. They ranged from $20,000 to $275,000, with an average of about $91,000.

Finally, while not technically a bonus, just more than half of the contracts provided for either some form of deferred compensation or a supplemental retirement benefit. That does not include contracts from those states where such benefits are specified in policy documents that are incorporated by reference into the employment agreements. When those are included, about 50 percent of these presidents had either a supplemental deferred compensation and/or retirement plan beyond those available to faculty members. Such benefits varied from $17,000 to $500,000 annually, with an average of $106,000 annually.

There’s more. As Equilar’s most recent annual report on executive benefits and perquisites in the corporate sector notes, base salary, bonuses and deferred compensation plans “don’t paint a complete compensation picture … Companies seeking to secure top talent at the executive level may supplement their offerings with additional benefits, commonly known as perquisites, or perks.” Such perks include everything from car allowances to air travel to professional services and more. According to Equilar, a provider of executive data that collects information from thousands of public companies, the median value of the perks in just those three categories alone totals over $130,000 per year in the corporate world.

With that in mind, we identified the perks specified in these employment agreements. One-third of the presidents received a car allowance, about the same percentage as Fortune 500 CEOs. (Our study does not include those presidents who are provided with either a state vehicle or one purchased by a university foundation.) The value ranged from $6,000 to $20,000 per year with an average of $11,405. Based on the mean value of this benefit, a president could easily afford to lease a very well-equipped Mercedes E-Class, and still have about $100 each month for gas. To put that into context, the lease price for a full-size American-made car, such as a Chevrolet Malibu, is currently $199 per month, or $2,400 per year.

Virtually every president in our study received some type of housing benefit. By far the most common is living in a university-provided home. When that is a requirement of employment, as is typically the case, no value is assigned. But 14 percent of these presidents received a housing allowance, which varied from $4,000 to $72,000 per year. At the high end, this would support a $1 million mortgage.

Another relatively common perk for university presidents was business-class and/or first-class airfare when traveling on university business -- a benefit also frequently available to corporate CEOs. That perk was extended often to accompanying spouses/partners. This drew our attention, as most states not only prohibit business-class travel but usually require employees to travel on the cheapest available fare. More surprising were the handful of contracts that provided for shared or private charter service. A few presidents even have access to university-owned aircraft.

We found other perks offered to university presidents that mirror those identified in the Equilar study of CEO perks. For example, nearly half of the presidents received some form of additional insurance -- for some, not only while president but also even through retirement. A number of presidents were eligible to be reimbursed for tax and legal services. A few contracts went into significant detail regarding tickets to athletic and cultural events. In some of those instances, tickets were made available to family members and specified seating, again, even through retirement.

Nearly two-thirds of the contracts provided for relocation expenses to the university. Those contracts often included provisions that exempt the president from any limitations imposed by state regulations. There were instances in which the contract provided for temporary housing, storage fees and even reimbursement for move-out expenses upon completion of the contract. In one instance a president was reimbursed for the value of a previous home that had sold at a loss.

Some of the more controversial, yet not uncommon, perks were memberships. They included dues for professional organizations (36 percent) as well as for social clubs (30 percent) and country clubs (26 percent). A number of contracts provided for memberships at multiple social and country clubs (16 percent), with some including full recreational benefits such as golf, tennis and swimming.

Since most of these perks are not a requirement for the position, we found one final benefit in some of the contracts: a “gross up” payment. That payment is to cover any tax liabilities that would be incurred based on the value of the perks. For example, if the value of a housing allowance is $60,000 per year, it might be “grossed up” by 30 percent to cover any federal, state and local taxes. The same would be true for car allowances, country club memberships, supplemental insurance or any of the benefits for which there is personal value to the president.

The study, compared to one we conducted in 2010, reflects an upward trend in both the number and cost of perks and bonuses for presidents of public universities. It appears that the private business sector is headed in the opposite direction. For instance, Bloomberg recently reported that Goldman Sachs has been cutting perks and bonuses, even going so far as limiting reimbursement for data charges on U.S. phone bills to a mere $10 per month, no longer reimbursing for Wi-Fi expenses while traveling and requiring itemized reimbursement for calls made from mobile phones.

That leads us to wonder if the governing boards of our universities, which have only recently begun to offer substantial bonuses and perks, are behind the times. If, as some say, university presidents are truly CEOs, then perhaps our governing boards need to look at emerging best practices in the private sector. Although the audience and purpose are different, each is responsible to a potentially large number of constituents. And while corporations often must consider their share owners, universities should consider the taxpaying public.