College Administrator Incentives

Tamar Lewin writes on the latest data about college and university president compensation, which was high and rising as of 2008.

It would be wrong to say that college tuition costs have tended to skyrocket in the United States because of the very generous compensation packages of some university presidents. But it’s definitely worth dwelling a bit on the incentives that administrators face. These are “non-profit” institutions, but they’re not charities being run on volunteer labor. The people making the decisions have real financial interests at stake. The way a lot of industries are structured, the best way to get rich is to think up a way to produce whatever it is you’re producing cheaper. That way you can cut prices, increase sales volume and market share, all while increasing per unit profit margins. Not everything in the business world works like that, of course, but some of it does—especially the parts where you don’t see endlessly increasing prices.

Higher education in America just doesn’t work like that. The precise mechanisms through which you get to be one of the highest-paid university presidents are a bit opaque to me (and it’s worth keeping in mind that there’s more to compensation than salary), but they don’t have anything to do with the idea of offering a good value to students. So it’s natural that the key institutions don’t really focus on value.