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Economics and Executive Compensation . . .

Pricey Presidents' Added Cost

Nicholas Johnson

Daily Iowan

March 7, 2006

Note: (a) Text in italics was in 650-word column as submitted, but was deleted by editor. (b) Source for cited facts are in bold in Jeanne Sahadi, "CEO Pay: Sky High Gets Even Higher," CNN Money, August 30, 2005, below. (c) Source for the opening quote from UI President David Skorton is Kathy A. Bolten, "The Rising Price of a President," Des Moines Register, February 19, 2006.

(d) Additional general sources on "Economics and Executive Compensation" include Nicholas Johnson, "Values Fund May Not Be So Valuable for Taxpayers," Des Moines Register, April 13, 2006, Richard Doak, "CIETC Director and Most CEOs Have Quite a Bit in Common," Des Moines Register, April 16, 2006, Del Jones, "CEOs Say How You Treat a Waiter Can Predict a Lot About Character," USA TODAY, April 14, 2006, and Editorial, "In Salaries Probe, Focus on Prevention; Strengthen Audits, Whistle-Blower Protection," Des Moines Register, April 10, 2006.

[Note: This material is copyright by The Daily Iowan, and is reproduced here as a matter of "fair use" for non-commercial, educational purposes only. Any other use may require the prior approval of The Daily Iowan.]

Our university's departing president, David Skorton, concedes, “When the median family income in Iowa is around $45,000 and I make over $300,000, it’s hard to argue that is not a lot of money. It’s very generous.”

When I ran for Congress I pledged my personal pay would be set by my constituents’ median income. Any additional would go to district projects.

Some of the wealthy beneficiaries of President George W. Bush’s tax cuts say they neither need nor want them.

Admittedly, Skorton’s observation, my offer, and the satisfied wealthy are pretty rare in this “I’ve got mine, Jack” economic environment.

We're going to have to pay our next university president significantly more. I'm not saying we shouldn't.

But this is a “teachable moment,” a time to reflect on compensation in America.

In 1982, the average CEO made 42 times what she paid average workers. By 2001 the ratio reached 525 to one. The cumulative pay of the top 10 over the past 15 years? Try $11.7 billion.

Had the minimum wage risen as fast it would be $23.03 an hour not $5.15.

An entrepreneur like Bill Gates who builds his own firm has a legitimate claim to riches. So does an athlete whose prowess increases TV revenues by multiples of his salary.

But most corporate CEOs are hired hands. For some, income increases even as profits decline. Increased sales are as likely the result of economic growth as executive genius.

Nor are disparities limited to the for-profit sector.

The gap between school superintendents' and teachers' pay keeps growing. So does the gap between university presidents and faculty.

If you're a CEO, and a board sets your pay, you're probably sharing in similar largess.

Nobody ever said personal income would be either rational or fair. You get what you negotiate. And what you can negotiate with collective bargaining will be substantially more than without it.

As advertising manipulates us to know the price of everything and the value of nothing, it's worth reflecting on what values we do have, other than income.

Columnist Molly Ivins says some Texans believe "more is better, and too much is not enough." It’s an understandable belief in a consumption culture. But "is that all there is"?

How much is enough? Clearly it's more than the share of our bounty provided the homeless, unemployed, and working poor.

But for those not in the bottom quartile, those in the top 10 percent, what is their "need" to be in the top one-tenth of one percent?

Those salaries aren't about money or acquiring more "stuff." They're about egos feeding on a comparative prestige measured only in dollars.

Is it not possible to live fairly well on $300,000 a year in Iowa City, especially with a free house, car and other expenses? Is there no one of quality in America who would love to assume the challenges, opportunities and prestige of leading this great university for compensation President Skorton deems "generous"?

Can we find longevity and institutional devotion in someone who comes here because we pay them more? Isn't that like trying to find fidelity in marriage with a potential spouse you met through an adulterous affair?

Like the spouse looking for the high of the next affair, why will those whose self-esteem demands ever-higher pay stay with us any longer than their next better offer?

But I suppose I dream. We don't make the rules, we just play the game. And from the winner comes the spoils. So we'll pony up as much money as it takes and hope for the best.

But the stability we'll gain, and the example we'll set for our young students, should cause us to pause and reflect. For the price we'll pay may end up being much more than the hundreds of thousands of dollars Iowans put on the table.
Nicholas Johnson teaches at the University of Iowa College of Law and maintains


The Rising Price of a President

Kathy A. Bolten

Des Moines Register

February 19, 2006

[Note: This material is copyright by the Des Moines Register, and is reproduced here as a matter of "fair use" for non-commercial, educational purposes only. Any other use may require the prior approval of the Des Moines Register.]

Money — lots of it — will play a key role in attracting and keeping the next University of Iowa president.

David Skorton, who is leaving for Cornell University, is the fourth U of I president in 19 years to be lured to a larger or more prestigious institution.

He'll make $675,000 at Cornell, more than twice his U of I salary. At $302,050 , Skorton's Iowa salary fell short of most presidents' compensation at comparable universities, two national measures show. In fact, state universities in Nebraska, Missouri and Oregon with smaller enrollments paid their presidents more than what Skorton receives.

The Iowa Board of Regents risks seeing another short tenure for the next president if the compensation package continues to lag, observers say.

"To try to secure the best leadership for the rest of this decade, it will require competing in this market," said Sheldon Steinbach, general counsel for the American Council on Education in Washington, D.C. "In many instances, you get what you pay for."

Marvin Pomerantz, a past Iowa regents president, was more blunt.

"We're in the Dark Ages when it comes to the way we pay people," he said.

Some faculty and students in Iowa City worry that the president's position is becoming a steppingstone to similar but better-paying positions, creating disruptions, causing faculty to leave, and making it difficult to attract top professors and researchers.

The worries are warranted, Steinbach said. "It interferes with relationships on campus. It interferes with the continuity of the contacts with state legislatures and impairs fundraising.

"It can take years for a university to cultivate people who give gifts. The president is a big part of that process."

The issue is one the regents will likely explore yet this spring, said Michael Gartner, the board's current president. About a month ago the regents asked their staff to compile a range of salaries of presidents at peer universities, he said.

"I hope salary isn't a bar to getting good people as candidates," Gartner said. "I think that we will try to find the very best man or woman we can find and then try to work out the very best salary package we can work out."

The U of I president's position is among the top jobs in the state, and whoever steps into the role will need top-notch fundraising skills and experience in creating economic opportunities that will help Iowa's economy and population grow, say faculty, students and regents. In addition, the president is instrumental in ensuring that postsecondary education is financially accessible to students.

About 30,000 students attend the U of I, which has more than 13,000 employees, a budget of $2.2 billion , and is considered the flagship of Iowa's three public universities.

"High expectations" for new president

Whoever becomes the school's next president will oversee a major national research university made up of 11 colleges offering more than 100 undergraduate majors, 107 study areas for graduate students, and seven professional degrees such as engineering, law and nursing.

The university also operates the Iowa Writers' Workshop and the University of Iowa Hospitals and Clinics . It boasts major sports teams that are nationally ranked and routinely invited to participate in bowl games and end-of- the-season tournaments.

In addition, thousands of people who affect Iowans' daily lives graduated from the U of I. Three-fourths of the state's dentists and half of its physicians attended the university. Teachers and administrators at 70 percent of Iowa's public school districts were educated there.

"Any president coming in must understand the complexity of the university," said Jay Sa-Aadu, a U of I finance professor. "And you add to this the numerous stakeholders — faculty, students, staff, taxpayers. . . . We need to have a very high expectations of this individual."

Despite those expectations, Skorton's U of I salary falls short of the average compensation of presidents whose schools belong to the Association of American Universities, a group of 62 schools that is devoted to academic research and education. The average salary package of that group's public universities was $348,738.

Skorton's pay is also less than the average compensation package of $378,666 for presidents or chancellors at 139 U.S. public universities, according to the Chronicle of Higher Education's annual executive salary survey. So is the salary of Robert Koob, president of the University of Northern Iowa, who receives $242,610. Koob is retiring in June, and a search is under way for his replacement.

Salary is important, but isn't the only thing

A university president often spends long hours on the job and frequently wears many hats — administrator, fundraiser, representative, spokesman. The president must understand university finances, academic expectations and research missions, and must be facile at communicating and interacting with students, parents, faculty, coaches and staff.

"We have to signal we want the best quality person we can get, and it takes more money," Sa-Aadu said. "I doubt very much it would be a productive venture thinking we could get someone at the same wage rate" Skorton now receives.

Rose Vasquez, an Iowa regent, said that while compensation packages are important to attracting top candidates, so are other things. She cited Iowa's quality of life and whether candidates' families like Iowa City and the state.

"Salary is a key issue, and we need to be mindful of it, but we also need to remember these other things," she said.

Skorton, in an interview with the Des Moines Sunday Register, also said salary isn't necessarily the only deciding factor for some university president job candidates.

He said the compensation offered by Cornell, located in Ithaca, N.Y., was not the main reason he accepted its offer. Instead, it was important that Cornell is a land-grant university — an institution geared toward serving its state's residents with agricultural and other offerings. Cornell also operates a statewide extension service. Also, the university is heavily involved with public outreach, including to students, faculty and community members, Skorton said.

Still, "We're on the low side, and we should see what we can do to raise the salary," said Robert Downer, president pro tem of the Iowa regents. Compensation "may be important to attracting the caliber of person that is really needed to head this very complex and high quality of institution."

Downer said increasing the compensation package for the president's job could mean the university will attract a well-rounded candidate rather than one with only one or two top-notch qualities.

Other compensation part of packages

In addition to his salary, Skorton receives an automobile allowance of $7,200, which he puts in a scholarship fund for U of I students. Like most university presidents, he lives in a house on campus. The university pays expenses, such as utilities and upkeep.

Salary packages for public university presidents can include private contributions, retention bonuses, deferred compensation and incentives paid when specific goals are met. At Iowa State University in Ames, private donations pay for an automobile for the president, but no private money is used in the U of I compensation package.

Richard Ekman, president of the Council of Independent Colleges based in Washington, D.C., said he doesn't think it's a good idea for a public university president to be paid with public and private money. "It's a bad way to go — it creates two sets of interests," he said.

Pomerantz, the former regents president and a Des Moines businessman, said the state risks losing top leaders and educators if something isn't done to increase salaries, not only of university presidents but also faculty. "We have billion-dollar budgets; hopefully, we could find a few hundred thousand for salaries," he said.

"Our problem is retention"

The average tenure of a university president is 6.6 years, according to an American Council on Education survey. The respondents said their greatest challenges were relationships with faculty, lawmakers and governing boards.

"Our problem is retention of excellent people," said Richard LeBlond, U of I faculty president. "We need to provide a competitive salary package, but we also need to do more to retain people. We need to make that position prosper — the president needs wide latitude and a degree of independence."

In August, the regents voted to give the presidents of the state's two other universities — UNI and ISU — 5 percent raises, while Skorton received a 3 percent increase. In addition, ISU President Gregory Geoffroy was given a deferred compensation package of $60,000 a year. He can collect the money — which will total at least $330,000 — if he stays at ISU until January 2011.

The move meant Skorton would have been paid $65,000 a year less than Geoffroy, who leads a campus with about 25,700 students, 6,020 employees and a budget of $949.32 million.

Pay not the reason, Skorton says

Skorton has said the difference in raises didn't play a part in his decision to leave Iowa. In an interview last week, he said that when he was hired, he asked the regents not to increase the pay from what the previous president had made.

"The average salary of the faculty at the University of Iowa is among the lowest when compared to peer institutions. At the time (2003), tuitions were being raised because of budget cuts," he said. "It wouldn't have been right" to accept a higher salary.

"When the median family income in Iowa is around $45,000 and I make over $300,000, it's hard to argue that is not a lot of money. It's very generous."

The pay of leaders at state universities is being discussed in other states, too.

California lawmakers are debating compensation packages for university chancellors — similar to Iowa's university presidents. Wisconsin's Board of Regents voted this month to raise the pay range of its 13 chancellors.

"The overall value of the (compensation package) is pretty competitive between universities at this level," wrote Jennifer Bol, a consultant for the executive search firm Spencer Stuart, in an e-mail response to questions from the Register.

According to the Chronicle of Higher Education's survey, 53 of 139 public university presidents receive compensation of $400,000 or more — and the number in that category is growing.

Among those is Mary Sue Coleman, president of the University of Michigan. Coleman had been the U of I's president, receiving $281,875. She left in 2002 to go to Michigan, where her annual compensation is $724,604, which includes a $100,000 bonus if she completes her five-year contract in 2007.

Four U of I leaders lured away

Skorton is the fourth straight U of I president to be lured to a larger or more prestigious institution.

James Freedman left in 1987 to became Dartmouth College's president. Hunter Rawlings left in 1995 to head Cornell, and Coleman left in 2002 to be president at the University of Michigan.

"There must be some people in Iowa that think the University of Iowa is like the minor league — preparing people for their next step," said Steinbach, the American Council on Education's general counsel. "I don't think that is saying anything disparaging about Iowa — it just seems to be a good breeding ground in the eyes of search committees at more prestigious institutions."

The main reason regents provided Geoffroy with a deferred compensation package was to keep him from being lured away.

Gartner said if the right person is found for the U of I job, "you hope they settle into this place for a long time. But you never know."

CEO Pay: Sky High Gets Even Higher

A New Report Shows Top-Dog Pay Bites Shareholders,
and Alleges War Profiteering Among Some CEOs

Jeanne Sahadi

CNN Money

August 30, 2005, 12:24 P.M. EDT

[Note: This material is copyright by CNN Money, and is reproduced here as a matter of "fair use" for non-commercial, educational purposes only. Any other use may require the prior approval of CNN Money.]

NEW YORK (CNN/Money) – If sky-high executive pay at publicly traded companies gives you vertigo, you might want to read this sitting down.

In 2004, the ratio of average CEO pay to the average pay of a production (i.e., non-management) worker was 431-to-1, up from 301-to-1 in 2003, according to "Executive Excess," an annual report released Tuesday by the liberal research groups United for a Fair Economy and the Institute for Policy Studies.

That's not the highest ever. In 2001, the ratio of CEO-to-worker pay hit a peak of 525-to-1.

Still, it's quite a leap year over year, and it ranks on the high end historically. In 1990, for instance, CEOs made about 107 times more than the average worker, while in 1982, the average CEO made only 42 times more.

The cumulative pay of the top 10 highest paid CEOs in the past 15 years totaled $11.7 billion.

And though the specific individuals in each of those annual top 10 lists changed year to year, many bosses did pretty well throughout the entire period. Citigroup's Sandy Weill, for example, has made $1.1 billion since 1990.

"Pay" in this instance refers to total compensation – including salary, bonuses, restricted stock awards, payouts on long-term incentives and the value of options exercised during the year.

The report also compares the growth in average CEO pay – which was $11.8 million in 2004 – to the growth in the minimum wage. Had the minimum wage risen as fast as CEO compensation since 1990, the researchers calculated, it would now be $23.03 an hour instead of just $5.15. And the average production worker would be making $110,126 a year instead of $27,460.

In some ways, though, comparing the compensation of a company chief to the average non-management worker is a specious argument, said Nell Minow, editor of the Corporate Library, an independent investment research firm providing data on corporate governance and risk.

"I'm willing to pay people based on the value they create," said Minow, who is herself a frequent critic of excessive executive compensation.

"Creating value" can mean a ton of money for the CEO, who presumably is in a position to create the most value for the company. But when it comes to pay, Minow said, "The question is, 'Did they earn it?'"

By objective measures in several instances, the answer, many would argue, is "absolutely not."

The authors of "Executive Excess" highlight what they consider to be war profiteering on the part of several CEOs of defense contractors. One such CEO, David H. Brooks of bulletproof-vest maker DHB Industries, raked in $70 million for 2004. By contrast, in 2001, he made $525,000.

Brooks also sold $186 million in company stock at the end of 2004, when the share price was trading at an all-time high. Immediately thereafter, it fell from just over $22 to under $16. Today it's trading around $7 a share. Analysts attributed the sharp decline in January 2005 to concern over large insider sales, according to reports.

In May of this year, the U.S. Marines recalled more than 5,000 DHB vests in advance of a news report questioning their effectiveness.

The authors of "Executive Excess" note, too, the great disparity between the average defense CEO's pay – $11.6 million last year – and that of a military general with 20 years' experience, who makes $168,905. The average private, meanwhile, earns $24,278, including extra combat pay.

From an investment standpoint, big pay for the chief is no guarantee of a big payout for the shareholder.

Between 1991 and 2004, the stock of the previous year's most highly paid CEO underperformed the S&P 500 half the time, in some instances by a stunning amount.

The most glaring example was Computer Associates. In 1999, the company paid its CEO $655 million as part of his share of a $1.1 billion stock bonus for the company's three top officers. In 2000, the stock plummeted 72 percent, while the S&P 500 fell 10 percent.

The blame for excessive CEO pay rests not with the CEO, Minow said, but with the company board of directors who determine CEO compensation. And it is those board members to whom shareholders should register their displeasure.

The Business Roundtable, an association of CEOs that lobbies on behalf of big business, had no comment for this article, but invited anyone to read the principles it advocates for executive compensation.

For more findings and recommendations from the report "Executive Excess 2005," click here.

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