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Friday, April 15, 2016

Winner-Take-All in the University Setting

Recently, Thomas Piketty gained tremendous attention for his academic work on inequality. "Piketty summarizes this complicated theory with the formula “r > g” where “r” is the rate of return on capital and “g” is the rate of growth in the economy." Put simply, the wealthiest individuals, who benefit from their investments or other linkages to the financial economy, have been grabbing an ever-larger share of the nation's wealth. This chart reflecting nearly 100 years of income data is quite telling:

Financier Steven Rattner pointed out a few years ago that similar inequality has been mirrored in sectors of the economy that are not directly linked to free market returns on investments. Specifically, he noted that even university presidents are beneficiaries of the "winner-take-all" society that is now the United States:
Recently, thanks to data compiled by The Chronicle of Higher Education, I saw these macro trends reduced to the micro level in a perhaps unlikely setting: institutions of higher learning. 
In 2010, the 10 top-earning private college and university presidents made an average of $2.1 million. That’s up from $637,000 in 2000, a stunning average annual increase of 12.6 percent... 
And just as in corporate America, those who preside over these institutions have done far better than those who populate the armies that labor below them. Over the decade that ended June 30, 2010, average faculty salaries at the 50 wealthiest universities rose by 14 percent, while that of presidents increased by 75 percent.
When I was hired at University of Louisville in 1991, I made $31,000. That was considered a fairly modest starting salary -- it was certainly not at the high end of the pay scale. Using the CPI to adjust that to current dollars, my 1991 starting assistant professor salary would be worth $53,900 in 2015. The political science department has hired a handful of beginning assistant professors in recent years and all arrived making around $54,000. In short, 25 years after I was hired at a relatively modest salary (compared to what peer institutions offer), UofL is still offering the same beginning salary. The $54,000 figure is considered modest, competitive if adjusted for cost-of-living, but well below amounts offered by other schools.

University of Louisville President Donald Swain made $155,000 in 1991. He had been serving as UofL President since 1981, so he was in midst of his 11th year. Using the same CPI adjusted rate, that salary would be worth $270,000 today.  I have found some archival evidence that Swain also received modest deferred compensation payments, equivalent to about 10% of his salary. So maybe Swain made $300,000 in 1991.

Has the winner-take-all problem emerged at UofL? As I blogged earlier this week, Jim Ramsey, who is in his 14th year as the top administrator, makes more than a million dollars annually from his job leading both UofL and its Foundation, including about $1.67 million in annual salary, deferred compensation, and other perks (UofL pays his taxes, for instance, which accounts for $600,000 to $800,000 additional payments each year). A consulting firm retained by the University reported that Ramsey made $2.5 million from UofL in 2014. Note that the state of Kentucky reports that Ramsey makes about $350,000 from his job as president. That figure, however, does not include Foundation payments -- salary, deferred compensation, tax payments, etc.

Put simply, the intro political science faculty salary has been flat over 25 years. The University President compensation has apparently increased 5- to 8-fold, adjusted for constant dollars.

Incidentally, the Board membership at Texas Roadhouse is presumably tied to Ramsey's current position at UofL, but the external compensation is not figured into those earnings figures. As noted Tuesday, he's made millions of dollars more just from the common stock compensation he has earned from that service.

There is no common stock compensation for faculty, of course.

I am not posting this to argue that Ramsey has been a bad president of the University. He has performed his job and has helped move the school forward in many ways. Incoming student ACT scores are significantly higher than they used to be and student retention has improved. Despite his former "insider" status in state government**, Ramsey has not staved off incredible cuts in state funding. He has been successful in raising private funds and convincing the state to allow the University to increase tuition substantially. Some academic programs that make UofL (and Ramsey) look good were actually started by previous UofL leaders.

Could others have done his job just as well, perhaps for much less compensation? No one can know the answer to that counterfactual, but the "winner-take-all" mentality generally magnifies small differences in performance with large differences in compensation.

Yesterday morning, anyone tuning in to the budget livestream on the Health Science campus could hear about 5 minutes of live mic broadcast before the event started (it has since been edited out). An administrator (I believe from the medical school) was lamenting that he had already nearly forgotten his mid-semester vacation in Cabo because it had been 10 days since his return. A top-level financial administrator complained about the level of negativity she's constantly heard on the Belknap campus.

News alert: the inequity in financial compensation, illustrated by the mid-term vacation in Cabo as well as President Ramsey's compensation package, very much helps to explain the level of negativity on the Belknap campus.

Update: Yesterday's announcement of a new contract for the football coach won't help, but that's a matter for another day. He's going to be paid more than $30 million for 7 years of coaching. The Kentucky legislature, earlier in the day, approved a 4.5% budget cut for UofL. Given the current funding level of $140 million from the state, this will amount to a $6.3 million annual cut.

Here's a counterfactual: How many wins could the football team achieve with a coach paid $375,000 instead of $4.375 million annually?


** Readers can judge for themselves what role Ramsey played in the current budget situation as he was state budget director for Governor Paul Patton when the state diverted $30 million from pension plans for other spending purposes. This was apparently a seminal move to divert such funds and it was replicated often over the next 15 years. Current Governor Matt Bevin is cutting University funding to pay for the past diversion of pension funds.

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