A Cap on Pay (and Bad Press)

Sometimes the political pressure is just too much to take.

In an about-face from six months ago, when it defended a more than 30 percent jump in compensation for one of the system’s new presidents, the Board of Trustees of the California State University System approved Wednesday a new policy that caps the amount of state dollars campuses can direct toward compensation for new presidents at 10 percent more than their predecessors received.

The move will probably help mollify some critics, including faculty, students, and lawmakers, who have been vocal about the system’s presidential compensation since July when the board -- at the same meeting it voted to increase undergraduate tuition 12 percent – increased the annual pay for the incoming president of San Diego State University to $400,000, $100,000 more than his predecessor.

But the new policy could also have negative ramifications, search and compensation consultants say, since it ties the universities' hands in terms of recruiting presidents, and could limit the quality of applications the system receives at a time when the system is poised to see a dramatic turnover in leadership.

“There is a lot of competition for the best talent, and that competition is nationwide, and to be a competitive player and draw the most talented people to become presidents of their colleges, you have to pay what the market place demands,” said Raymond D. Cotton, a Washington lawyer who specializes in presidential contracts.

A study conducted for the board in March found that salaries of California State presidents fell between $258,000 at the Maritime Academy to $328,200 at San Jose State and California Polytechnic State University at San Luis Obispo. The system's peer institutions at the time had an average salary of $425,945.

While adopting the new policy, the board also adopted a new lists of comparison institutions for Cal State campuses of different sizes. The old list of comparable institutions had the same peers for all campuses, regardless of size, and included some private institutions that tended to drive up the average salary. Under the new policy, the mean of each campus’s comparison institutions will be the starting place for salary determination, and other factors including the candidate’s “reputation for national leadership and length and depth of executive experience” will help determine the final salary.

The California State system has been one of the hardest-hit by the economic downturn. The system has seen three successive years of state funding cuts and has made significant cuts to operations while increasing tuition to offset the shortfall.

Wednesday's decision is predominantly a political one rather than a financial one, since presidential compensation in the California State system, even for the highest paid presidents, does not amount to even 1 percent of any campus's budget. Elliot Hirshman, the San Diego State president whose salary first raised the compensation issue in July, receives $400,000 annually -- $350,000 of which comes from the state, the rest coming from the university's private foundation (all of his predecessor's compensation came from the state). The university spent more than $256 million in 2009-10, the year with the most recent data.

But the juxtaposition of the salary and tuition hikes has been a public relations struggle for the system. Since the July meeting, lawmakers have introduced various bills that would cap presidential pay in years when tuition increased. Mike Uhlenkamp, a spokesman for the California State University System, said a major reason for adopting the new policy was to move past the discussion. “There is a lot of noise surrounding the issue, not only in California, but in higher education throughout the U.S., that has drawn away some of the time and effort that trustees have and need to put toward other things that are probably more important to the mission of the university,” he said.

The system is also looking into how it selects future presidents, which administrators hope will also drive down costs.

But not all the critics were happy with the new policy. “While I am pleased to see CSU Board of Trustees finally recognize that their past executive compensation practices were completely unacceptable, their new policy just doesn’t go far enough,” State Sen. Leland Yee, who introduced several legislative caps on presidential pay, including one that would cap incoming presidents’ compensation at 5 percent more than their predecessors, said in a news release Wednesday afternoon. “Those making hundreds of thousands of dollars should not receive double-digit pay increases during bad budget times or when students are forced to foot the bill.”

Uhlenkamp said the policy is designed to be flexible enough to show restraint while still attracting top talent to the system. “The board had to make a decision and wanted to get this resolved in a way that would still leave us competitive in the market while acknowledge that we are under budgetary constraints,” he said. He also said the benefits of being part of the California State University System and working with the group of students the system works with will be an additional incentive to work there.

The California State policy only limits the amount of state money that universities can spend on presidential compensation, meaning the board could still use other revenue sources, such as endowment returns, to supplement a president’s pay. Several other universities do this, but it raises questions about the president's priorities, Cotton said: "There shouldn’t be a perception that the president’s loyalty is to anything other than the state."

Uhlenkamp said most of the California State campuses don’t have large enough endowment returns to offer such a supplement, so the point is moot on those campuses.

The policy comes at a key time for the system. It is currently in the process of selecting new presidents for five campuses: Fullerton, Northridge, San Bernardino, San Francisco and the Maritime Academy. Several other presidents in the system are nearing retirement age. If the policy does hinder the system’s ability to attract top talent, it could have a dramatic effect on the long-term success of the systems.

“When you hire a president, you’re affecting just about everything that institution does,” Cotton said. “A president or chancellor makes many, many decisions in a single day, and in the presidency, he or she is going to surround themselves other people like them. If you hire the best and the brightest, then they will also hire the best and brightest.

“This is an opportunity for them to go out in to the market, find the best talent, bring it to California, and keep it there,” Cotton said. “They shouldn’t shirk from that challenge."