College and University President Pay and Future Performance

What is it about?

Just as with executive compensation in the corporate environment, the pay of university presidents has come under scrutiny. In this study, we examine the link between the level of abnormal compensation for university presidents in the current period and the subsequent performance of the university. We find that private schools awarding “excess” compensation (relative to schools with similar characteristics) improve their reputation and resources to a greater extent in the next two years than private schools not awarding “excess” compensation. Our results suggest that some portion of what appears to be excess pay in private schools is related to differences in the president’s ability to deliver performance changes that would be valued by the university’s stakeholders. Specifically, we find that private schools reward improvements in academic quality, but do not reward improvements in the academic environment such as reductions in class size. Conversely, what appears to be excess compensation in public schools is not related to performance metrics that are commonly used by the business press to rank universities, suggesting that performance metrics differ significantly between private and public schools.

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