How the Deferred-Compensation System Allows College Leaders to Rake in Millions

How presidents at private colleges benefit from the deferred-compensation system.

All over America, private colleges and universities rely on the deferred-compensation system to incentivize presidents to pursue long tenures.  According to supporters of the system, deferred-compensation plans encourage presidents to remain with an institution for a long period of time, ensuring stable and successful leadership.  In fact, these compensation plans have become a common tool for retaining campus leaders throughout the higher education system.

But how do deferred-compensation deals work?  Well, a school will set aside tax-free money every year in a fund for the college leader.  The leader in question will not be able to withdraw any money from the fund until a previously-agreed-upon date.  Should the leader leave their position or be fired before they meet the terms of their deferred-compensation contract, then they will not be able to access the money that the institution put aside for them.

Because the money set aside can easily enter the millions, deferred-compensation deals are seen as a powerful incentive for college leaders to remain in place.  For instance, such deals have contributed to several of the multi-decade tenures seen at some of America’s richest private non-profit institutions.  According to experts, deferred-compensation deals encourage different behaviors than those that focus on base pay.  Specifically, deferred-compensation deals force both colleges and chief executives to take on a certain amount of risk when money is contingent on mutual commitment.  With this pressure weighing on them, campus leaders don’t just stick around; they strive to make meaningful advancements and changes.

However, the deferred-compensation system does have its critics.  Many argue that college executives should be paid on the basis of performance rather than the amount of time they remain in office.  Others point out that such a payment system is indicative of the compensation measures used by major business executives and corporate leaders—many of who now serve on the governing boards of colleges and universities across the country.  Critics argue that such a system attracts people who know how to chase money, but who may not know anything about higher education.

This is what you need to know about the deferred-compensation system used at many American private higher education institutions.  Looking for a consulting firm with experience working with salary, legal, and other human resources issues?  Then don’t hesitate to contact the professionals at McKnight Associates, Inc.  We are ready to offer you hands-on human resources consulting for colleges, universities, medical centers, and organizations of all sizes.