From the issue dated May 24, 2002
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For Presidents and Boards, a Handshake Is No Longer EnoughAn age-old tradition dies as contracts become the norm for chief executivesBy JULIANNE BASINGER Five years into her presidency at Rollins College, Rita Bornstein found herself sitting face to face with her board chairman, trying to figure out how best to
"I found it very difficult," she recalls. "I didn't want to seem ungrateful or greedy." But she did want her new contract to spell out the existing housing arrangements for her family, cover some costs for her spouse to travel with her on college business, and include a severance agreement and deferred compensation. What was to have been an informal conversation evolved into months of negotiations, with the board chairman consulting the college's lawyer and Ms. Bornstein hiring her own legal adviser. Now in her 12th year as president of Rollins, Ms. Bornstein says the result -- security and specificity -- was worth the anxiety of the negotiations. "Contracts are a very important way of avoiding misunderstandings." While only a decade ago it was not unusual for presidents to accept that they would serve at the pleasure of a board, and that their employment terms would be agreed upon with only a handshake, today nearly 70 percent of the executives get it in writing. Part of that shift can be attributed to the professionalization of the post: Presidencies are increasingly more businesslike and corporate. Dealings between boards and presidents in the past were rooted in higher education's ecclesiastical traditions, and top leadership positions were treated as callings that weren't to be sullied by the ways of commerce. But boards now recognize that they must follow the customs of business in order to attract and keep the best candidates for presidential jobs. "They're realizing that they need to be competitive with those institutions that do have a more sophisticated and professional approach to the employment relationship," says Thomas C. Longin, vice president for programs and research at the Association of Governing Boards of Universities and Colleges. From the presidents' perspective, the change is all about job security. Boards at private colleges often want presidents to make rapid changes or to quickly raise money, and failing to do so may mean an early exit. Boards and presidents of private institutions also face increased accountability under new federal rules that require more documentation of decisions on presidential salaries and benefits, and that allow the Internal Revenue Service to assess stiff penalties for excess compensation. At public institutions, prospective leaders want added security as those presidencies have become more political and volatile in recent years. Even presidents like Ms. Bornstein, who has had a long, successful run as a fund raiser and leader at her college in Florida, want some written guarantees. "It's a question of looking at a landscape littered with presidential failures and saying, I need protection," she says. Too Corporate? Board members increasingly come from the corporate world and are accustomed to formal contracts for chief executives. But some trustees, and even presidents, worry that contract negotiations are becoming too corporate and the lawyers too aggressive, straying far from the missions and traditions of higher education. Jamienne S. Studley, president of Skidmore College, says presidents' lawyers in some cases have become like agents for professional athletes, pushing for benefits far beyond what other employees at a college receive. "It has the danger of distancing presidents from their campuses or creating a competition among presidents on the wrong sort of basis," she says. She has a simple contract in the form of a letter of agreement that lists her annual compensation, which was $207,462 in the 2000 fiscal year, according to tax records, and her benefits, which are the same as other Skidmore employees receive. Her contract also includes a severance agreement. Other boards and presidents increasingly believe that more-specific contracts can help them clarify their relationships early on and avoid problems down the road, says Constantine W. Curris, a former president of Clemson University who now heads the American Association of State Colleges and Universities. The informality of the past relationships doesn't work as well in today's fast-paced academic world, where financial and political pressures mean boards often want presidents to take more risks. "It's more a cultural change than anything else," he says. "There's very little left to chance and more left to presidential performance and a board's assessment of performance." The shift toward formal contracts has been gradual. About 65 percent of presidents of public institutions and 69 percent of those at private ones now have written contracts, according to a 1998 survey of college presidents published in 2000 by the American Council on Education, the most recent data available. Surveys by the College and University Professional Association for Human Resources show that the number of leaders with formal, written contracts increased from 49 percent in 1984 to 68 percent in 1997, the most recent year that study was done. That means that about 30 percent of presidents work without contracts. Higher-education scholars say that those presidents often work at small private colleges affiliated with churches. Some boards also still hesitate to give contracts because they fear it will limit their ability to fire a president. But the increasing turnover in presidential jobs has built demand for good presidential candidates, giving them more leverage to push for guarantees, search-firm consultants say. First-time presidents sometimes lack the confidence or sophistication to ask for a contract, but experienced ones often will seek more-elaborate agreements. IRS Penalties New federal rules also encourage formal, written agreements for presidential compensation. The Internal Revenue Service in January published final rules on how the agency plans to enforce a 1996 law that imposes stiff penalties on top officials at nonprofit entities, including independent colleges, who receive undue compensation. The measure doesn't apply to public colleges. Under the law, institutions must show that their top officials earned their compensation, and that the salaries and benefits they received are comparable to those given to leaders at peer institutions in similar geographic markets. Private-college presidents who are found to have received "excess benefits" will have to repay the institution for the excess amount that they received, plus interest, and then pay a tax of 25 percent on the excess. Board members who approve such benefits also will be held individually liable under the law. The law was passed after high-profile scandals in the 1990s involving the compensation packages of William V. Aramony of the United Way and Peter Diamandopoulos of Adelphi University. Because the new rules require boards and leaders of nonprofit groups to thoroughly document their compensation decisions, the law has earned a nickname in some legal circles as the "Nonprofit Lawyer's Appreciation Act of 1996." The law encourages boards and presidents to seek presidential contracts, because it grants an exemption to the penalties for a leader's initial contract with an organization, says Celia Roady, a Washington tax lawyer who represents nonprofit groups. However, any subsequent changes to the contract will void the exemption. Partly for that reason, boards should still obtain data on salaries and benefits at comparable institutions when hiring a new president, says Raymond D. Cotton, a lawyer in Washington who specializes in presidential contracts. Some higher-education scholars believe that private colleges don't have much cause to worry about the IRS rules. But Leonard Henzke Jr., an IRS lawyer who is a member of the agency's committee overseeing enforcement of the law, says that colleges shouldn't assume they can rest easy. Now that the final rules have been published, the IRS committee has been meeting this spring to decide how to step up enforcement. "We have been doing auditing, but not to the same degree that we are going to be now that we have the final regulations," Mr. Henzke says. Private colleges will have to note on their IRS Form 990, which is a public record, any penalties they have been required to pay. Moreover, the penalties aren't just a concern for colleges that pay their leaders top dollar, he adds. Even small fringe benefits that a board does not properly approve and substantiate can be penalized. While the law doesn't require it, "having a formal, written contract that lists all the fringe benefits is the better practice," Mr. Henzke says. Spelling It All Out At some colleges, employment agreements for presidents already have become more detailed. "In most presidential searches, the contracts used to have only about three terms listed," says Shelly Weiss Storbeck, managing director of college-presidential searches for AT Kearney. "Now, they can have 40 terms." New presidents hired this spring at Arizona State University and the University of Tennessee, unlike their predecessors, will each have two contracts: one with the university and, for the first time, one covering compensation from its affiliated private foundation. Michael M. Crow, the executive vice provost at Columbia University, in recent weeks signed two three-year contracts for a compensation package worth at least $520,000 a year for his new job as president of Arizona State, where he will take office this summer. His eight-page contract with the university outlines his annual base salary of $390,000 and has general terms for his compensation for retirement, housing, automobiles, moving expenses, travel expenses for himself and his spouse, and entertainment. It also provides for an annual performance-and-compensation review as well as terms for severing his employment, including the board's procedures to terminate him with or without cause and the steps to be followed if he resigns. Mr. Crow's second contract lists the supplemental life-insurance policy and the tuition benefits for his children that he will receive from the Arizona State University Foundation. The 12-page contract approved this month by Tennessee's Board of Trustees for John W. Shumaker, who will take office this summer, is more complex. The six-year agreement, along with another one being finalized with the University of Tennessee Foundation, will provide a compensation package that could be worth nearly $734,000 annually. That exceeds the nearly $600,000 a year that Mr. Shumaker now earns as president of the University of Louisville, where he is one of the highest-paid presidents in the country. The contract with the University of Tennessee provides him with an annual base salary of $365,000 and an expense account of $20,000 a year. It also allows him to be eligible for up to $98,550 a year in performance bonuses for accomplishing annual goals, to be set by the board. He can receive more bonuses under the foundation contract for such achievements as meeting fund-raising targets and raising the university's academic and research rankings. Such performance-based incentives are still uncommon for college presidents, higher-education scholars and lawyers say. "There's still a hesitancy against that except in the most entrepreneurial institutions," says Mr. Longin, at the governing-boards association. While more boards have agreed in recent years to businesslike employment contracts for presidents, many trustees view the awarding of performance bonuses as veering too far from the culture of higher education, he adds. But a growing number of presidents and trustees believe that spelling out the details helps avoid problems later. Mr. Shumaker's contract, for example, goes into great detail about who will pay what costs for the presidential house, down to the sewer and long-distance telephone bills. (The university will pick up the tab for the former, and he will pay for the latter.) Such precision is important, says Robert H. Atwell, a president emeritus of the American Council on Education. "There are many, many presidents whose downfall has originated in something about the house." Forced Out A case in point is Mark L. Perkins, who was forced to resign last month as president of Towson University after questions arose over nearly $1-million in renovations to the presidential mansion, which the university bought last summer for $850,000. The University System of Maryland's Board of Regents had become upset over the cost of the renovations -- including $70,000 for an elevator and $25,000 for an entertainment center -- after reading an article in The (Baltimore) Sun. Mr. Perkins's contract provided for a house, "including furnishings, maintenance, and upkeep," university officials say. But he was reluctant to sue for breach of contract, and in any event didn't want to work without the board's full confidence. Francis Canavan, a spokesman for the university system, says the regents declined to comment on whether or how much the board had to pay to buy out Mr. Perkins's contract. Preventing Lawsuits Having a contract does not increase the chances that a president will sue, and lacking one may open a window for legal action, according to higher-education scholars and lawyers. This spring, W. Ann Reynolds, the president of the University of Alabama at Birmingham, filed a complaint with the U.S. Equal Employment Opportunity Commission, accusing the university system of sex and age discrimination. Ms. Reynolds, who was forced to resign last fall and will step down this summer, never had a contract with the university. The federal complaint is required by law before she can pursue a discrimination lawsuit, although she has said that she hopes to avoid one. Higher-education lawyers say that having a contract that spelled out severance provisions and conditions for termination would probably have helped to protect both her and the board, and to avoid legal action. A contract can also help avert precipitous actions by a board or a president. William V. Muse, now chancellor of East Carolina University, was thankful that he had one when the trustees at Auburn University summarily dismissed him last year, just days after he had accepted East Carolina's offer. Board leaders told him that they wanted him out of his office by June 30, a month before he would have been vested for Alabama retirement benefits. But a clause in his Auburn contract required the board to continue to employ him until he qualified for the benefits, even if it removed him as president, so Mr. Muse threatened to sue. The board complied with the contract by giving him the title of "special counsel to the board" until he assumed his post at East Carolina last August, although he was asked to pack his belongings and move to a smaller office, formerly occupied by one of his assistants. "My advice would be: Wherever possible, secure a contract," Mr. Muse says now. Still, at East Carolina, he can only hope for one. Some boards at both public and private institutions are reluctant to award such agreements, largely because of tradition. The University of North Carolina system, of which East Carolina is a part, has never given contracts to its system president or campus chancellors. Molly C. Broad, the system's president, has attempted to secure such contracts for several years, to no avail. But Joni Worthington, a spokeswoman for the system's Board of Governors, says it may revise the policy, in order to be more competitive in recruiting. "The benefits of contracts may be an issue that they consider at further length as they deal with more candidates accustomed to having formal contracts," she says. Other boards have discovered that lacking formal contracts can lead to trouble. The Board of Regents at Midwestern State University, in Texas, had not spelled out any exit provisions with its president, Henry Moon, in the basic letter of agreement that it had signed in 2000, when he was hired. The board voted last fall to fire him, but months later, he remains on the university's payroll. He is on administrative leave with a tenured position in geography, even though Midwestern State has no geography department. The board is still consulting its lawyers about how to resolve the matter, and now awards more-detailed contracts, says Mac W. Cannedy Jr., chairman of the regents. "Dr. Moon's situation prompted us to change our policy," he says. "Everything now is spelled out in a contract." As for presidents, a growing number say that having such agreements is simply a matter of professionalism. "The presidency is still a calling," says Ms. Bornstein, of Rollins. "You feel the call to this kind of job, but it definitely now is a business-management, CEO position." 
IRS PENALTIES FOR 'EXCESS BENEFITS' TO PRESIDENTS Internal Revenue Service regulations set the following penalties when college presidents are found to have received "excess benefits," defined as compensation that exceeds the value of the service that they have provided. That value is determined by comparing it to the salary and benefits given to presidents at peer institutions in similar geographic markets.
SOURCE: Internal Revenue Service http://chronicle.com Section: Money & Management Page: A29
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Copyright © 2002 by The Chronicle of Higher Education