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A couple easy fixes to CEO Pay and college costs


stahleyp
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Perhaps there are plenty of holes with the couple approaches here but why couldn't the government do something along the lines of this?

 

 

1) To help control college costs, the government could link college costs to inflation. In order to qualify for any government assistance/loans colleges could not increase total price of education above the level of inflation. If they violate this, they lose funding for a certain amount of time.

 

2) Tie executive compensation to median workers' compensation. The IRS could basically say that if executive pay is more than 100x or 150x (or whatever) then none of the expenses associated with salaries for any employee is tax deducible. Sure, you run the risk of companies laying people off but I think the more likely scenario is to stop over paying executives.

 

 

I think almost everyone, regardless of political party, thinks college costs are crazy and so is executive pay.

 

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Paul,

 

The two issues you describe are significant and I plan to contribute if value can be added but, while doing research/thinking, before asking how the government could "solve" the issues, perhaps reasonable to use inversion and try to define the underlying causes or driving forces behind the two phenomena?

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There are standardized tests to enter college - SAT & ACT - there should be standardized tests to EXIT college.

This would eliminate much of the nonsense going on in college - as those programs that do not teach anything of value would be exposed.

It would force academics to provide real education on important skills - that could be measured upon graduation.

 

A lot of foolishness would be eliminated - and eventually folks would wise up and not pay for much of this garbage.

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Paul,

 

The two issues you describe are significant and I plan to contribute if value can be added but, while doing research/thinking, before asking how the government could "solve" the issues, perhaps reasonable to use inversion and try to define the underlying causes or driving forces behind the two phenomena?

 

I think much of the "cause" is government backed and guaranteed loans. This has allowed the universities a pork barrel they can not resist.

Therefore, they bump up their course offerings of useless skill courses (minorities "studies", LGBT "studies", etc, etc) - all these social awareness

and useless skills that attract students, all the time knowing they will get paid - but also insuring that the students graduate knowing nothing.

The administrations have increased staffing with so many positions as well - no wonder the tuitions have sky rocketed - but the schools will get paid.

 

They can't resist the money - but the quality of real education and work preparation has gone down.

 

We are badly in need of a shakeout and back to the basics of education.

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The average person is more likely to need to hire an attorney than to need to hire a CEO. 

 

But an attorney makes at least 10x what the average person makes.

 

I see that as a bigger social problem.

 

An attorney makes at least 10x what the average person makes? 

 

What planet are you on, how do I get there?

 

Most attorneys are broke.  Most attorneys have mortgage sized+ student loans to pay back.  The job market is terrible (a lot of young attorneys never get a job). 

 

In the Michigan market...you can hire teeming HORDES of attorneys for about $40k a year.  A few years ago, it was even worse than that.

 

About the top 10% or so of attorneys make OK money....but the vast majority do not.  It is a very bi-nomial distribution....The top makes good money...very little in the middle AND HORDES of attorneys making very little $.

 

Why are there some many lawsuits against the law skools?  Why is there so much substance abuse & mental illness in the profession?  Why are there so many websites on the interwebs RAILING against law skools and the profession?

 

Why are there so many articles about what a mess law skools are in?  Please see:

 

https://www.theatlantic.com/magazine/archive/2014/09/the-law-school-scam/375069/

 

 

The idea that becoming an attorney is a pathway to a middle class standard of living is a wide spread myth.

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clutch and cubs,

 

I agree. Before the government got involved, college costs were significantly lower than today. One would think that with larger enrollments, colleges costs would decrease over time. After all, it doesn't cost much more to have 30 students or 40 students in a class. There needs to be some level of accountability. I admire the government wanting to make college more affordable but there needs to be restraints.

 

Eric, I think your recent encounters with attorneys is affecting your feelings towards them. I don't blame you for that though!

 

Cigar,

 

I think I know the underlying causes. And they both stem from government involvement. I think it was in the 90s when the executive pay was required to be disclosed. After that, everyone had a benchmark. As it is with active investors, everyone tries to beat the benchmark (even though most fail!) but still want to be rewarded. I figure it's hard to get the genie back in the bottle so one needs to look at ways to try to make things proper. If a CEO is going to be paid a massive amount of money then they need to be taking some downside too (firing is not downside if you walk away with $100 million for failing).  And the college issue I talked about above.

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Paul,

 

The two issues you describe are significant and I plan to contribute if value can be added but, while doing research/thinking, before asking how the government could "solve" the issues, perhaps reasonable to use inversion and try to define the underlying causes or driving forces behind the two phenomena?

 

Agreed - the underlying causes need to be addressed.

 

With tuition it is twofold IMHO: (1) inability to discharge or modify the  loan in bankruptcy, and (2) no skin in the game from the college.

 

With CEO salary also twofold: (1) lack of true metrics to determine CEO impact. This is likely unsolveable but I believe can be improved. And (2) lack of shareholder power to enforce controls on management. Shareholder base is too out-of-touch and slow to respond because they are usually poorly informed and no close enough to the business.  This results in poor pay incentive structure (cash bonuses, clawbacks) and poor oversight over management behavior.

 

To address these, I believe tuition loans should be modified in bankruptcy after a period of time (7 years?). Colleges should be forced to retain a % of the loan amount.

 

CEO pay I agree with the original poster - tying it to median employee pay will probably get us 80% there. Better incentive structure will get another 10-15%.

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When I started at Purdue as an undergraduate in 1971, the in-state tuition was $350 per semester, that would be $2,168 in today’s dollars. Currently the in-state tuition is around $6,000 per semester for engineering. (Tuition is around $5,000 per semester and some programs have additional fees.) This is almost three times greater than inflation and this is with no tuition increases the last 7 years.

 

https://www.purdue.edu/newsroom/releases/2018/Q2/purdue-president-daniels-announces-unprecedented-7th-straight-year-of-tuition-freeze.html

 

(An aside, Indiana had, still does, a program of reduced tuition for children of disabled veterans. My dad was a disabled WW II vet. So, my tuition was $90 per semester; my BSEE cost be $720 in tuition.)

 

A culprit in the faster than inflation rise has been university rankings. US News began ranking universities in 1983. For universities that are members of the American Association of Universities, the top 62 research universities in the US, rankings have little to do with teaching. They are mainly based on research. Research funding per faculty member, number of Ph.D.s graduated per year per faculty member, number of faculty that are members of the NAE, etc.

 

To raise your ranking, or even just to maintain, you have to pour more dollars into research related functions, not teaching, each year. So there has been an arms race created by these rankings.

 

And where do the dollars come from that pay the salaries of faculty to do research? Undergraduate tuition.  (Today it is not uncommon for star faculty to be making well over $300,000 per year with many not ever teaching undergraduates.) Much of the increased cost of undergrads going to college is the cost of the ever-greater research programs, and star faculty salaries, needed to maintain, or increase, rankings.

 

I suspect as part of this arms race is faculty teach fewer classes per year. This means a larger faculty and each faculty member has more time to devote to research.

 

 

Edit: Also universities want to move in, and stay in, the Association of American Universities, which is based on amount of research. Univ. of Nebraska and Syracuse University were removed in 2011. I know Indiana University is worried so they are trying to start an engineering program in hopes of more research funding.

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Eric, I think your recent encounters with attorneys is affecting your feelings towards them. I don't blame you for that though!

 

 

My Sacramento divorce attorney charges a crippling $450 per hour.  It is the going rate.

 

Eric:

 

That very well may be.  I am also sorry to hear that you even the need the services of a divorce attorney...

 

HOWEVER, I am going to guess that you are going to a top 10% divorce attorney...perhaps even a top 1% divorce attorney.  Sure, those guys MIGHT make plenty of money, but they are far removed from the average.

 

Also, just because somebody charges $450 does not necessarily mean that they bill 2,000 hours in a year.

 

I have an attorney friend who does primarily business law.  He is tied in to a wealthy ethnic minority in the metro area.  He does not charge $450/hour, but he bills at a good rate for the area....He has a few problems though.

 

A). He has to maintain an office.  Nothing outrageous, almost modest...but it is in a better part of town.  In the office he needs a phone & internet.  He also needs Westlaw/Lexis access.  He also needs state court rulings (books & updates).

 

B). He needs to maintain professional liability insurance

 

C). He needs to ADVERTISE in the ethnic newspapers.

 

His business is also variable.  Some months are good, some months are TERRIBLE.  When he pays for his necessary expenses...he is NOT making that good of a living.  In fact, he is making a TERRIBLE return on his time & investment.  He would have been WAY better off getting a "regular" job.

 

A lot of attorneys who can sometimes bill decent rates, get killed on the overhead & downtime.

 

 

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It is a very bi-nomial distribution....The top makes good money...very little in the middle AND HORDES of attorneys making very little $.

 

My experience with business lawyers is similar to Ericopoly's. Most of the decent attorneys charge way too much per hour and seem to be getting away with it. If most lawyers are poor, why is this happening? 

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Lots of people go into law, make barely any cash, and eventually leave the profession.

 

BLS stats:

 

Quick Facts: Lawyers

2017 Median Pay $119,250 per year

$57.33 per hour

Typical Entry-Level Education Doctoral or professional degree

Work Experience in a Related Occupation None

On-the-job Training None

Number of Jobs, 2016 792,500

Job Outlook, 2016-26 8% (As fast as average)

Employment Change, 2016-26 65,000

 

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About the top 10% or so of attorneys make OK money....but the vast majority do not.  It is a very bi-nomial distribution....The top makes good money...very little in the middle AND HORDES of attorneys making very little $.

 

Just an FYI, and not intended to distract from your point:  You mean bimodal.  A binomial distribution is what you get when you flip a (possibly biased) coin and count the number of heads.

 

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Perhaps there are plenty of holes with the couple approaches here but why couldn't the government do something along the lines of this?

 

1) To help control college costs, the government could link college costs to inflation. In order to qualify for any government assistance/loans colleges could not increase total price of education above the level of inflation. If they violate this, they lose funding for a certain amount of time.

 

-----)

 

In the US (the comments do not reflect the conditions in my area as American fellow members could not believe the tuition fees paid for my children going through higher education), tuition fees are reported to have grown at much higher rates than inflation, often typically as follows:

https://www.businessinsider.com/this-chart-shows-college-tuition-growth-since-1980-2016-8

 

However, digging deeper, reported tuition fees, as reported, are gross numbers. When you look at net tuition fees (net of grants and tax benefits, without taking into account student debt), the long-term trends, in the main, show much lower cost inflation and, in under many scenarios, flat trends. Higher education enrollment has increased but public funding per enrollee has decreased. However, the net result is that the headline numbers significantly inflate the "real" median underlying net trend. The underlying reasons behind the huge increase in student debt are controversial but I humbly submit that this may be an issue that maybe should be discussed around the kitchen table or perhaps complemented by a short course on basic financial literacy in high school.

 

Despite the mitigating factor described above, higher education is expensive in the US and, for many, increasingly more so. I understand that "explanations" for this situation can be grouped under two headings: "revenue" issues and "cost" issues.

The revenue side (Bowen) is related to the concept that higher education costs will be driven by the revenue the institution can raise per student unit as part of a political process. IMO, the big contributors here are mission drift, curriculum bloat, the notion that higher "productivity" and cost control will automatically result in lower quality in education (similar concept appears in healthcare) and especially the fact that the pressure felt by institutions concerning decreased direct public funding has been more than compensated by increased implicit and explicit federal government support through debt to students, with a net result of more and more applicants.

The cost side (Baumol) which I referred to some months ago when discussing a healthcare topic has to do with the fact that the relatively high costs allocated to tuition and education have to do with the high standards of living that the US has achieved. Like other related sectors where educated labor and services are involved and where international out-sourcing is difficult or impossible, think healthcare and others (contrary to manufacturing for instance), "productivity" measures have not had meaningful impacts on costs.

 

IMO, like in healthcare, culture change (like a company restructuring) is necessary based on better measurement of outcomes, a focus on the cost/quality mission and efficient integration of technology (ie online learning) if the goal is to match rising higher education costs with the long term trajectory of the underlying economy. Another issue with political ramifications since "public" involvement will continue to be part of the picture.

 

(-----

 

2) Tie executive compensation to median workers' compensation. The IRS could basically say that if executive pay is more than 100x or 150x (or whatever) then none of the expenses associated with salaries for any employee is tax deducible. Sure, you run the risk of companies laying people off but I think the more likely scenario is to stop over paying executives.

 

I think almost everyone, regardless of political party, thinks college costs are crazy and so is executive pay.

 

-----)

 

Another tough issue. I would agree that, despite noble intentions and personal interest when reading proxys, mandatory disclosure of top executive pay has been a major cause of relative envy and outbidding. CEOs can be fired and tenure duration has come down but I think that at least part of the solution is to correlate downside to the huge upside that top executives have been able to reap. For example, clawback of previous compensation in relation to poor results or even personal financial responsibility (to a certain degree) in the event of a bankruptcy-related event. Also, the structure of compensation can be tailored to long term value creation.

 

(-----

 

Separate comment related to legal costs in the US: The number of lawyers per capita is off the chart in terms of international comparison and that tends to create a lot of competition across the spectrum. Given the tendency to reward according to talent (meritocracy vs inequality), some lawyers tend to do very well.

 

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Guest Schwab711

Good post boilermaker.

 

For CEO/exec pay, the issue is it's actually cheaper to pay employees with stock options/RSUs than cash. The reason is there's a excise tax on salaries greater than $1 million for your five highest-paid employees. Thus bonuses went from 10%-25% to > 100%. The bonus is more tax effective if given as contingent equity so it's often paid in that form. Much of executive pay outpacing average workers is just tax incentives.

 

Get rid of stock options as compensation (there's no reason only specific owners should pay executive wages) and count total compensation towards the excise tax and the spread will decrease.

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And where do the dollars come from that pay the salaries of faculty to do research? Undergraduate tuition.  (Today it is not uncommon for star faculty to be making well over $300,000 per year with many not ever teaching undergraduates.) Much of the increased cost of undergrads going to college is the cost of the ever-greater research programs, and star faculty salaries, needed to maintain, or increase, rankings.

 

I suspect as part of this arms race is faculty teach fewer classes per year. This means a larger faculty and each faculty member has more time to devote to research.

 

If someone is a big enough star to be earning $300k+, then I sure as hell hope they're not teaching many undergraduate courses.  That would be pretty nuts.  FWIW here's some US faculty compensation info from 2011:

 

https://www.chronicle.com/article/Distribution-of-Average/127041

 

Canadian schools must publish lists of all employees making $100k or more.    $300k in Canada remains very highly unusual for faculty ranks, and faculty making this much are generally in finance / business.  Excluding a couple people in medicine and pseudo-administrative positions like Deans, the top science/engineering professor at University of Toronto makes $291k. 

 

https://www.sunshineliststats.com/?page=1&orderby=salary&provinceid=9&year=2018&n=University%20of%20Toronto

 

Faculty teach fewer courses than they did in the past, but there are now far more students in an average class and far greater demands put on the faculty with respect to their teaching. Universities have responded by shifting a lot of undergraduate teaching to their growing ranks of grad students, post-docs, full-time lecturers, and part-time instructors.  None of these people cost as much as faculty, so I'm not so sure to what degree the rise in tuition has been precipitated by fewer courses being taught by faculty. 

 

Aside from advancement in rank, the per-annum increase in faculty salary at my school has been around 1.75% since 2006.  Over that time there has been a huge change in the amount of focus on research, no decrease in teaching, and tuition has gone up by well over 3% per year.  Much of the tuition fee increase in Canada is a result of a long decline in per-capita government grants, which has transferred a bigger slice of university operating costs onto students.  There also seems to have been an explosion in administrative costs but I don't have good data on that.

 

There have been a number of studies into academic costs, so there's likely no need to guess about the various reasons behind cost escalations.  I haven't spent much time digging into it.

 

 

 

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About the top 10% or so of attorneys make OK money....but the vast majority do not.  It is a very bi-nomial distribution....The top makes good money...very little in the middle AND HORDES of attorneys making very little $.

 

Just an FYI, and not intended to distract from your point:  You mean bimodal.  A binomial distribution is what you get when you flip a (possibly biased) coin and count the number of heads.

 

Yes, thank you for pointing that out.  You are correct.

 

 

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I heard a story that a bathroom replacement that consist of urinals, toilets, showers, sinks, tile work, for a frat house of 30-40 kids requires a budget of $400-500k.  It took the alumni association years of fund raising.  They mentioned that a similar job would not have cost more than $50k if done by the alumni.  Union labor is required and needs to be approved by the college.  There are also 3-5 administrative sign offs.  The funds needs to be ready by Jan in order to do the work during the summer when the students are away.  I think this story is very telling of the "fat" that is in the college system.

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Eric, I think your recent encounters with attorneys is affecting your feelings towards them. I don't blame you for that though!

 

 

My Sacramento divorce attorney charges a crippling $450 per hour.  It is the going rate.

 

Eric:

 

That very well may be.  I am also sorry to hear that you even the need the services of a divorce attorney...

 

HOWEVER, I am going to guess that you are going to a top 10% divorce attorney...perhaps even a top 1% divorce attorney.  Sure, those guys MIGHT make plenty of money, but they are far removed from the average.

 

 

So to get favorable justice, or any justice at all, one has to have the resources. This is indeed a significant social problem.

 

I just read the other day about someone innocent who spent 15 years in jail, mainly due to his lousy public defense lawyer. if he could have afforded a top lawyer he would not have spent one day inside.

 

Many of these top lawyers got to where they are thanks to nepotism, family networks, connection to judges etc. If you are the son of a well-known judge, you're going to be making 40k a year? Unlikely. Another social problem.

 

 

 

 

 

 

 

 

 

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Hey all:

 

Here is a very interesting fact about law skools.  Tuition for the worst is almost the same as it is for the best.

 

For example, Harvard is arguably the best OR is in the top 3 schools.  Their tuition is about $63k per year.

 

Compare that with Cooley Law Skool's tuition rate is about $53k per year.  In the year 2018, in many people's opinion, Cooley is perhaps not the worst law skool, but it is very close to it. 

 

Please see: https://abovethelaw.com/2017/12/the-10-worst-law-schools-in-the-country-2017/

 

So Cooley is charging close (85%) to what Harvard is charging.  Is an education from Cooley worth what one from Harvard is? 

 

Cooley is not alone in charging this rate of tuition.  University of Detroit/Mercy is charging about $43k per year in tuition.

 

Why is there so little difference in the cost of tuition?  Compare the opportunities/wages  of Harvard graduates compared to those of Cooley, UofD, or any other bottom half skool.

 

There is a MASSIVE difference of outcomes for graduates, but amazingly, tuition rates are shockingly similar.

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And where do the dollars come from that pay the salaries of faculty to do research? Undergraduate tuition.  (Today it is not uncommon for star faculty to be making well over $300,000 per year with many not ever teaching undergraduates.) Much of the increased cost of undergrads going to college is the cost of the ever-greater research programs, and star faculty salaries, needed to maintain, or increase, rankings.

 

I suspect as part of this arms race is faculty teach fewer classes per year. This means a larger faculty and each faculty member has more time to devote to research.

 

If someone is a big enough star to be earning $300k+, then I sure as hell hope they're not teaching many undergraduate courses.  That would be pretty nuts. 

 

 

If the $300k was coming from other sources besides undergraduate tuition.

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And where do the dollars come from that pay the salaries of faculty to do research? Undergraduate tuition.  (Today it is not uncommon for star faculty to be making well over $300,000 per year with many not ever teaching undergraduates.) Much of the increased cost of undergrads going to college is the cost of the ever-greater research programs, and star faculty salaries, needed to maintain, or increase, rankings.

 

Could you please provide a source for this claim?  Thanks in advance. 

 

 

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