2005 Presidents Institute

Presidents Institute • Chief Academic Officers Institute • Foundation Conversation • Calendar of Events •

Negotiating Nonsalary Benefits

By Raymond D. Cotton, Vice President for Higher Education,
ML Strategies, LLC

Published in The Chronicle of Higher Education, July 26, 2002

In negotiating an employment contract, a college president and a board are faced with many compensation, governance, administrative, and legal issues. But both sides may be in a hurry to get the agreement signed so the college can make a public announcement.

In most cases, the new president has spent his or her career in higher education. On the other side of the table are people whom the Association of Governing Boards of Universities and Colleges calls "citizen trustees." That is, they are usually highly regarded people from the community (bankers, lawyers, business people, et al.) who donate their time -- and often their money -- for the benefit of the college on whose board they sit. Nevertheless, most board members have little idea what elements ought to be included in the employment agreement of a president. According to AGB data, most of the time they have little or no comparison data upon which to make such decisions. And their knowledge and understanding of the academic enterprise may be limited to what they learned about it years earlier as undergraduates.

As a result, the two parties come together with the mutual desire to benefit the college or university they both love, but lacking the skills, the information, and the time to make informed decisions. That's why many trustees who are responsible for the president's contract (usually the board's compensation committee or executive committee) look backward to the employment agreement that existed between the institution and its prior president, and try in principle to stay as close to that agreement as they can.

Data collected by Jane Wellman and Robert Atwell in Presidential Compensation in Higher Education: Policies and Best Practices (AGB, March 2000), state that only about 20 percent of boards use outside consultants to advise them during the contract-negotiation process. It is important for the president-elect who, after all, is oftentimes the only higher-education professional involved in these negotiations, to help educate the board members. But that can be awkward, given the newness of the relationships, and thus third parties, preferably lawyers who are knowledgeable in higher-education issues, can be helpful.

As a higher-education lawyer myself with more than 20 years of practice, I've seen a variety of nonsalary issues get lost in the negotiation shuffle, to the detriment of both the president and the board. Here are the most common:

Deferred compensation: Because it involves risk-taking by the president, an awareness of basic elements of nonprofit tax law, and some new thinking by the board, deferred compensation often fails to make it into presidential employment agreements. The deferring of compensation can occur when the parties agree that some portion of the president's salary is to be held in trust and made available if he or she serves out the full length of the contract. When a board does not make use of this kind of incentive, it may be giving up an opportunity to hold on to a star performer through the use of "golden handcuffs." For the president, deferring some portion of compensation can provide significant tax benefits and additional income at a point in the president's life when retirement may be looming. While there is no typical amount of deferred compensation that ends up in the compensation package, the final figure is usually related to the president's base salary and the length of the contract. If the board does not raise this issue, presidents or their representatives should.

Disability insurance: Almost no one gets excited about disability insurance -- until they need it. In my opinion, everyone in higher education should have a disability policy that covers at least 60 percent of their salary. Clearly, this should apply to the president, too. Unfortunately, many colleges have policies in place that discriminate against higher-paid employees and leave the president without sufficient coverage. Such polices may cover 60 percent of an employee's salary, but may also have a benefit cap as low as $5,000 a month. Assuming a president earns a salary of $200,000 a year, 60 percent of that amount would be $120,000. If a college has a disability insurance policy with a $5,000 a month benefit cap on it, only 30 percent of the president's salary would be forthcoming in the event he or she became totally disabled while working for the college. Unless a president has significant other assets or resources, I view that level of coverage as insufficient to adequately protect the president and his or her family in the event of a catastrophe. In cases like this, the president ought to bring this inequity to the attention of the board chairman or the compensation committee and request additional disability coverage to bring the level to 60 percent of base salary. Specific add-on policies are available in the marketplace.

Life Insurance: Depending upon the president's family and financial circumstances, adequate life insurance coverage could make the difference in keeping the president's children or spouse above the poverty level should the president die while in office. How much life insurance is enough is a question to be answered by presidents and their financial advisers. As an industry minimum, I would recommend that the college or university provide coverage of at least two and a half times the president's salary.

Long-Term-Care Insurance: This is a relatively new type of insurance designed to fill the gaps in employer-sponsored health insurance plans and ultimately Medicare. A long-term-care insurance policy provides reimbursement for custodial-care expenses (i.e., home health care or nursing-home care) not covered by health insurance or disability income polices. In the event of a disability while working, these policies can provide the money to pay for custodial-care expenses and ensure that assets accumulated for retirement are not consumed prematurely. In addition, while disability benefits typically end at retirement, long-term-care insurance policies can provide benefits on a post-retirement basis. Since long-term-care insurance policies are considered health insurance policies, they receive very favorable tax treatment; premiums and benefits are not subject to current or future taxation. Also, this is one of the few fringe benefits that may be provided to spouses. Finally, providing the president and spouse with a long-term-care insurance policy may be another opportunity to use "golden handcuffs." The board of trustees may opt to structure this portable benefit to be paid up in 10 years or at retirement.

Residence: The president's home can be a tool used for recruiting, fund raising, alumni events, faculty and student events, and so on. Many colleges and universities own a president's home that is inhabited by the incumbent president. The college or university covers most of the expenses associated with the president's home. In the event that the college or university does not own its own president's home, a benefit that can be negotiated between the board and the president would be a level of "housing allowance." There are no fixed guidelines for housing allowances that I am aware of. However, in those cases where the president's home is routinely used for college or university business, $2,000 to $4,000 a month in housing allowance support would not be unreasonable. In high-rent areas like Boston, New York, or San Francisco, even higher levels of housing assistance could be justified in today's market place.

These and other nonsalary benefits ought to be discussed thoroughly in contract talks between the board's compensation committee and the president (or their representatives). Sometimes the parties can negotiate these issues directly without feelings of irritation or acrimony. Most often, however, I would recommend that the two sides either agree upon a neutral mediator or each select a representative to negotiate.

Once a contract is negotiated, a well-qualified lawyer should be consulted to draft the final agreement, which should be a legally binding document. The negotiation process itself is very important to the ongoing relationship between the board and the president. All of the issues that are of concern to either the board or the president should be thoroughly discussed, negotiated, and agreed upon at this time.

The legal literature reflects many cases where the parties to an agreement talked past each other and did not have a genuine meeting of the minds on important issues. In academe, we most often see this expressed when presidents do not stay the full length of their contracts.

I had a case once where a president was being asked to leave his post. I reviewed his contract and found that it was very one-sided. I asked him why he had signed such a contact; hadn't he had legal advice? He replied that he had believed he did not need a lawyer because he had trusted the other side to be fair to him. Don't make that mistake.

Experience has taught me that when it comes to the relationship that ought to exist between a president and a board, good fences do indeed make for good neighbors.