University reform, part III: so what can be done?

In part II, the barriers to reform in the university sector were discussed. It became clear that neither the governance structure nor the basic funding model was up for grabs. Also, one should not count on market forces, the unions, or the academics to be all that much help. None of the current reforms on the table are hence likely to achieve a reduction in the immense overhead that is dragging the sector down.

But what then can be done by the Commonwealth? Many of the ideas given by the commenters seem eminently implementable and would engender an on-going process of change: reduce the ARC/NHMRC red tape and channel more money via them to empower the academics; ask the Productivity Commission to do a report on the source of the administrative overflow; cut the rankings and ERA-type processes because they generate a lot of admin with almost no return and simply make more use of the ARC; have more competition via online-universities; have a governance group inside the education ministry to champion change. These all seem good ideas to me.

As to my own thoughts, there is another thing of real importance that the commonwealth can play with because of its position as the paymaster: it can mandate the pay-structure of the top of the universities. It can thus directly do something about the enormous salaries paid to the top.

With some Vice Chancellors making between 1 and 2 million dollars per year (including bonuses), several times more than the highest-paid VCs in New Zealand, it is a clear equity issue. Yet, it is also a governance issue: universities are non-profit organisations with public protection and subsidies. To hand out huge salaries to anyone in such sheltered organisations means you engender a layer with an enormous appetite for grandeur and who need protection inside their own organisation from those less paid who think they do the work. It thus encourages a burgeoning administration protecting the high income layers.

The same issue has come up in many countries, and one particular solution springs to mind: to set a maximum income at some percentage of top politicians, say the Minister for Education. So, Australia could take a leaf out of the recent reforms in the Netherlands and instigate a maximum remuneration for everyone in the university sector. The rule of thumb the Dutch have hit upon is 130% of the pay of a government minister, roughly equal to 350,000 AUS (see here for an explanation in English). This is now mandated as the maximum income not just for all civil servants, but all semi-government institutions too, including universities and hospitals. At the same time, all other forms of compensation were outlawed, including any KPIs, options, consultancy, etc.

A similar reform would be eminently possible and desirable in Australia, particularly for the university sector. It agrees with the reportedly biblical and Greek view that no one should earn more than 5 times as much as another. It also sets a maximum that is really still quite generous by historical and international comparisons: a 350,000 AUS salary would put one well high into the top 1% of all people in Australia and would constitute a normal Vice Chancellor salary in many countries. It would obviously be equitable, probably supported by the unions.

Above all, this is a policy that can actually be implemented by the Commonwealth: universities are publicly funded places and the Commonwealth can without much trouble demand that the people running the institutions that receive such huge amounts of public funds (via the ARC, NHMRC, HECS) abide by their wishes concerning salary caps. It needs nothing more than simple legislation.

What effect would such a rule have in the Australian university sector? Probably a very beneficial one. Not only would it improve equity, but at a stroke improve the incentives:

  1. It would reduce the importance of monetary incentives amongst university administrators and thus increase the importance of long-run payoffs like reputation and the opinions of outside stakeholders. This would be a major improvement above the short-run incentives most are under now.
  2. It would at a stroke make it less important for administrators to surround themselves with people who protect their own position because there will be much less of a queue of people wanting to topple them from the throne.
  3. It would scare away people who only want to be a university administrator for the money and thus increase the number who want to improve universities. This can only be a good thing.
  4. It would take away extreme risk-aversion for adverse media events or complaining students: once top administrators are paid what they are worth in stead of what they can grab, they no longer need to be as fearful of losing their job over this or that scandal. After all, since they are paid what they are worth, they can then go elsewhere and earn that same amount, or something close to it. Hence they would act much more calmly and rationally when it comes to investments.

Now, of course, those making huge incomes will immediately tell you that they are such fantastic talents that they simply would go to another CEO job paying them the same amount. This is pure myth as you should realise from a cursory glance at their previous careers: most Vice Chancellors were quite low-paid academics before they went into administration and don’t have a history of making large sums of money in the private sector at all. It is a myth to think they would take a job elsewhere if their salary is reduced to being only 3 times what they were making as an academic.

Author: paulfrijters

Professor of Wellbeing and Economics at the London School of Economics, Centre for Economic Performance

16 thoughts on “University reform, part III: so what can be done?”

  1. The main benefit would be slightly easing grievances among academics (though history shows there was bitter academic opposition to administrators even before we had full-time VCs; I consider this a standard academic sentiment that no policy change can eradicate). There would be savings of $10-20 million in a sector turning over $24 billion. I doubt the other claimed positive effects – but on the other hand, I don’t think it would much change who put their hand up or their motivations on the job so it would not have negative effects either.


    1. it is not much of a grievance amongst the academics I hang out with (economists cannot complain about salary in this country), but I think you underestimate the direct savings and knock-on effects: sure, on the VCs alone you would save no more than 20 million or so, but think of the whole layers of DVCs, pro VCs, Heads of Departments, and Deans. I wouldnt know where to find information on their salaries and bonuses, but I would guess the savings of a 350,000 salary cap would be around half a billion for the sector as a whole, loosely based on there being around 20 people making over half a million per university.

      I think the knock-on effects are also much greater than appreciated. With a flatter salary structure also comes a less hierarchical and less bureaucratic culture.


      1. I had not factored in other highly-paid staff. This is sometimes in annual reports. For example, UQ had 8 executive staff on more than $500K in 2011. I have not seen data on salaries for deans but imagine some could be that high, though I doubt heads of department are very lucrative. Though most long-term academics would not get senior admin jobs elsewhere, a $350K or $500K cap would limit unis for other administrative roles. They would never get a top-level IT or financial person for $350K.


      2. Would that include bonuses and handshakes or just the baseline? At one of the previous universities, performance to KPIs were reportedly a big part of the compensation package. Heads of finance, IT, HR, Marketing, and some of the lawyers would surely also be in the range?

        I agree though that if there is a real loss in terms of talents one might no longer afford, it might be in finance.


  2. I am not nearly as pessimistic as Paul.

    The universities are founded under State Acts. This gives the States a lot of power over how the universities in their State evolve. It seems clear that the State governments could choose university councils which would insist on a high level of accountability to those governments for the performance of local universities, within the umbrella of federal funding.

    Unfortunately, and I find inexplicably, governments routinely defer nominations for council membership to the universities themselves – this converts the universities into either worker managed collectives, or allows them to be captured by rent-extracting managers. Anyone who has worked in a university for any period of time will have seen both.

    If a State were to choose its council, and the council were to hold the Vice-Chancellor responsible for achieving the government’s objectives (sacking them if necessary), we would see a major improvements in university operations.

    Every corporation works within tight constraints, from the market, rating agencies, analysts, institutional investors, employees, competitors etc,but we do not accept that as an excuse for their poor performance.

    State governments have progressively fewer tools to influence state development, they should grab this one.


    1. I agree that the state governments could achieve a lot and that they are neglecting their responsibilities on the issue of the university councils. However, it is easy to see why they don’t care and not going to care: the money wasted is not theirs and any money saved would not be theirs either. The gains of getting involved would then immediately be usurped by Canberra. So it’s easier to dose of and let the workshops and rent seekers get in with it. It keeps a lot of people employed.


      1. State governments have been active on governance, Victoria is in the process of yet another change. The main trends have been fewer council/senate members, more people appointed for particular skills such as finance or commercial experience, and a strong emphasis that even those members elected by particular constituencies (eg staff or students) are supposed to represent the interests of the institution as a whole. It’s effectively reduced the power of 2/3 internal rent-seekers, but probably strengthened management by removing the groups most likely to reflexively oppose them. The old model seemed harmful in NSW, where universities were paralysed for years by bitter senate disputes, allowing UQ and U of M to greatly improve their relative position. But in other states what has changed due to governance reform is not so obvious, to me at least.

        The obvious problem with governments appointing more people to governing bodies is that universities become more state-controlled institutions.


      2. I had an RA go over the composition of these councils a few years back. One in six has a PhD. Yet, the whole of the coalface (including the hierarchy!) is supposed to have a PhD.


      3. They are not expected to research, so I am not sure that this is a problem. For example, these are the main statutory functions of Melbourne Uni’s Council:

        (a) to appoint the Chancellor, any Deputy Chancellor and the Vice-Chancellor;

        (b) to establish policies relating to the governance of the University;

        (c) to oversee and review the management of the University and its performance;

        (d) to oversee the management and control of the property and business affairs of the University;

        (e) to oversee the management and control of the University’s finances;


      4. I doubt Microsoft and Apple would have gotten anywhere if they were run by a board wherein only 1 in 6 knew what a computer was, despite the fact that there too the board would do a variety of tasks. If 5 out of 6 don’t know about core business, the business won’t thrive. They would appoint the wrong CEO, have no idea about policy or performance, and have no idea to what end the businesses and finances of the university are geared.

        I can see the point of having the odd finance-savvy person or government and business connected person on these boards, but 5 out of 6? I can see the advantages from a control point of view though….


  3. This reflects the history of universities, where senates/councils are not supposed to interfere in the core academic matters. They are not boards in the corporate sense – more trustees providing broad oversight. Almost everyone on the academic board, which does have some say over course content, would have a PhD.


    1. sure, but the Academic Board only advise and their tasks are set by others. Its the Councils that own the unis and if you dont have the knowledge there as to what a university actually does then forget about it making forceful decisions.


  4. You don’t need to just look to NZ. The salaries are excessive by US standards as well.


    Public university bureaucrats at Purdue (very comparable to the Go8s both in terms of quality and size) are getting paid a fraction of what Australia’s make and people are outraged.

    The difference is that US academics have the balls to do something about it. Good luck getting Australians to stand up for something. She’ll be right mate. Fair dinkum.


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