The Higher Cost of Higher Education

[smstonypoint]

I don't doubt that university presidents and CEO's are paid about the same for the size of the organization they head. Both are grossly over-paid IMO. The excesses of one should not excuse or justify those of the other. That's how we got to where we are now.

Where are we now?

Are these executives underpaid, overpaid, or paid just right? I know little of the empirical literature dealing with the principal-agent problem and executive compensation, but some studies indicate that, on average, corporate executives are paid much less than their contributions to the values (market capitalization) of their firms. I am not aware of any studies of university executive compensation and the "value" they bring to their institutions. I don't even know how "value" should be measured.

Steve

 

[dave1949]

Where are we now?

Are these executives underpaid, overpaid, or paid just right? I know little of the empirical literature dealing with the principal-agent problem and executive compensation, but some studies indicate that on average corporate executives are paid much less than their contributions to the values (market capitalization) of their firms. I an not aware of any studies of university executive compensation and the "value" they bring to their institutions. I don't even know how "value" should be measured.

Steve

If historical ratios of CEO pay to average pay across an organization are any guide, they are grossly overpaid now. Or, they were grossly underpaid in the past. :laughing:

On a basis of value added, to argue that they were justly underpaid in the past implies that they were about worthless then. I don't think that is true.

If profit margins are the performance measure, stagnant or declining inflation-adjusted wages for 75% of the employees, and outsourced jobs, would have a lot to do with growing profits. Are CEO's paid to hollow out the middle class or run a company? They are being rewarded for the hollowing out as much or more, than for innovation, leveraging assets and strategic product positioning within markets. There is nothing innovative about a pile of offshore cash on a tax holiday.

Given the incestuous nature of board members and top officers in companies, they are rewarding each other for helping each other keep more of the profits in their own pockets. They are aided and abetted by very friendly treatments in Congress. Sounds harsh, but how else can the distribution of wealth be sliding back to the robber baron days?

Sorry to rant.

 

[smstonypoint]

Welcome to the world of trickle down economics and the privatization of government (aka smaller government).
It's a brave new world heh?

I don't understand this comment. What privatization?

Steve

 

[DeereMann]

No, no, dave1949..........keep going.

I rather enjoy the rants, esp. with #1 son entering the fray next fall.

I also thought the Robber Barons rather warm & cuddly, myself. Heck, the images of John D. Rockefeller handing out dimes in the street to New York Orphans at the same time he underpaid their fathers brings tears of joy to my eyes! Or Andrew Carnegie & his famous libraries. etc. etc.

:stirthepot:

 

[bcp]

If historical ratios of CEO pay to average pay across an organization are any guide, they are grossly overpaid now. Or, they were grossly underpaid in the past. :laughing:

From:
CEO-to-worker pay imbalance grows

"In 1965, U.S. CEOs in major companies earned 24 times more than an average worker; this ratio grew to 35 in 1978 and to 71 in 1989. The ratio surged in the 1990s and hit 300 at the end of the recovery in 2000. The fall in the stock market reduced CEO stock-related pay (e.g., options) causing CEO pay to moderate to 143 times that of an average worker in 2002. Since then, however, CEO pay has exploded and by 2005 the average CEO was paid $10,982,000 a year, or 262 times that of an average worker ($41,861)."

 

[riptides]

Wow...

Ranks of millionaire college presidents grow | Fox News

 

[milkman636]

If historical ratios of CEO pay to average pay across an organization are any guide, they are grossly overpaid now. Or, they were grossly underpaid in the past. :laughing:

On a basis of value added, to argue that they were justly underpaid in the past implies that they were about worthless then. I don't think that is true.

If profit margins are the performance measure, stagnant or declining inflation-adjusted wages for 75% of the employees, and outsourced jobs, would have a lot to do with growing profits. Are CEO's paid to hollow out the middle class or run a company? They are being rewarded for the hollowing out as much or more, than for innovation, leveraging assets and strategic product positioning within markets. There is nothing innovative about a pile of offshore cash on a tax holiday.

Given the incestuous nature of board members and top officers in companies, they are rewarding each other for helping each other keep more of the profits in their own pockets. They are aided and abetted by very friendly treatments in Congress. Sounds harsh, but how else can the distribution of wealth be sliding back to the robber baron days?

Sorry to rant.

:thumbsup::thumbsup: Two thumbs up Dave.

 

[smstonypoint]

The owners of firms are in business to make a profit. As the great man said, "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest."

The salaries and wages owners pay their employees are expenses and the owners have no incentive to pay their employees more than the employees add to the value of the firm. Suppose I am the owner/manager of a brewery. A potential employee may come to the table with little or no skills, but would contribute $10.00/hour to the value of the firm. I would pay up to $10/hour (including fringes, employer FICA, etc.) to hire him/her. Other potential employees may show up with more in the way of training and skills and would add more to the value of the firm. I would pay up to the marginal value product of those workers to hire them. As the owner and manager, I can monitor my employees and determine their contributions to the business. If my employees find their skills and training are worth more in another business, they should change employers. In doing so, they improve their own incomes and the efficiency of the marketplace. They end up where their talents add the most value.

Suppose my beer is prized by my customers and I become wealthy in the process. I now want to enjoy the fruits of my labors and want to turn over management of my business. In interviewing potential managers, one candidate whose training (in agricultural economics),experience, and vision make him/her my clear choice. I estimate the candidate could increase the value of the firm by $4,000,000/year. What should I offer him/her? I face the principal-agent problem. I, the owner (principal) have to be concerned that the manager (agent) will act in my interest to maximize the value of the firm, rather than padding his/her own nest. I might offer the manager profit-sharing, partial ownership or other incentives to overcome the problem. I would be willing to pay the manager up to his marginal product. If I can hire him/her for less, I further pad my nest.

If profit margins are the performance measure, stagnant or declining inflation-adjusted wages for 75% of the employees, and outsourced jobs, would have a lot to do with growing profits. Are CEO's paid to hollow out the middle class or run a company? They are being rewarded for the hollowing out as much or more, than for innovation, leveraging assets and strategic product positioning within markets.

If executives aren't acting in the best interests of their shareholders by increasing the value of their firms, they face dismissal by their corporate boards, their corporations may be taken over by other corporations, or by private-equity firms.

There is nothing innovative about a pile of offshore cash on a tax holiday.

They are responding to the tax code -- it's not a problem of their own creation, IMO.

Given the incestuous nature of board members and top officers in companies, they are rewarding each other for helping each other keep more of the profits in their own pockets. They are aided and abetted by very friendly treatments in Congress.

I don't question the presence of "cronyism" and rent-seeking. Shareholders should demand and receive better corporate governance. Rent-seeking is a whole other topic.

Sounds harsh, but how else can the distribution of wealth be sliding back to the robber baron days?

Funny you should ask. Greg Mankiw addresses the issue is his blog today (http://gregmankiw.blogspot.com/2013/12/on-measuring-changes-in-income.html) and the Journal of Economic Perspectives article he links.


Steve

 

[dave1949]

The owners of firms are in business to make a profit. As the great man said, "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest."

The salaries and wages owners pay their employees are expenses and the owners have no incentive to pay their employees more than the employees add to the value of the firm. Suppose I am the owner/manager of a brewery. A potential employee may come to the table with little or no skills, but would contribute $10.00/hour to the value of the firm. I would pay up to $10/hour (including fringes, employer FICA, etc.) to hire him/her. Other potential employees may show up with more in the way of training and skills and would add more to the value of the firm. I would pay up to the marginal value product of those workers to hire them. As the owner and manager, I can monitor my employees and determine their contributions to the business. If my employees find their skills and training are worth more in another business, they should change employers. In doing so, they improve their own incomes and the efficiency of the marketplace. They end up where their talents add the most value.

Suppose my beer is prized by my customers and I become wealthy in the process. I now want to enjoy the fruits of my labors and want to turn over management of my business. In interviewing potential managers, one candidate whose training (in agricultural economics),experience, and vision make him/her my clear choice. I estimate the candidate could increase the value of the firm by $4,000,000/year. What should I offer him/her? I face the principal-agent problem. I, the owner (principal) have to be concerned that the manager (agent) will act in my interest to maximize the value of the firm, rather than padding his/her own nest. I might offer the manager profit-sharing, partial ownership or other incentives to overcome the problem. I would be willing to pay the manager up to his marginal product. If I can hire him/her for less, I further pad my nest.

If executives aren't acting in the best interests of their shareholders by increasing the value of their firms, they face dismissal by their corporate boards, their corporations may be taken over by other corporations, or by private-equity firms.

They are responding to the tax code -- it's not a problem of their own creation, IMO.

I don't question the presence of "cronyism" and rent-seeking. Shareholders should demand and receive better corporate governance. Rent-seeking is a whole other topic.

Funny you should ask. Greg Mankiw addresses the issue is his blog today (http://gregmankiw.blogspot.com/2013/12/on-measuring-changes-in-income.html) and the Journal of Economic Perspectives article he links.

Steve

Getting back to this discussion ...

First I think Greg Mankiw's piece is a stretch. He is looking very hard to find questionable gains in one income segment of the economy. Perhaps he should apply himself to the whole income spectrum?

Married versus shacking up? Needing to make those sorts of distinctions is not a strong point.

I also don't think wage earners whose employers are paying more for health insurance is a valid wage gain either. The larger complaint seems to be that employees themselves are paying more too. That isn't a real wage gain, it is a further transfer of wealth to somewhere else.

What does distribution of total family wealth have to say about his opinions, for example?

As far as paying wages no more than value added, that is sensible. The wage market will have a lot to do with driving that decision. A business owner may decide to seek more value through adding talent or experience, but they still need to compete with the labor market in terms of how much it will cost to get that.

In the wage market, it's true that the lower income levels of wage earners are more exposed to global competition than CEO's and University Presidents, and that will suppress those wages here in the US. But, in theory at least, shouldn't we see a leveraging down of wages at all levels?

If reasonably capable people are forced to accept wages lower than their skills would merit, why doesn't that effect go all the way up the chain of income levels? Supply and demand should reflect the fact that there are extra people floating around the labor pool with skills and experience. How does primarily only the upper level of wage earners escape this effect?

From a lay person's economic science point of view, it seems you are attempting to selectively apply the principles.

I agree shareholders should demand better corporate governance. There have been shareholder attempts at this but my recollection is they haven't had much success. One problem they face is large blocks of shares are held and voted by institutional investors; pension funds, investment houses, etc. Those share votes are controlled by yet another cadre of board members who aren't likely to run around fouling their own nest. I would bet that the outcome of practically any vote is predetermined before the annual shareholder's meeting is held.

 

[MossRoad]

Almost everyone in Indiana is within a 1 hour drive of an Indiana University campus. Average tuition for in-state is around $7K per year. Add books, fees, etc... $8500 per year is more realistic. If you live at home and work minimum wage 20 hours a week during the school year and 40 hours a week (or more) during off weeks in summer or during semester breaks, you should have no problem getting an Indiana University degree in 4 years with ZERO debt when you get out. If you take just one extra class per semester and a couple during the summers, you can get out in three years.

If you go to Indiana Vocational Technical College, those are even closer and about half the cost of I.U. Again, you can work, go to school, live at home and get out debt free, or in the case of I.V. Tech, get out with money in your pocket.

The real cost of living at college is the room and board. Its HUGE, even exceeding the tuition costs of state schools.

I have a child living on campus at a state college. They estimated the cost to be $22K per year plus some expenses.
$9k tuition
$10-12k room and board
$$$ books, fees, transportation, beer and pizza.
They weren't too far off.

Fortunately, we started a 529 when she was 5 (wish we would have done that when she was born) and put $20 a week in there. That really ads up over time and its not taxed. I highly recommend anyone with children to do the 529 as soon as they are born.

We promised her an additional $5K per year (that was the cost of day care when she was an infant, less than Catholic grade school tuition and the same as Catholic high school tuition, so we were used to that).

Her late great grandmother left her a gift of $10k.

She earned $6K per year in academic scholarships.

She works 8-12 hours per week on campus.

When she leaves college at the end of 4 years, she'll have some money left in her 529 for grad school, and over $25k in her savings account and a total debt of $3k.

Getting out of college with a double major, triple minor, a semester of foreign study and a positive net worth of $22k is nothing to shake a stick at.
It can be done. It is being done. Yes, we helped her with about half of it. But it was affordable because we planned BEFORE WE HAD BABIES.
She has some sweat equity in the game as well, so she knows she earned it.
We have a second child and we've done the same for her.

The best advice I can give anyone that has or is thinking of having children is to start a 529 as soon as they are born. $20 bucks a week in a good mutual fund will build up before you know it.
Look into in-state schools. They are very affordable.
Look into smaller private universities. They offer HUGE scholarships.
Look into living at home and going to a regional state school campus. Had my child done that, she'd of had an additional $30k in her pocket at graduation.
Stay away from student loans.
Students should work while they go to school.
No, you can't have an iPhone. Here's a no-contract Walmart phone. Get over it. :laughing: