Running a university is a thankless job. To many Vice Chancellors, it must feel like running a daycare full of angry toddlers while being white-anted by their own staff.
A university is not an easy business to run, but a business is what a university is. Competing demands, some logical, but many not, tug at the purse strings. People expect you to have a magic pudding of money.
Budgets can change on a whim with little warning and no recourse. Vice Chancellors are perhaps uniquely positioned among academics to know the dangers of the piles of regulation for which many academics seem to extoll.
Running a university takes a significant amount of business acumen. And this is precisely the problem. Many Vice Chancellors simply do not have the business skills necessary to run a large, complex organisation. Some, also appear to be willfully ignorant of precisely what happens in their own organisations.
Some Vice Chancellors are cosplaying as CEOs, as it was pithily put on Reddit. I am fortunate to work at one of the better-run universities. However, I feel for many academics who are stuck elsewhere.
So, where did things go wrong?
Well, it’s the old axiom: ‘show me the incentives and I’ll show you the outcome’. Interestingly, two academics, Bengt Holmstrom and Paul Milgrom, formalised this in their seminal work in the 80s and 90s. They both subsequently won separate Nobel Prizes.
In short, if you want to ‘grow the pie’ you might incentivise people to grow it. If you take the approach that there is a ‘fixed pie’ that you must allocate, your pie will actually shrink as people leave to a place that will reward them. Or, if they stay, they exert less effort than is optimal. It underscores the logic behind the Laffer curve. It also explains why the UK’s move to hike capital gains tax actually resulted in a fall in capital gains tax receipts: people left.
The problem is that incentives in universities are haywire.
Universities are run like a socialist dystopia, in many cases. Despite many academics being left-leaning, their complaints about universities show precisely why the ideology that many lionise is so catastrophic.
If we look at individual academics, there is little – if any – incentive to work harder or produce more outputs. Pay simply flatlines. In many fields, there is no ‘supplementation’ or ‘loading’ or ‘bonus’ for doing a good job. A professor with 20 years of experience might well be paid the same as one with one year of experience.
Similarly, if you establish a lab, create a new course, or establish a new program, there is no upside. The bonuses are nigh nonexistent. And academics do not own shares in the company.
The only way to get a ‘seniority’ bump in your salary is to use your expertise to be more efficient and work fewer hours. You can immediately see the problem: your skilled workers are incentivised to quietly quit rather than work more hours. Ironically, this is exactly the opposite of what you would want to achieve.
Academics who want to work more hours and to get ahead might well be better served going to industry, doing a side-hustle, or going to the Middle East to earn more money and pay less tax. Ironically, given the emphasis on universities needing practical, real-world insights, they risk losing precisely the type of people that the general public wants them to keep.
This also has other unintended consequences. Academics – starved of pay increases – look to get ‘utility’ from nonpecuniary avenues. These can include ideological posturing. They might think, ‘If I’m not going to get paid more, I might as well gain by using my soapbox…’
Vice Chancellors also face incentive challenges. Vice Chancellors’ bonuses are small. They are underpaid relative to US university presidents or CEOs of other large organisations. Indeed, against what metrics do you even judge a bonus? In the private sector, we would base it on profit maximisation and share price. But, in the arcane world of nonprofits, where government can slice revenues on a whim, it is not so simple.
The bureaucratic – public sector – mindset exacerbates things. Vice Chancellors are implicitly incentivised to not run a surplus. This is because if they run a surplus, all manner of demands for value-destroying projects will accrue. These will be unsustainable if the surplus dips. Thus, pragmatically, Vice Chancellors cannot easily run a surplus to save for a rainy day. Ironically, if they were to do so, politicians might well point to those savings as a reason to cut budgets. The irony is a very odd incentive to not be fiscally responsible today because to be responsible is to risk irresponsible consequences tomorrow.
Then there is the bureaucratic blob. Academics hate admin, but then seem to also decry the number of professional staff. Universities cannot function without them and they are invaluable. Especially given the sheer weight of the regulatory burden. But, let’s face it, there are groups that add no financial value. And, when your own pay turns on managing a bigger team to get higher seniority, you are incentivised to grow your team whether or not it makes financial sense.
How then do we fix this?
Well, there seems to be little appetite to do so. We need to acknowledge that universities are businesses and that they should be well-run. At present, they appear akin to state-owned enterprises and appear to suffer similar flaws, which, ironically, business academics have well documented.
Academics – to their own great detriment – seem to disdain market solutions. But, in an ideal world, perhaps universities should incorporate. Faculty could buy shares (and be paid in shares), and incentives could be (more) aligned. After all, if an academic owns enough shares, they might well want fiscal discipline. Alas, such an elegant solution appears to be a nonstarter.
