Suppose you’re going in for heart surgery. Do you want the cheapest surgeon, who invariable will be the least experienced or qualified, or do you want a surgeon who will save your life?

So it is with business management.

Imagine your business is going under. You’re getting smashed on both revenues and expenses. Do you hire a cheap CEO to save money and risk that CEO being cheap for a reason? Do you appoint your top engineer – who might be very good at his or her job – but who has no background in finance or accounting? Or, do you search for a skilled CEO and pay the market rate?

What do you do?

Now consider a situation where you really want a turnaround specialist. It requires deep expertise and involves a lot of work and long hours. The specialist will make a lot of enemies, but you’ll only pay him/her very similar to the other employees. How many people will take the job and deal with the stress? Maybe they would prefer to not deal with it? Or, if they want to take on such a role, they will look for a different employer?

These analogies have strong parallels to university management and how we pay university CEOs, or Vice Chancellors.

University governance is under scrutiny. This is why the Department of Education has moved to improve how universities are run, recently releasing a report on governance principles. There are many concerns, ranging from a bloated internal bureaucracy, through to rampant violations of labour laws, and a perceived lack of accountability. But, here, I will focus on one of the most contentious: remuneration.

Universities are in a bad financial state. Revenues are under pressure owing to restrictions on international students. Talk of restructuring exacerbates this, as students become wary of joining a university whose rankings might fall. Conversely, expenses are also increasing. Student demands are also increasing, partly owing to a situation of over promising, and potentially under delivering.

One of the proposed remedies is to cap vice chancellor pay. Various caps have been proposed, but all caps are below current salaries. It’s straight out of the Fabian Socialist playbook, designed to destroy ambition and aspiration.

Capping Vice Chancellor pay, unfortunately, will lead to significant unintended consequences, which risk exacerbating the death spiral in which universities already operate.

It’s a case of proposing the wrong solution solve the identified problems. Of throwing the baby out with the bath water. Of amputating a leg to solve a sprained ankle.

Let’s start with what a Vice Chancellor does: A Vice Chancellor position is not an academic position. Vice Chancellors are CEOs. They oversee large, complex, organisations with thousands of employees and tens of thousands of ‘customers’. Few academics have the experience or skills required to be a Vice Chancellor. As skilled as a professor might be at his/her research, research is not the same as running an organisation. To run an organisation, you might have real world, evidenced, business skills.

The immediate, and direct, impact of crunching Vice Chancellor pay therefore is that you will not be able to hire anyone competent. We might debate whether Vice Chancellors are currently competent. I will address that shortly

It is undeniable that if you cap Vice Chancellor pay, many people will not take the job. Why is this the case? Well, it is because well over 200 US universities pay Vice Chancellors more than AUD 1 million, while offering more perks and lower tax. It is a no-brainer that a qualified Vice Chancellor would take a US position if Vice Chancellor salaries are cut.

Another comparison is pay in the private sector. Again, Vice Chancellors manage large, complex, organisations. People with those skills can work at listed companies. Corporate CEOs earn significantly more than do Vice Chancellors. If pay is cut, it is easy to see that a qualified person will simply move to where they can earn more for their skillset. Some might stay in the academic sector out of ‘intrinsic motivation’. But, intrinsic motivation does not buy nice things. Clearly, some Vice Chancellors could not get a corporate CEO job. But, do you want to be stuck with the people who cannot get a corporate job? Or, do you want to be able to access a broad pool of talent?

Sometimes people remark that universities are ‘different’ from the private sector so should pay differently. But, that only works if the demands and job are different. If the job description is akin to that of a private sector CEO, and those are the skills you want, then that is the benchmark you must use.

Politician pay is a false comparison. No CEO benchmarks their pay to that of politicians. Indeed, the low pay, terrible conditions, and poor career prospects likely deter many talented individuals from entering politics. That is, politics already evidences the problem of a worsening talent pool.

People might argue that Vice Chancellors already do a bad job. Thus, they are not worth their pay. In some cases, that might well be correct. However, the solution is to improve hiring practices and select competent people, not narrow the pool of potential candidates and only be stuck with underqualified candidates.

The indirect consequences of crunching Vice Chancellor pay are also important. You will face significant staffing problems. This is due to pay compression. If you cut Vice Chancellor pay, then deputy Vice Chancellor pay must also fall. And, Dean-level pay will fall. After all, why be a Vice Chancellor if being a Dean pays better? But, then academic pay must also fall. Again, why take on the responsibility of being a Dean if you can just be an academic?

The problem is immediate: how do you incentivise people when you crunch pay and there is no clear increase through hard work, or ambition? In short, crunching Vice Chancellor pay is a recipe for tenured faculty ‘quiet quitting’, if they have not already. It will also make it nigh impossible to hire talented academics in the international market: why come to Australia to earn less and pay more tax? This is important as the academic labor market is international.

There is also an implicit problem: how do you keep industry- engaged and public-facing academics when you crunch pay? They have outside options in industry. Universities, and academics, have usually sneered at these. But, the inescapable truth is that if you don’t match industry pay, adjusted for conditions, you will lose people. And, the people you lose will be the most practically focused. That is, they will – ironically – be the people that the public say they would most like to keep.

The net result: crunching Vice Chancellor pay has significant unintended consequences and it will backfire. It will exacerbate the death spiral in which universities currently find themselves.

Universities must – however – improve their executive hiring practices. And, long term, they could consider incorporating so that they can offer ESOPs and pay Vice Chancellors with equity. This, however, might be a bridge too far given the anti-aspiration rhetoric that often surrounds the education sector.

Mark Humphery-Jenner, Otso Capital and UNSW Business School