Compensation for School Leaders: Do We Have the Right Model?
Compensation of heads (directors) of international schools has become big business, especially for consultants who promote their prowess in benchmarking of executive compensation. Boards don’t like to see those consultants coming, since the end result is often marked growth in the head’s compensation package. Heads, conversely, may well be content with such an end result. For those schools that may not want to pay the premium that a benchmarking consultant commands, the board may task itself or the current head with surveying the sector informally in order to identify the components of other compensation packages, if not also the value levels of each component.
Are we making the assumption that benchmarking peer group pay is really the best way to construct an executive package? I submit for longer-term discussion that this method may be woefully short, on a number of fronts.
Heads of school, the chief executives of the international school world, tend to have compensation packages that include any combination of (but not limited to) the following: base salary, bonus, deferred compensation, housing (actual residence or allowance), tuition remission, club memberships, enhanced insurances, retirement accounts/pension pots, automobile, mobile phone, utilities, and so on. Unless the head works for an exchange-listed company, stock options would not be in the offing. What we’re really talking about is whether a compensation package is equitable, credible, and fair.
But therein lies the danger. Equitable, credible, and fair...compared with what? Peer group pay is easy to compare when you have the data, but is it really the best way to identify what is equitable, credible, and fair, relative to the school in question? Is a large package right for the executive who underperforms in a particular context, just because ‘all the other schools are paying it?’ In the corporate world, executive compensation has continued to grow over the past years across all (market) indices, even since enhanced scrutiny was brought about in the early 2000s. I would be curious to know whether head of school compensation has grown in a similar vein in the same time period, and what that means.
Heads can make decisions with consequences in the six- or seven-figure range. Not inconsequential, in the grand scheme of things. One thing that many corporations now do is to report the chief executive’s salary as a multiple of the median employee salary (for instance, 50 times the median salary). Should we follow suit and have boards ask chief financial officers to report the head’s compensation in relation to the median teacher salary? Is that comparison a helpful correlation, or does it create distortion, for any number of reasons? Or might a better comparison be against the head’s direct reports, the members of the senior leadership team, in terms of what s/he contributes to the bottom line as head?
I am keen to learn whether the world of head compensation is essentially flat, when all factors (cost of living, size of school, etc) are taken into account. And, if it’s flat, what does that mean for the model of benchmarking heads against their peers?
At the very least, the peer benchmarking approach assumes that a compensation package for the head must be competitive, otherwise the head will leave for another school. Have we done research on this assumption? Or is the assumption based on a cognitive bias, namely vividness bias, meaning that people tend to overemphasise the likeliness of its actual occurrence? What if it’s based on an illusory correlation? Shouldn’t we consider that? For instance, a much-cited academic paper by Charles M. Elson and Craig K. Ferrere, professors at the John L. Weinberg Centre for Corporate Governance at the University of Delaware, argue that the assumption that a chief executive can easily depart for a similar position is simply untrue.
In a recent article on executive benchmarking in Korn Ferry Briefings, the authors (Irving S. Becker and Lawrence M. Fisher) note that Korn Ferry Hays Group “recommends that board members go beyond benchmarking, and instead use multiple lenses to evaluate compensation via a more complex and rigorous assessment of both internal and external factors” (20). As they state further, “the goal is to establish ‘internal equity,’ or the perception that the organisation is paying people according to the relative size and impact of their roles” (20). They continue to identify the following pieces that the board might consider, relative to the job requirements and expectations (I’ve contextualised it to heads):
objectives and milestones to be achieved
head’s experience, skill set, leadership style, motivators (financial and otherwise), and appetite for risk
challenges associated with the role, relative to the market: e.g., does the head need to turn around a struggling school? What kinds of behaviour is a head expected to incentivise, whether monetarily or non-monetarily?
the school’s overall compensation philosophy and culture
To return to the aforementioned research of Elson and Ferrere, those two authors argue in “Executive Superstars, Peer Groups and Overcompensation: Cause, Effect and Solution" that the pay of chief executives is “out of whack because it’s based on peer-group pay.” In an interview with Korn Ferry, Elson points out that “benchmarking against other CEOs is problematic. Their pay is compared to somebody in another organisation, and boards always pay the median and more. It’s based on the assumption that CEO talent is transferable, and it’s not. It’s much more homegrown. We discovered that it’s quite rare that CEOs move between peer companies” (21). Elson, looking specifically at a corporate, shareholder-driven model, goes on to say that “compensation has to be related to the productivity that the executive provides the company; pay for performance is critical” (22). Most interestingly, though, he also notes that he thinks their compensation package “needs to be created in the context of how others in the organisation are paid. You need neutral metrics, designed by boards that have long-term interests in the health of the [organisation] themselves, because anything can be gamed” (22). There is much here to consider, in terms of a school’s particular context; is Head of School talent truly transferable, for instance? Or are we experiencing cognitive bias?
To me, although this assertion is very much of interest, I wonder how it might work in international schools, where (reportedly) our schools experience substantial turnover in board members of parent-heavy boards? Is it possible for self-perpetuating boards to construct themselves in a way that their metrics for the head’s success are aligned with long-term interests of board members in a given school? What role do term limits play in this kind of approach? And, a real third-rail for consideration, what role should parent-heavy boards have in determining executive compensation, if their role is effectively identical to that of the “say-on-pay” politics that permeate so much of the corporate world? Has/is intervention of “parent-hat-only” boards been a response to and a major driver of head compensation in international schools? Are parent-controlled boards akin to the role of proxy advisory firms in the corporate world? Is that kind of board too political in nature to begin with, and does it need a serious overhaul via a renewed look at the board by-laws?
There are no specific answers here, only a number of (what I hope are) very significant questions that we need to raise in our schools, and specifically in our boardrooms. The fundamental question, in many ways, is this: is money what really drives success? And, by the way, how do you define success for your school?