Chapter 3: “How many educators does it take to…?” Challenges with Compensation and Student-Faculty Ratios

Cranky curmudgeon's turn: Light bulb moment: there are important best-practice rules and ratios for a higher education institution to follow concerning the number of faculty and staff to employ, and how much to be paying out in compensation. Many schools pay too much to too many people. Unsurprising Note: pretty much none of those people think they are overpaid or extraneous.

In the previous two chapters of our riveting assessment of higher education finance, we discussed the unhelpfulness of the discount rate and the importance of Net Tuition Revenue, and noted how essential it is to strive to reduce costs in an environment of declining NTR. Since most institutions are experiencing declining NTR (especially small private nonprofits), what are the important costs to cut in a college’s budget to follow NTR downward? And—if the answer includes “compensation” (which it probably does), how does an institution know how many positions to keep? “How many educators does it take to…” keep a college open and financially stable?

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The Not-So-Magic Quadrant…

One of the quick rules of thumb for understanding college expenses is a quadrant—a grid with four equal squares. Up to a quarter of the budget—one square of the quadrant—is typically committed to fixed expenses that must be paid: items like debt service and utilities. About 25%—another square in our quadrant—is used for variable expenses: departmental budgets, facilities maintenance, student services, and everything else, that can be cut in a pinch.?

For most colleges, at least half of the expense side of the budget—two of the squares in the quadrant—is taken up with compensation: salaries, hourly wages, benefits. Some places run a bit hot at 55% or 60% or even 65%, but half is a reasonable rough estimate. David Wright , President Emeritus of Indiana Wesleyan University, has a nice little series of posts on LinkedIn about “Why Does College Cost So Much” (not to be confused with the 2014 book of the same name by Archibald and Feldman). Wright uses IWU’s actual costs in a typical year to demonstrate the breakdown of the 46% expended on personnel at that institution. (Actually this is a good report—anything below 50% is alright compared to most institutions’ rate.) Part 2 of Wright’s series breaks down the personnel costs into wages and benefits pieces. At Indiana Wesleyan, he reports, 42% of personnel costs went for benefits, while 58% went to wages. Similarly, Jeff Spear of CFO Colleague reports his firm finds the rate for average benefits for college employees runs around 32% (sometimes higher, depending on the rate of retirement contributions).

For easy figuring, then, let us assume a typical budget expense quadrant looks something like this:?

One might quibble with the exact percentage breakdowns of the two Compensation quadrants, whose contents are not sized equally in this example. But mostly it is not unreasonable to assume roughly 50% of the operating expenses at an institution are related to Compensation.?

… and the Willie Sutton Rule

So say your institution has been running a regular temperature of a 5% structural deficit—not that unusual for many schools these days. (Long-time readers [!] will recall that a “structural deficit” means the institution has had several years in a row of budgetary expenses exceeding revenues on the operations side, with not much change in sight. Keep that up, and the school goes out of business.) The Board, mindful of their fiduciary responsibility (a term frequently bandied about, and infrequently examined) and agitated by the cash and endowment drawdown, decrees: The budget must be balanced in the next year. Where is the diligent administration to look for that 5% cost cutting? I mean, 5%—that’s only a nickel on every dollar, right? How hard can it be to cinch the belt by 1/20? (Clue: they haven’t been able to do it for a while now; thus the structural deficit.)

By definition, this 5% reduction cannot come from the 25% fixed expenses quadrant. Not paying the light bill has immediate and severe deleterious consequences. Likewise, cutting 5% of the overall budget from the departmental (variable expenses) quadrant means slashing that sector from a 25% to 20% share, which will be accompanied by howls of mostly legitimate complaints from folks who point out they can hardly afford to buy paperclips, print posters, and run field trips on their existing budget, much less on just 80% of it. Big departments like Athletics and Facilities will particularly struggle. We could cut several entire departments to spare the remaining ones from cuts, on sort of a “lifeboat food supply” principle, but this too is deeply unpalatable, not to mention technically difficult. (This is, however, an important concept to which we shall return in future chapters. "Remember: 'Foreshadowing'--your clue to quality literature.")

Thus The Administration (a collective term often used casually, over-broadly, and pejoratively by students and faculty alike) begin to glance sideways more and more often at the 50%+ compensation piece of the budget. They begin to apply the “Willie Sutton rule.” Sutton, a career bank robber in the U.S. from the 1930s-1950s, after his capture was supposedly asked by a reporter “why he robbed banks.” His dumbfounded response: “Because that’s where the money is.” Sutton later claimed the interview never happened, but “If anybody had asked me, I’d have probably said it. That’s what almost anybody would say… it couldn’t be more obvious.”

It’s pretty obvious to The Administration, too, where they should look for that 5%. Compensation is where the bulk of the non-fixed budget money is spent. This is why, in no particular order, layoffs, hiring freezes, skipped merit raises and cost-of-living increases, pauses on retirement/matching contributions, and decreasing shares of health insurance premiums paid by the employer are so common in crunch times. Cuts in expenses often come from compensation “because that’s where the money is.” But layoffs and compensation cuts are so distasteful to everybody, including administrators, that, upon reviewing the situation, like the famous Dickensian character Fagin from the musical version of Oliver Twist, they often think they’d better think it out again.

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Thinking It Out Again

Clearly there is a minimum number of faculty, for instance, required to teach a given number of students. Especially at small institutions that proudly trumpet their low student-faculty ratios as a talking point on their websites, it is difficult to expect a change to 300- and 450-student classes. But there is a tension between finding compensation cuts and employing faculty, who generally are more expensive than staff. Faculty Senate members, and/or unions, will fight for an 11:1 or 12:1 or maybe, grudgingly, a 13:1 ratio. (This is based on the number of Full-Time-Equivalent [FTE] students and faculty.) But for a lightly endowed institution with budget problems, probably the right ratio is more like 17:1 or 18:1 or more.

Likewise, at many institutions the ratio of students to staff is often too high for financial sustainability. This goes back to Chapter 2 in our series and the discussion of how many services and amenities an institution must provide—how many counselors? Coaches? Grounds personnel? Thanks once again to Matthew D. Hendricks of Perspective Data Science for a helpful video on one way to calculate how many staff an institution should have, based on the number of full-time students.

For the harried Administrator looking for a magic formula to solve the decidedly non-magical quadrant problem at a typical private nonprofit, the redoubtable Jeff Spear suggests some basic assumptions and ratios:

For an institution with:

--average Net Tuition Revenue of at least $14,000 per student…

--student-faculty ratio should be 18:1 or greater

--total compensation should not exceed 70% of NTR (or 50% of total costs)

--faculty should get ca. 32% of the 70% (ca. 22.4% of total NTR), while staff get 38% of the 70% (ca. 26.6% of total NTR)

By Jeff’s calculations, this allows for faculty compensation exceeding $61K on average, on a sustainable basis for the institution. Seems attractive. What could possibly go wrong with presenting these numbers towards a balanced budget?? (We will pause for a moment here while several diligent readers quietly do a little personal institutional math for themselves… How y’all doin’ on that 70%-of-NTR compensation ratio?)

It would be interesting to contemplate whether most higher ed employees would be satisfied with these ratios. For some faculty, $61k on average is not considered to be enough, and an 18:1 ratio is too many students per instructor. When caught up in some of these conversations, I confess I have been personally tempted to figuratively pile all the available faculty compensation money on the table and tell the bickering faculty members, “That’s all there is. If you don’t like the way we are planning to distribute it, you divide it up ‘fairly’ amongst yourselves. But there isn’t any more.” Then in my fantasy I would sit back and make popcorn whilst watching the Lord of the Flies chaos that would ensue. One begins to have sympathy for that poor harried budget Administrator, whom you notice is now affixing the head of a pig to a stake…

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The compensation and ratios problem is a challenging one, and getting it right can easily mean the difference between success or failure for finance administrators—and the institution. And of course, a big problem, mentioned in previous Chapters of this little excursus, is that there is tremendous downward pressure on that $14k NTR figure as well… But there are other minimum expenses at an institution too—perhaps those can be reduced in addition to, or instead of, this knotty compensation problem? Don’t touch that dial—our next chapter will examine some of the minimum expenses required for a higher ed institution, and why smaller institutions are particularly vulnerable: “So you wanna run a college, eh? It’ll cost ya!”?

Vincent Morris has spent more than 25 years winding up the cranks in various higher education administration and consulting roles. He currently serves as Vice President for Business Affairs at Hanover College, a small private liberal arts institution on the banks of the Ohio River in southern Indiana.

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