Written evidence submitted by Michael Nisbet

1.                 This evidence relates to evidence submitted earlier to the Committee in writing and on 12th December 2017 concerning Vice-Chancellors’ pay: 

(a)             the CUC evidence submission (VAL0071, October 2017);

(b)             the witness remark by OfS’ CEO “there is a salary issue” (Qn59).

2.                 Value for money in higher education is perceived by the students through the teaching and their learning experience at the institution. Students are adults. They choose to apply for membership of the institution to study, and pay it their fees - as adults. The source of the funds to pay those fees is a legitimate but separate discussion. Just as the source of a shopper’s income is of no concern to a supermarket, so the source of a student’s fees money is secondary for the university.

3.                 As the chief executive of the institution, the role of the Vice-Chancellor or Principal rightly includes the improvement of the teaching and their  learning experience. It is critical for each higher education institution to have an appropriate person in place with both the authority and the expectations. In turn, that requires ensuring the appropriate pay level.

4.                 Recent criticism of some Vice-Chancellor pay being too high may be justified in one or two instances for the institution concerned. But on the publicly available evidence any criticism of the generality of Vice-Chancellor pay levels being too high is quite misplaced and unjustified.

5.                 Little heed has been paid to fact that each HEI is an organisation in its own right, and that each institution has very different management challenges from its size, range, history and prospects. The missing element in the Committee’s approach reflects HEFCE’s shortcomings, in the lack of understanding that each HEI is distinct and different. It is  a failure to accept that HEIs are organisations needing managing, and that value for money by each is ensured by the actions from its centre.

6.                 The Committee appear to have a correct summary understanding that the 163 HEIs typically have about 2,000 employees and that their Vice-

Chancellors typically have a salary of £235,000. Thus the proposal to review all over £150,000, and the suggestion by some to actually limit the maximum to £200,000, could appear superficially as reasonable.

7.                 In fact, it turns out that the opposite is the case. That £200,000 should not be the maximum but represents a minimum for Vice-Chancellors’ pay for most full universities and equivalents. The two dozen smaller other HEIs can usually justify their current £100-£200,000 levels.

8.                 This note describes the evidence central for the appropriate Vice-Chancellor salaries of the 163 higher education institutions of the UK. It finds that for most full universities, pay of £200-450,000 can be justified.

9.                 After summarising the large range of HEI sizes, V-C pay is described in terms of reference points. First, relevant comparators and direct benchmarks from the External Context are described, then the Internal

Connections of the Vice-Chancellor pay with typical HEI pay structures. All

the evidence, especially from the current UK pay levels, consistently supports this £200-450k for full universities (eg over 1,000 employees).

Size Range of HEIs

10.            The 163 higher education institutions are much more varied in size than the Committee appears to have recognised, with deep implications for appropriate pay levels for their Vice-Chancellors. In terns of their employees, HEIs vary from under 100 employees to over 12,000 employees, a size range of over 100: 1. A uniform maximum pay across a size distribution of over 100:1 is a nonsense, denying they are different organisations, and would undermine effectiveness.

11.            Using HEFCE & TES data, the UK’s HEIs are summarised in these 7 groups with their median current Vice-Chancellor salary (Annex C):

12.               The 24 Russell Group universities are typically 3.5x the size of the 111 other CUC universities. There are currently 119 HEI Vice-Chancellors with salary over £200,000 (67%), of which 115 are in CUC universities (85%), and 4 in the 28 other HEIs [i]. To understand whether these salaries are justified, or the £200-450k range highlighted here, we turn first to the External Context and then to the Internal Connections.

External Context

13.            Some Committee members may not be up to date on typical UK senior salaries in 2017, particularly those at the higher end – such as within the

1% of UK employees whose  annual earnings are over £139,000.

14.            Inflation can undermine reference points. In just the 20 years since 1997, money wages and salaries have increased by 75%. So a salary then of £180k is today the same position as £315k. (One might be swayed by the first digits “1” and “3” for a false impression of “3x”.)

15.            First, the latest three Prime Ministers have held their salary down, but the

UK Prime Minister should officially be on over £300,000 pa:-

(a)             the SSRB (2007) officially recommend the Prime Minister should be on at least 3.5x the MP salary. The enquiry evidence from IPSA and elsewhere showed very consistently that MPs should have been be on £80,500 in 2012, and thus £84-86,000 in 2017 [ii], hence £300k for PM;

(b)             in the UK, the Lord Chief Justice is currently paid over £252k, and                 our Chief of the Defence Staff is paid £260k;

(c)              the Prime Ministers of Australia & New Zealand are on £260k and

£240k[iii], despite their populations being one third and one tenth the UK.

16.            Next, most Universities employ from 1,000 to 10,000 employees. So the Vice-Chancellor would thus be “1 employee in 1,000 or in 10,000 employees”. (Only 3,000 UK businesses have over 1,000 employees.) Across the UK, the “1 in 1,000” employee earnings level is £360,000 (2017), or

£210-230,000 in the Public & NFP 5 sectors. (see Annex D)

17.            Third, overseas comparators from English speaking countries also reinforce these background reference pay levels of £200-450k salaries for many UK university Vice-Chancellors. They are relevant for the upper end of university Vice-Chancellorships which may be subject to more international competition for post holders.

18.            The CUC evidence submission cited these ‘median’ HEI pay rates (at undisclosed exchange rates into £ [iv]) for English-speaking universities:

19.            These international reference points of £186-402k are all consistent with the

£200-450k being referred to here, and also with the range of £210/230£460/490k found above for 2017 within the UK Public and NFP sectors for such “1 in 1,000” and “1 in 10,000” employees.

20.            These External Context reference points also need to be matched with the relevant Internal Connections for Vice Chancellor pay.

Internal Connections

21.            The Vice-Chancellor is the leader of his or her organisation, and their salary must fit with the pay structure of their particular institution. The larger and more complex the organisation, the more managerial levels are appropriate for its management, and the higher the pay of its CEO. So the two distinct elements are

(i)     how many main levels are needed overall; and

(ii)   what is the appropriate pay ratio between them.

22.            Organisation levels are of two kinds: the main Accountability Levels are the ones of main reporting relationships to the manager to whom one is accountable, and the interim Responsibility Levels apply to additional skills, experience or team leadership roles. There are normally 3 Responsibility

Levels [v] within each Accountability Level.

23.            From the number of employees, the larger organisations of 10-20,000 will have up to 8 main Accountability Levels; the typical universities of 5-7,000 employees up to 7 main Accountability Levels; and the smaller universities of 1-2,000 employees up to 6 main Accountability levels.

24.            From extensive experience across thousands of years, as well as recently in both market and Communist economies, the normal pay ratio between such main Accountability levels is 1.62x the pay of the level below. This 1.6x ratio

is an empirically observed regularity (like “pi”).  It is resilient, and if compressed (eg 1970s) is always restored.

25.            For example:

(a)             amongst all the 6-700 quoted companies, the CEO is typically paid 1.6x the amount of the direct reports, the executive directors [vi] ;

(b)             within HEIs, the lecturers’ pay (£43k) has typically averaged 60% that of professors (£73k), but given the recent decline to 55% their union (UCL) is campaigning for a restoration of the 60% ratio.

26.            There are a few exceptions to this normal “corporate” pay ratio of 1.6x. Sometimes organisations choose to give equal emphasis to both performance accountability and to shared values, recruiting in only at the entry level or from very similar organisations, and so employ the

“collegiate” pay ratio of 1.38x. Examples include some senior public sector roles, such as ministers in governments or the top three tiers in UK local authorities.(A few experiments try a “communitarian” ratio of only 1.17x between the main Accountability Levels, on the grounds that for them shared values predominate over performance accountability, but such organisations do not survive long. The Church of England applied this from the 1990s.) But in corporate bodies with both performance accountability and values, the former matters.

27.            To illustrate the application to universities, an example for a 5-7,000 employee university requiring seven main Accountability Levels:-

28.            Pay structures within an organisation should cohere and be consistent across the organisation for all its employees contributing to its purpose, For those tempted to explore the application of the lower “collegiate” pay ratio within universities, despite it being markedly more egalitarian than the C20th ‘socialist’ pay structures of USSR & China, here are the required pay reductions in 2017 which could replace the illustrative Vice-Chancellor salary of £325k 9 with one nearer £150k:

29.            The largest universities may include an eighth Level, that of Pro ViceChancellor analogous to a full executive director with its full Accountability Level responsibilities. But if Pro Vice-Chancellors are present in medium sized universities, they are more as an interim Responsibility Level. For smaller universities of 1-2,000 employees, there may be several

Responsibility Levels between Professor and Vice-Chancellor, but whatever their names they are mostly in the one main Accountability Level.

30.            Thus across employee size ranges of institution one can reasonably expect typical salary rates (£kpa) of 

31.               The conclusion from this analysis of the Internal Connections to the university’s pay structure is that Vice-Chancellors’ salaries can again fairly

be expected to be in the range £200-450k, though it depends on the size of the institution. For any size there will be a range of salaries.

Particular Circumstances

32.               In addition to the External Context and the Internal Connections, there is the third element of Particular Circumstances either of the institution or of the individual to be taken into account. There may be times when a premium to the typical expected salary may have to be paid, for example for a key person whose expertise and experience are particularly sought to effect specific improvements to that institution.

Application in the UK

33.            The Committee might seek assurances as to how such Vice-Chancellor salaries of £200-450k align with the current levels of other senior UK pay, particularly among the other NFP & Mutual and the Public Sector pay for top positions.

34.            It would be unlawful for government or a government agency like the Office for Students (from January 2018) to interfere with any charity. Currently, it appears that any salary deemed to be somehow sufficiently out of line would prompt “a discussion” from OfS with the relevant Governing Body. A salary too high would raise questions as much as one too low. (eg Would a low paid Vice-Chancellor have the authority, the remit and the expectations of improving the HEI’s performance, or is the role and so the institution just coasting?)

35.            First the “Inform” approach. The Office for Students could inform HEI Remuneration Committees of the typical actual current salaries, by HEI institution size (see para 11 above and Annexes B & C). Simply informing Remuneration Committees of the present trend of typical salaries for each size of HEI might improve their decision-making.

36.            Second, the “Range” approach. The OfS could go further, publishing a table showing a range of typical current V-C salaries by institution size. Within that HEI range would be regarded as not unusual for that size of institution. Salaries outside that range, higher or lower, would “raise the director’s eyebrow”. An example is shown at Annexes A & B, which is the trend line fitted to current salaries with an illustrative range of +/-25%. Of today’s salaries, 83% fall within +/-25% of trend. Only a tenth are higher than expected from their size; a dozen are lower.

37.            Third, there is the “Upper Limit” approach. The OfS could “expect” the Vice-Chancellor salaries never to be higher than an upper limit, such as typical NFP & Mutual for that size of organisation. At present the current

Vice-Chancellor salaries do track very closely the NFP & Mutual and Public Sector pay rates from the “1 in 100” to “1 in 1,000” rates. But for most HEI institutions, over 1,000 employees, the typical salaries are markedly below these benchmark rates. At 10,000 employees, the typical university Vice

Chancellor trend is £320,000, whereas these few (“1 in 10,000”) in the NFP & Public Sectors are on £430-490,000. Overall, 85% of Vice-Chancellor salaries are below ‘public sector+10%’.(Examples of the “limit” method

Annexes E & F.)

38.            The 3 illustrations from the above current data are summarised below:

Conclusion

39.            These three approaches (“Inform the Typical”, or “Identify the Range”, or “Specify the Upper Limit”) can each inform the setting of appropriate Vice-Chancellor salaries. They all imply that salaries for university ViceChancellors could well be justified in the range £200-450,000 identified here, solely from the UK pay reference points and depending on the employee size of the institution and on its circumstances. 

40.            For reference, here are the estimated approximate numbers of UK employees with earnings above the £200-450,000 range [vii] potentially appropriate for Vice-Chancellors:

41.               So any suggestions of universal limits of £150,000 or £200,000 across all Vice-Chancellors’ salaries are simply unworkable and unsustainable, given the organisation sizes and the managerial requirements of all the universities and other HEIs concerned.

January 2018

Annex B - Illustration of RANGE of Appropriate V-C Salaries

Annex C -Vice-Chancellor Salaries by Size Group

Annex E - Illustration of UPPER LIMIT of Appropriate V-C Salaries

Annex F -Vice-Chancellor Salaries Relative to Company CEOs