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Head Compensation: The Race to the Top

While the compensation of some independent and international school heads may have been held in check during the recession, and some heads may have passed up salary raises or bonuses until a more prosperous future time, several factors have caused a substantial jump in compensation patterns and trends for heads of schools in the past year.

Of course, in the United States, many schools are still suffering from weak enrollment and the effects of increased and unsustainable (and unfunded) need based financial aid that maintains diversity as well as the public perception of full enrollment. But even in these schools, boards have come to realize that real leadership and talent may be even more valuable now than it is in flush economic times.

1. The Search for Talent

Just as in the corporate world, there is a great demand for innovative and strong leadership in the independent and international school realm. This Search Consultant has observed that a number of schools are fishing in the same pond for talent, leading to competition and higher salaries. Whether a head is in the market or simply open to a conversation from a search consultant, he or she will find that a number of schools have raised the ante in major ways to ensure that they land the best available candidate. One international school head with a package valued at 650,000USD was recruited to another international school for 750,000USD, as one example.

This is out of reach for the majority of our schools but where to start when designing a competitive head of school compensation package? Boards will ask this Consultant periodically what the relationship is between what a teacher is paid and what the head is paid. The differential is nowhere near as wide as in the corporate world between the salary and benefits of the CEO relative to his average employee. Nor should it ever get there. However, if one takes the salary of the highest paid full time teacher and multiplies it by two, one should arrive at the salary of the highest paid administrator, NOT including the head. If, in turn, one multiplies that salary by two, and then adds housing, deferred compensation, possibly a club membership and more tuition remission than what other faculty and staff receive (if applicable), then one is approaching a number for a total head compensation package.

2. The Drive for Retention

A number of schools have offered retention bonuses and other unique elements of compensation packages in order to ensure that a valued school head does not jump ship due to the lure of a nicer location, a better family option, or a return to one’s home base. In one case, a Board agreed to fund university tuition for four children over a period of years including a gross up for taxes, making the value of just that portion of the package worth over one million dollars.

Of course, the caveat in the United States is that the compensation packages for all Head of School/CEO/ Executive Directors of 501(c)(3) organizations must pass safe harbors muster. In addition to satisfying the IRS, these compensation packages must not draw unwelcome attention from the Attorney General’s Office in the organization’s state. In a highly publicized case in New York, two brothers are undergoing an investigation by the Attorney General for allegedly paying themselves exorbitant salaries as executives of a large partly state funded organization that serves adults with special needs. As a result, all similar organizations in the State now have to complete an exhaustive compensation survey and submit it to the Office of the Attorney General.

3. Planning for Retirement

More schools are beginning to understand the need to assist heads in their retirement planning in a tax smart way. Most heads are former teachers and hence “caregivers” who have not necessarily saved adequately or engaged in financial planning. Many boards in the US are providing an annual benefit of up to $5,000 for a professional who will assist the head in planning for the future.

In another recent case, a very fine international Head had some major challenges to complete at his School before his planned retirement. However, he had not amassed much in savings due to the needs of his large family over the years. The School provided for him a limited retirement asset of over 1,000,000USD spread over five years as an incentive to serve out his tenure. Thus, the Board helped to solidify the School’s as well as the Head’s future.

4. The Entry of the For Profit Schools

Historically, international schools were either small family owned ventures or international English speaking schools for expat families with elected boards modeled on the US public school tradition.

Many of the smaller family owned schools paid modestly for leadership, in recent years not surpassing 300,000 USD in total value. Some of the early conglomerates emanating out of the Middle East, India, the UK, and Dubai also paid rather modestly for head of school talent because there were many layers of management between the head and the CEO. The salaries paid to those middle managers above the head/director took away from the monies paid to the head/director.

Now many major “third” players have emerged. These are large corporate entities or partnerships that are buying up small family owned schools or launching new schools, often called “international.” These schools are competing aggressively for the best available talent in the marketplace. They are paying top dollar or in local currency to lure highly capable heads with strong national, regional or international track records to assume the leadership of their fledging schools and give them immediate credibility.

Some of these head packages are near 800,000USD in total package value, not including stock options that could reach 1,000,000 to 2,000,000USD per year.

In fact, in the United States alone, while $500,000 in total package value was once considered high, there are now many heads with over $600,000 in package value and increasingly more at $700,000 plus.

What Next?

A major element that seems to be driving up these packages is significant bonus or deferred compensation incentives that relate in part to a healthy bottom line: increased enrollment through new student numbers and improved retention; greater annual giving; and surpluses generated.

Boards are asking heads to create unique profit centers that in the past would not have been conceivable. Some of these new profit centers, even for nonprofit schools, include satellite schools in the area or more likely in India or East Asia. These can generate as much as one to two million in US dollars a year in returns to the “mother ship.”

Another byproduct of the rise of head of school compensation is the “trickle down” effect. This has also caused a jump in the pay of the middle ranks of heads in the US and elsewhere, i.e., those earning between 300,000USD and 500,000USD in total pay.

The patterns noted above, in our opinion, are not short term, but rather reflect a powerful new shift in executive compensation. The entry into the market of an aggressive new group of for profit ventures willing to buy the “reputation” of a head in order to launch a new school or strengthen an existing one, means that a whole new level of competition has entered the field.

John Littleford
Senior Partner