Tuesday, January 18, 2011

Profit Sharing in Higher Education

Colleges should really consider using some motivational solutions from outside of academe to help out while financial challenges hit home. One such solution that has worked well in many business is profit sharing. Profit sharing in higher education? That’s a crazy idea. First we are not businesses. We don’t try to produce a profit. Profits are for proprietary schools with stock holders. Our stock holders are students and the public. And two, even if we did, there have not been any profits in a  long time. Deficits we have. Profits…no.

First, colleges can and do create profits. We just don’t call them that. Our fund accounting approach to budgeting has us call profits  fund balances or surpluses. There are times when at the end of the year there is unspent money that has not been encumbered. That extra money is a surplus in the budget. The surplus money goes into a rainy day fund for future use, If we were for-profit that surplus would be called profit and we would either take it or share it with stakeholders through dividends, payments or bonuses. In fact, a major difference between a good not-for-profit school and a for-profit school is their accounting systems. Fund balance for not profit. Cash accrual for for profits. Other than that, a good school is a good school. A bad one bad whether for profit or not.

So my suggestion is that colleges set retention and thus fiscal profit objectives above what is planned fore in the budget and then share the profit. If for example the college sets its revenue and expenditures at $10,000,000 for the year. This is the money that the school officially and actually plans to take in and then spend. If it hits the revenue goals then it will hit the expenditure goals and voila, no profit.  This is the usual budgeting process.

But what if Mammon University then said any revenues we receive above $10,000,000 will be shared with the entire college’s almost 300 full and part-time faculty, staff and administrators. That would probably make some people very happy including then folks I met recently who said they are teaching 18, 21 and even 25 hours to make their own personal financial needs work. Their basic salary just was not cutting it. They realized that Mammon was not able to do much more in the way of raises since there was little money available for them. Tuition was being raised to meet current expenditure demands and external general funds were just falling way short. So any additional pay would have to come from outside of the annual budget since every dollar was accounted for in it.

But where could any additional funds come from.  Mammon could not get more new students to pay tuition. The classes ware filled to capacity right now. There is no more money to hire additional faculty and staff to take care of more new students. Well, what about if the school determines that though it cannot get any more new students it could keep more of those they had. They worked hard to get them,; now they needed to work as hard to keep them.

The budget was formulated with the average attrition percentage of 25%. So the budget expects that during the year, it will lose 50% of its class.  There is a great deal of opportunity there to increase retention and thus profit – revenues above what were set in the budget. All is needed is to keep more students.

With a 25% annual attrition rate, that means that during the year if the enrollment population started at 12,000 for instance, that puts 3,000 students at potential to drop out. That makes 3,000 opportunities to generate revenue in excess of budget.

So let’s say the Mammon agrees that it will share any profit with the college in the following manner. The school will keep 50% of the profit. We will give faculty 30% of profit in equal shares with full time getting 25% of the money and adjuncts sharing 5%. Staff will get 15% of the profits to share and administrators will share 5% of the profits.  There are 90 full time faculty, 72 adjuncts, 80 full time staff and 25 administrators for a total employee population of 195 full-time and 72 adjuncts at Mammon.

For every student that is retained over the budgeted 9,000 considering that most students leave after first semester is over or at least after classes have started and full fall tuition is received, Spring semester revenue is what is available to recoup. Half of the full annual tuition figure. (I’m leaving fees and other revenue generators out in the example.) So each student retained would add at least $6000 to the profit sharing pot with the following values to the school and employees.

A gain in unbudgeted retention would yield
1%  30 students or $180,000
2%  60 students $360,000
3% 90 students $540,000
5% 150 students $900,000 and
10% 300 students and $1,800,000 to share.

At just a 1% gain (Merely 30 students) Mammon would gain $90,000. The 90 full time faculty would share $45,000 or an additional $500 each. Adjuncts would receive $4,500 to share; staff would receive $13,200 and administrators $4,500. All of this would be money above and beyond regular salary and not computed as part of base salary which would make a difference later.

Let’s say Mammon increased retention by 5% (just 60 more students) of the available population. The University would receive $450,000; faculty $225,000; adjuncts $22,500; staff $66,000 and administrators an additional $22,500 to share. If Mammon’s employees really out out an effort to retain even more students and hit ten percent, all the numbers double.

As to grade inflation, well, the grades are already inflated but the University could calculate the average grades in a class and even section over the past five years and use that as a base to detect any inflation.  The whole set-up could include a limitation ion grade inflation to be not a factor by saying all grades need to fall into the patterns from previous years. There could even be penalties for any grade inflation detected.

The scheme provided puts the emphasis on faculty. That is because faculty can figure into decisions to stay or leave more than others. What customer service the  faculty deliver can be the primary factor in a decision to stay or go. Moreover, a school will need faculty buy in so having more to share might help achieve that buy in.

And everyone benefits.

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1 comment:

Tyson Cooper said...

This is a wonderful idea, however, federal Title IV legislation may soon prohibit it. Currently there are several "safe harbors" for schools to tie incentives to enrollment. It is currently proposed that these safe harbors end in July 2011. At that point "postsecondary institutions cannot tie commissions, bonuses, or other incentive compensation to recruitment or awarding financial aid." One might be able to interpret this very liberally and go ahead anyway but they would be on shaky ground. It's sad but true. Otherwise revenue sharing is a wonderful motivator.