In economics theory, goods and services are priced by the market, i.e., supply and demand determine the outcome(s). Let us use the Neoclassical economic theory to examine if this is the case in higher ed industry. When the resources are abundant, there is no issue to pay whatever price asked by the service providers. This sounds more like a non-market solution which may lead to inefficiency? Are we correct? But thing, is a bit different when most schools are experiencing budget cuts from the state, waning federal dollars, when donations are getting much smaller or even more challenging when total student enrollment drops. Worse if these four elements occur at the same time. How colleges and universities in the US are going to fund their activities and cover their expenses?
In the past weeks, there were several articles discussing college and university administrators salary. For example, when NY governor planned to expand aids for in-state, it appears that the Bundy Aids, which supposed to help paying students’ tuition went somewhere else, such as to pay the administrators salary. Another example comes from FL. The lawmakers in that state have questioned Broward College president’s salary recently. Similar kind of situation at MSU. When she quits her post, the school pays pretty well chunk of money to president, according to some analysts.
The question that one might have is that, what appropriate methods or approaches to use, if any, to determine campus administrators salary? Manufacturing industry follows the so-called product costing discussed in managerial or cost accounting college textbooks. Basically, there are three elements that make up the total cost such as direct material, labor and overhead or indirect cost. The product costing theory discusses further the issue of standard or full costing as the basis in product & pricing strategies. A question that one might have is that, in service industry such as higher ed, what will be the appropriate way to price the administrators salary? They indirectly contribute to the students’ class room activities. So, their salary can be classified as overhead cost. If there is no scientific method that can be applied/used to price their contribution, then their salary may have been determined, so far, using some sort of arbitrary methods or guidelines, which do not have any clear scientific justification.
Neoclassical economists such as Pareto hypothesized that the price paid to the last hired worker should not surpass his or her contributing productivity (example, if her or his contribution has a value of $10, then the max amount that they can be paid is $10). The question will be, how can one measure an administrator (Example: a college president) productivity?
Plus the Neoclassical economic theory applies basically to for-profit organizations, which may not be appropriate for non-profit institutions such as colleges or universities? Will then the non-market solution, such as bargaining is the best efficient solution? We invite the best brain in this country to think about this challenge. If this question can be answered, then what one needs is mathematical proofs to justify it. Believe us, that this will be a significant contribution not only for this country, but also the academic world.
If there is a managerial accounting or a mathematical economist genius who happens to read this post, please share your opinion along with your logical (math) proofs. Thanks!