For-Profit Colleges Pay Executives Based On Profit, Not Student Success, Report Finds

For-Profit College Executives Paid On Profit, Not Student Success

Top executives at major for-profit colleges take in millions of dollars in annual compensation -- primarily from taxpayer subsidies -– yet most of their pay is unrelated to student achievement, according to preliminary findings from a congressional investigation.

The report from Rep. Elijah Cummings (D-Md.), the ranking member of the House Oversight and Government Reform committee, found that publicly traded college corporations calculate executive compensation "predominantly on the profitability of their companies rather than the success of their students."

"This is especially troubling given the billions of taxpayer dollars flowing into these institutions and the serious financial risks to students who go through these programs," the report concluded.

For-profit colleges receive much of their revenues from federal financial aid: student loans, Pell grants and military educational benefits. Yet students often fare poorly, dropping out in large numbers and defaulting on federal loans at double the rate of their counterparts at public institutions.

Cummings sent letters in December to 13 for-profit college corporations, seeking information on how the quality of education and student performance are tied to what he termed "lavish" executive pay at the schools. Chief executive officers at several for-profit education companies take in much more than presidents at some of the most prestigious U.S. private universities.

Todd S. Nelson, the former chief executive and now chairman of Education Management Corp., the nation's second-largest operator of for-profit colleges, took in more than $13.1 million last year. The highest-paid Ivy League president, Richard C. Levin of Yale University, received $1.6 million in compensation, according to tax filings.

In a preliminary report sent to Democratic members of the House Oversight and Government Reform committee on Friday, congressional staff found that "the single most significant measure for determining executive compensation at these schools is corporate profitability, including factors such as operating income, earnings, profits, operating margins, earnings per share, net cash flow, and revenue."

The report found that 10 of the 13 companies considered profitability for at least 70 percent of executive pay. The other three companies did not provide enough information to determine how student success factored into executive pay, according to the report.

For-profit colleges have increased revenues over the years by rapidly expanding their enrollments. From 1999 to 2009, the number of students attending for-profit colleges more than tripled, far outpacing the growth of traditional higher education, which grew by a fifth, according to an analysis of federal data from the Education Trust, a student advocacy group.

Although about 12 percent of college students nationwide attend for-profit schools, the sector is responsible for more than 45 percent of federal loan defaults.

In many cases, companies had executive compensation documents that made only "vague references" to student performance and "failed to indicate the specific extent to which these measures affect executive compensation," the report said.

At Career Education Corp., which owns the Le Cordon Bleu chain of culinary schools, 75 percent of executives' bonus pay was based on meeting profit goals, according to the report. The remaining 25 percent of executive compensation was based on "individual executive performance factors."

There were several optional criteria to determine an executive's performance at the company, including student graduation rates and career placement rates. But the company provided no details on whether those student performance goals were actually considered, according to the congressional report.

Nonetheless, all executives at the company reached 100 percent of their individual goals in 2010, the report found. Last year, the chief executive of Career Education Corp., Gary McCullough, resigned after an internal investigation found that the employees were artificially inflating job placement rates at some health and arts programs to remain in good standing with college accreditors -– and continue to be eligible for federal aid dollars.

A spokesman for Career Education Corp., Mark Spencer, acknowledged that the company used such a compensation plan for senior executives in the past. The company updated its compensation plan this year, he said -- a plan that now ties 66 percent of senior executives' potential compensation to student-focused goals unrelated to "any financial performance objective." The plan has not been released publicly.

A spokeswoman for DeVry Inc., Jennifer Dooley, wrote in an e-mail that "our first obligation is to our students, and our shareholders understand this." She continued: "They know that only by focusing on serving our students, and on delivering value over the long term, will we ensure our economic viability."

Representatives from 11 other companies mentioned in the report did not respond to requests for comment Friday.

UPDATE: 10:23 p.m. -- This article has been updated to include comment from a Career Education Corp. spokesman.

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