For university leaders, a little economics is a dangerous thing

The concern about the prolonged freezing of the teaching grant in England is understandable. The £9,250 cap has been in place for five years and will remain for the next two years at least. Critics note that its value will soon be the equivalent of £6,000 in 2012, the year that the fee cap was tripled from £3,000 to £9,000.

But the point is that income per student in 2012 (from fees and block teaching grant) was about £6,000 and universities got along reasonably well. The real problem is that the “markets” introduced since then have led to inefficiencies.

As we discuss in our 2019 book, English Universities in Crisis: Markets without Competition, the competition that the government expected a much higher fee cap to unleash didn’t materialise, so the Office for Students added regulatory burden instead. Now even the government is complaining about the bureaucracy it spawned, and the University and College Union and Universities UK are locked in a years-long dispute over the decimation of the pension system and (by the UCU’s figures) a 25 per cent real-terms fall in lecturers’ wages.

Vice-chancellors seem to believe the answer lies in a tighter relationship among pay, productivity and subject. But there are harsh economic consequences of that “right to manage” model. The (private) London Business School (LBS) goes toe to toe with the international giants and even in 2015-16 paid an average professorial salary of more than £200,000. Is that really what vice-chancellors have in mind? Is your university going to be able to charge the £97,500 that the LBS sets as its MBA fee?

The economics of remuneration systems holds important lessons that UUK and the Universities and Colleges Employers Association (Ucea) might find surprising. Ironically, the harder and more advanced the economics article you read, the “softer” it appears. Gone is the blunt reliance on markets and financial incentives, replaced by nuanced mechanisms to achieve efficiency of the sort that universities used to have.

The first point is that final-salary pensions systems are employers’ best friend. Except when you hit the lifetime cap, pensions receive hugely favourable tax treatment. More importantly, the final-salary system gives the employer huge power: the incentive of getting promoted towards the end of your career is leveraged up when the pay increase lasts not just through your last few working years but continues in your future pension. Instead of tapering off their contribution, the long-serving senior lecturer redoubles their efforts to become a professor.

Similarly, contrary to employers’ perceptions, incremental pay scales do not give long-serving employees an unearned gift. In fact, they allow universities to hire new entrants – to expand or refresh – at a discount because those new entrants expect to move through the increments and eventually up the ranks.

A wise university has a predictable and equitable promotions system that clearly rewards contributions but doesn’t promote too early. When vice-chancellors complain that they have unproductive academics, they are overlooking the fact that they (or their predecessor) promoted the professors, while the lecturers don’t have the incentive to succeed because there’s no clear route to promotion – often because the system doesn’t reward performance. Find other ways to recruit, such as market supplements or offering a supportive environment.

Don’t match outside offers, though. This creates inequality, particularly if women are less mobile for child-caring reasons, but it also doesn’t work. It encourages academics to focus on externally observable activities rather than internal service. They spend their time hunting for new jobs that they are hoping to not take. Call their bluff and wave them goodbye.

But don’t replace them with teaching-focused academics. The natural career cycle – particularly if universities fail to maintain incentives throughout – means that, for some academics, publications slow down. These people still want to contribute, and their experience can make them amazing lecturers, particularly for large first-year courses. But, wait, you’ve already hired a teaching-focused professor at relatively high pay to teach that course.

Don’t lose sleep, either, if you have too many professors in your French department. Make your management studies students take courses in the humanities. Take advantage of the buyer's market to become a world-leading university in French literature. And remember that fashions shift and you may have to find something to do with all your surplus management professors in a few years.

Finally, bear in mind that the more universities focus on money, the more they will need to come up with. Such “extrinsic rewards” drive out intrinsic ones, such as job satisfaction, collegiality, research time and autonomy. Yes, you need to recognise your best academics in promotions and pay, particularly in high-demand fields. But if it’s all about pay, you can’t afford it.

So rebuild the things that got good academics to work for you in the first place. Restore the supportive, constructive style of administration that once was the norm. Hire more academics to lower the student-to-staff ratio. Provide more administrative front-line support to students and academics. Improve classroom and other academic facilities. Increase academic pay to match inflation.

This is economics, not rocket science. But vice-chancellors need to work harder on their homework. In economics as in all fields, a little knowledge is a dangerous thing.

Jeff Frank is professor of economics at Royal Holloway, University of London. Norman Gowar is professor emeritus of mathematics at the University of London. English Universities in Crisis: Markets without Competition is published by Bristol University Press.