Much of university executives¡¯ annual pay should be held aside for up to a decade while the long-term impact of their handiwork becomes apparent, an Australian Senate committee has?heard.

Economist Sean Leaver said 40 per cent of vice-chancellors¡¯ total remuneration, and 20 per cent of the earnings of other university executives, should be withheld in a ¡°deferred compensation¡± fund.

Those affected would be able to collect half of their deferred pay after five years and the rest in another five years, under Leaver¡¯s recommendation to the Education and Employment Committee.

¡°Clawback provisions¡± would allow universities to reclaim payments to executives subsequently found to have misbehaved or caused financial harm.

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The approach would help resolve a ¡°mismatch¡± between university executives¡¯ ¡°current observed performance¡± and the future effects of ¡°unobserved risky behaviour or malpractice¡±.

Leaver, a former banker, said the approach had been applied in finance in the wake of ¡°numerous high-profile cases¡± where the ¡°full consequence¡± of employees¡¯ performance had taken years to emerge.

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¡°By deferring some of a bank employee¡¯s compensation to a future date, an employee is motivated to ensure actions are aligned with the bank¡¯s long-term viability and performance,¡± he explained in a submission to the committee¡¯s university governance inquiry.

He said the idea had been enshrined in the Australian Prudential Regulation Authority (Apra) , which requires the governing bodies of financial institutions to maintain pay arrangements that promote ¡°effective¡± risks management, ¡°sustainable performance and ¡°long-term soundness¡±.

Apra-regulated entities are expected to defer 60 per cent of their chief executives¡¯ ¡°variable¡± remuneration, such as bonuses and incentive payments. For other senior managers or any ¡°highly-paid material risk-taker¡±, 40 per cent of variable remuneration must be deferred.

Leaver, a former staffer and doctoral candidate at RMIT University, has published numerous articles, book chapters, submissions and conference papers focusing on the behavioural economics of education.

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He warned against Australia¡¯s 2014 proposal to deregulate university fees, arguing that market-based assumptions ¨C for example, that high prices drove customers elsewhere ¨C were inadequate in explaining the complexities of educational choice, particularly when tuition fees were covered by income-contingent loans.

He also that if fee deregulation were to proceed, private fund managers ¨C rather than the government ¨C should assume the risk of non-repayment, as a way of pressuring universities not to set unrealistic fees.

Executive pay is a prominent topic in the 181 published submissions to the Senate committee inquiry. Mark Humphery-Jenner, associate professor of finance at UNSW Sydney, argued that university executives should be offered incentive payments tied to their institutions¡¯ financial viability.

But Humphery-Jenner cautioned against pay caps or government intervention, insisting that Australian university leaders were ¡°underpaid¡± compared with their counterparts in the private sector and overseas. He said that at least 240 US university presidents earned more than the typical Australian vice-chancellor¡¯s package of about A$1 million (?480,000), and scores of company chief executives received more than A$5 million.

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¡°If we reduce vice-chancellor pay, then those vice-chancellors can [move] to higher paid alternative jobs,¡± his submission says. ¡°No legislative change to executive pay is...warranted.¡±

Peter Tregear, an adjunct professor at the University of Adelaide, scoffed at suggestions that universities needed to pay executives enough to attract the best in a global market. He observed that the vice-chancellors of the nation¡¯s six top-ranked institutions were all Australian-born.

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john.ross@timeshighereducation.com