November 10, 2010, 4:12 PM EST
(Updates with closing share prices in the 10th paragraph.)By John Hechinger and John Lauerman
Nov. 10 (Bloomberg) -- Strayer Education Inc., a chain of for-profit colleges that receives three-quarters of its revenue from U.S. taxpayers, paid Chairman and Chief Executive Officer Robert Silberman $41.9 million last year. That’s 26 times the compensation of the highest-paid president of a traditional university.
Top executives at the 15 U.S. publicly traded for-profit colleges, led by Apollo Group Inc. and Education Management Corp., also received $2 billion during the last seven years from the proceeds of selling company stock, Securities and Exchange Commission filings show. At the same time, the industry registered the worst loan-default and four-year-college dropout rates in U.S. higher education. Since 2003, nine for-profit college insiders sold more than $45 million of stock apiece. Peter Sperling, vice chairman of Apollo’s University of Phoenix, the largest for-profit college, collected $574.3 million.
Education corporations, which receive as much as 90 percent of their revenue from federal financial-aid programs, are “private enterprise that’s almost entirely publicly funded,” Henry Levin, director of Columbia University’s National Center for the Study of Privatization in Education, said in a telephone interview.
Students at for-profit colleges are defaulting on their loans at three times the rate of those at private, nonprofit institutions, according to data from the U.S. Department of Education, which is tightening regulation of the industry. The graduation rate for first-time, full-time candidates for four- year degrees at for-profit colleges is 22 percent, compared with 55 percent at state colleges and 65 percent at private nonprofit universities.
‘Public Trough’
“For-profit colleges are reaching into the public trough to finance luxurious lifestyles at the expense of people who are going to have to pay back loans,” said Levin, a professor at Columbia University’s Teachers College in New York.
John G. Sperling, Apollo’s 89-year-old founder and executive chairman, received $263.5 million from stock sales during the last seven years. Robert B. Knutson, retired CEO and chairman of Pittsburgh-based Education Management, the second- largest for-profit college chain by enrollment, got $132.4 million. Dennis Keller and Ronald Taylor, former co-CEOs of DeVry Inc., a Downers Grove, Illinois-based for-profit higher education company, together collected $110.4 million in stock proceeds.
‘Appropriate’ Rewards
Industry executives deserve to be rewarded because of their records as entrepreneurs and the performance of their companies’ stock, said Harris Miller, president of the Washington-based Association of Private Sector Colleges & Universities, which represents the industry.
“If a company has done well, and the market has rewarded executives, that’s totally appropriate,” Miller said in a telephone interview. “These guys were in it for the long term. They believe in the sector. They weren’t in it for a quick buck.”
Apollo shares doubled over the last decade, even after dropping almost 40 percent this year because of investor concern that new government regulation will reduce enrollment and profits. Strayer and DeVry shares each more than doubled since the beginning of 2003, even after stocks in the industry declined 32 percent this year through today, according to an index of 13 companies.
Apollo fell 21 cents, or less than a percent, to $36.63 at 4 p.m. New York time in Nasdaq Stock Market composite trading. Strayer declined $2.60, or 1.8 percent, to $144.33. DeVry fell 11 cents, or less than a percent, to $46.79 in New York Stock Exchange composite trading. The education stock index retreated 1.8 percent.
Exceeding Harvard
The windfall to executives at for-profit colleges towers over the rest of higher education.
Harvard University in Cambridge, Massachusetts, pays President Drew Faust $800,000 a year. Shirley Ann Jackson, president of Rensselaer Polytechnic Institute in Troy, New York, received $1.6 million and was the highest-paid president of a nonprofit or public university, according to Chronicle of Higher Education surveys of the most-recent college filings. The median annual pay of presidents at private nonprofit universities was $358,746, compared with $627,750 at large, private research universities, the Chronicle found. Heads of public institutions took home a median $436,111, according to the Chronicle.
At Strayer, Silberman heads a chain of colleges with 54,000 students last year, about the size of New York University, based in lower Manhattan. Silberman’s $41.9 million pay package amounted to 32 times NYU President John Sexton’s $1.3 million a year.
Soaring Stock
Silberman received a $40 million stock grant in 2009 that vests over 10 years, David Wargo, a Strayer director and former head of the company’s compensation committee, said in an e-mail. After Silberman arrived, Strayer shares rose almost 10-fold through 2009, when the grant was made, Wargo said. Silberman will receive none of the stock if he leaves the company before 10 years, so the grant is aligned with shareholders’ long-term interests, making it “consistent with best compensation practices,” Wargo said.
Silberman oversees 86 campuses, while NYU centers on New York City, Wargo said. Sondra Stallard, president of Strayer University, the company’s primary educational unit, is paid similarly to Sexton, Wargo said.
NYU has 18 schools and colleges in New York and sites abroad, including a degree-granting campus in Abu Dhabi, said university spokesman John Beckman.
University of Phoenix
The enrollment of Apollo’s University of Phoenix, 470,000, is about the same as that of the State University of New York system. Apollo co-CEO Charles Edelstein received $6.75 million in the year ended Aug. 31, 2009, 12 times the pay of Nancy Zimpher, who gets $545,000 a year as SUNY chancellor. William Pepicello, president of the University of Phoenix, is a closer comparison with Zimpher and receives cash and stock compensation of $1.8 million annually, said Apollo spokesman Ryan Rauzon.
Over half a century, Apollo’s John Sperling, a former college professor raised in a log cabin in the Missouri Ozarks, pioneered the for-profit college industry, Rauzon said. Sperling improved access for the poor, providing courses on demand, online and at night, Rauzon said. The “overwhelming majority” of the shares that John and Peter Sperling sold are founders’ stock that had been held for decades, Rauzon said.
The Landscape
“John Sperling had a revolutionary idea, and we think it has changed the landscape of higher education for the better,” Rauzon said in a telephone interview. “When you look at him as a founder and entrepreneur who has improved the lives of millions of Americans, that alone explains his compensation.”
An Aug. 4 report by the U.S. Government Accountability Office, Congress’s investigative arm, found that recruiters from Apollo and other for-profit companies misled students about the cost and quality of courses. About 13 percent of University of Phoenix students default in the first two years during which they are required to make payments on their student loans, three times the percentage at private, nonprofit colleges, Education Department data show.
Apollo has eliminated incentive pay for recruiters, monitored phone calls and started a program that lets students sample courses for free before committing, Rauzon said.
Indebted Barista
Jolene Daly, who lives in Turlock, California, borrowed $54,000 to pay for her bachelor’s degree from the University of Phoenix. She now works as a barista at a Starbucks Corp. coffee shop, making $8.94 an hour. Apollo should spend less on its executives and more on its instructors, who were poorly qualified and unprepared for courses, she said.
“It’s nice to know that that’s what I was paying for, because it certainly wasn’t the courses,” Daly said in a telephone interview. “It’s kind of infuriating.”
Apollo spends $2.1 billion annually on education and instructional costs, which is more than any other expense and “commensurate with what our students need,” Rauzon said.
Seven of the 15 higher education CEOs were paid more than their peers at similarly sized companies, according to Equilar Inc., a Redwood City, California-based executive-pay researcher. Equilar tallied salary, bonuses, long-term incentive pay, stock awards, the value of stock-options grants and perks from SEC filings. Equilar didn’t include the change in value of executive pensions.
Annual compensation ranged from Silberman’s $41.9 million to $413,000 paid to Donald Graham, chairman and CEO of Washington Post Co., which owns the Kaplan higher-education chain, the nation’s third-largest by enrollment.
Silberman’s annual compensation would have ranked him eighth on Equilar’s list of the highest-paid executives at the largest 1,000 companies. Strayer was too small to make the Equilar list.
Stock Options
Andrew Clark, president and CEO of San Diego-based Bridgepoint Education Inc., ranked second among for-profit colleges in annual pay. His compensation amounted to $20.5 million, according to an SEC filing. Clark’s 2009 pay was an anomaly because he received a $19.4 million stock-option grant, most of which was related to the company’s April 2009 initial public offering, said Bridgepoint spokeswoman Shari Rodriquez.
The number of students attending for-profit colleges rose to 1.8 million in 2008 from 550,000 a decade before, Education Department data show. Since 1998, annual industry revenue increased almost sixfold, to $33 billion, according to an estimate by Trace Urdan, an analyst with Signal Hill Capital Group in San Francisco.
Transformation
The industry has transformed itself, growing from its roots in trade schools for auto mechanics and massage therapists to offer bachelor’s and even graduate degrees. For-profit colleges cater to low-income and minority students often neglected by traditional institutions, the industry group’s Miller said. Higher default rates reflect the socioeconomic status of students, rather than the quality of institutions, he said.
Students, not colleges, apply for federal grants and loans to pay tuition and fees, so the companies aren’t directly subsidized by taxpayers, Miller said. State and private universities also receive government money, while education companies pay taxes, reducing their cost to the public, he said.
The executives with the biggest gains -- including the Sperlings at Apollo -- sold substantial holdings before their companies’ stocks fell because of proposed government rules restricting recruiting and tying federal financial aid to student-loan repayment rates.
To identify those winners, InsiderScore.com, a Princeton, New Jersey, company that analyzes insider transactions, compiled data for the seven years starting in July 2003, when electronic stock-sales data became available.
Finding Winners
Share proceeds start with the overall sum received from selling stock over the seven-year period. To approximate gains, InsiderScore then subtracted the value of open-market purchases and the cost of exercising options in that time frame. Because of the limitations of publicly available data, the proceeds may include amounts that executives paid for shares or options in earlier years, including when companies were private.
Not all the shares sold were granted by company boards as compensation. Executives also sold long-time holdings of founders’ shares or, in the case of the Washington Post, inherited stock in which the CEO had no ownership interest.
Washington Post
SEC filings show $65.7 million in stock sales during the last seven years under the name of the Washington Post’s Graham. The family held the shares for decades, largely in trusts for the benefit of siblings and their children, according to Post spokeswoman Rima Calderon. Graham acted as a trustee and had “no beneficial interest” in the proceeds of the sales, she said. Graham also transferred stock to his ex-wife, Mary Graham, Calderon said. None of the stock originated as compensation to Graham, she said. Filings confirm her account.
The SEC is conducting an informal inquiry into Apollo’s insider share sales. The inquiry relates to disclosures of information about an early 2009 Education Department review of Apollo’s operations, the company said Oct. 26. Apollo said it was cooperating.
John Sperling and his 50-year-old son, Peter, have sold a combined $837.8 million in Apollo shares since 2003, filings show.
The Sperlings have been diversifying their investments, selling shares during SEC-sanctioned “windows” for disposing of stock, Rauzon said. On Nov. 1, Apollo said it would initiate a trading plan for the Sperlings that would further restrict the timing of stock sales. The father and son still hold Apollo shares valued at about $770 million, filings show.
Fighter Pilot
Education Management’s Knutson, who made $132.4 million in stock sales, is also a founder. Starting with the Art Institute of Pittsburgh, Knutson, a former fighter pilot and Wall Street banker, built a national chain that now has 158,000 students.
In 2006, Knutson, then CEO, sold Education Management to a group of private-equity firms, led by Goldman Sachs Group Inc., for $3.4 billion. Education Management, which went public again in October 2009, now has a market value of about $2 billion. Jacquelyn P. Muller, a spokeswoman for Education Management, declined to comment on Knutson’s stock sales.
DeVry’s Keller and Taylor, who founded for-profit Keller Graduate School of Management in 1973, bought Oakbrook Terrace, Illinois-based DeVry in 1987. Their combined stock sales of $110.4 million reflect decades of investment in DeVry, Joan Bates, a company spokeswoman, said in an e-mail.
“Dennis and Ron were entrepreneurs who started this organization from scratch,” Bates said. “They made tremendous sacrifices and took on a great deal of financial risk.”
Taylor remains a DeVry director and senior adviser. Keller retired in 2008 and is a senior adviser.
Using Fortunes
For-profit college executives have used their fortunes to fund outside investments and interests.
Peter Sperling owns a Santa Barbara estate with a $20 million tax value. He is selling a “neoclassical villa and guest house” in San Francisco, which is on the market for $47 million, according to a listing. Rauzon declined to comment on Sperling’s property.
Keller has been a trustee of both his alma maters, Princeton University in Princeton, New Jersey and the University of Chicago, two of the nation’s wealthiest nonprofit colleges. He has given at least $50 million combined to the two universities, according to announcements from the institutions. Princeton named an engineering education center in his honor. DeVry won’t comment on Keller’s philanthropy, Bates said.
Student Loans
Maria Avila recently got her master’s degree in business administration from DeVry’s Keller Graduate School of Management and also has a bachelor’s from DeVry. A 44-year-old single mother and Mexican immigrant, she is featured in a promotional online video of school success stories.
Avila owes $74,000 in student loans, which she must repay on a $40,000-a-year salary as an accounting clerk for a Chicago television station, she said. Keller should have given money to a scholarship fund at DeVry, Avila said. Bates declined to comment.
“I’m like, ‘Give it to me,’” Avila said. “I need it.”
--With assistance from Stephen Grove in New York. Editors: Robin D. Schatz, Jeffrey Tannenbaum
To contact the reporters on this story: John Hechinger in Boston at jhechinger@bloomberg.net; John Lauerman in Boston at jlauerman@bloomberg.net.
To contact the editor responsible for this story: Jonathan Kaufman at jkaufman17@bloomberg.net.
