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Education Department's Clarification of New Incentive Compensation Payments Regulations Raises Questions

  • April 6, 2011

The Department of Education has released general guidance in a “Dear Colleague” letter to clarify issues arising under its new Title IV Program Integrity Regulations. The regulations, scheduled to take effect on July 1, 2011, extend the ban on incentive compensation to athletic personnel who engage in recruiting activities for colleges and universities.  While the clarification seems to answer some questions, it raises others.

Among other things, the new regulations change the rules governing programs authorized by the Higher Education Act of 1965 (“HEA”) to eliminate the 12 “safe harbors” that excepted certain payments from the HEA’s ban on incentive compensation payments based on securing student enrollment or the award of financial aid.

In its October 29, 2010, comments to the final Title IV Program Integrity Regulations, the Department said the ban applies “to all employees at an institution who are engaged in any student recruitment or admission activity or in making decisions regarding the award of title iv, HEA funds.”  The Department included athletic department staff in the class of recruiters, stating that “recruitment of student athletes is no different than recruitment of other students.”  At the same time, the Department concluded that incentive payments made to athletic personnel based on such factors as “team academic performance” would not violate the ban.  This naturally led to questions about whether incentives tied to related factors, such as graduation rates, were equally exempt from the ban.

Elsewhere in its comments, the Department stated that “paying bonuses to recruiters based upon retention, completion, graduation, or placement remain in violation of the HEA’s prohibition on the payment of incentive compensation.”  This suggests that bonus payments made to athletic personnel based on team cumulative GPA was acceptable as a form of “team academic performance,” but that graduation were not.
The limited exception for “team academic performance” also raised the question of whether student academic performance could determine incentive compensation payments for other school personnel.
In the following excerpt from the Dear Colleague letter, the Department rejected a broad application of the rule:

Question 5: Can institutions make payments to persons or entities engaged in any student recruitment or admission activity or in making decisions regarding the award of financial aid based upon the institution’s students’ academic performance while enrolled?

Answer 5: No. The compensation of recruiters based on the academic performance of the students recruited violates the incentive compensation ban. (See 75 FR 34817-3481 (June 18, 2010).) However, many activities are not considered recruitment activities subject to the ban on incentive compensation as shown in Table 1. To the extent that  employees are engaged in these other activities their compensation may be based on successful student performance.  The preamble noted that bonuses for athletic personnel to reward performance other than securing enrollment or awarding financial aid, such as a successful athletic season, team academic performance, or other measures of a successful team, are permitted. (See 75 FR 66874-66875 (Oct. 29, 2010).) This statement merely reflects the fact that the payment of bonuses to athletic personnel is a common practice and is not typically viewed as incentive compensation based on recruitment of individuals as students, but at most may indirectly reward success in recruiting that small subset of individuals whose enrollment would benefit the institution’s athletic program. This discussion was not intended to suggest that incentive payments in other areas of the institution are allowed.

Although the Department’s response clarifies that the exception for student academic performance applies only in the athletic context, it does not expressly say whether “team academic performance” also includes graduation rates.  This can lead to conflicting interpretations on whether incentive payments based on team graduation rates is a violation of the HEA.  A narrow reading would limit incentive payments based on team cumulative GPA only, and not graduation rates, which the Department considers to be an indirect form of “securing enrollment.”  A broader interpretation is that athletic personnel may be paid bonuses based on graduation rates because coaches are not recruiting individuals for the purpose of increasing student enrollment.  Rather, according to the Department’s response, coaches recruit individuals for the benefit of the school’s athletic program.  Thus, coaches recruit athletes, not students.  This view may support the position that athletic personnel are fully exempt from the incentive compensation ban because their recruitment efforts do not constitute a covered activity.  Not only would the payment of bonuses based on graduation rates be acceptable, but so would anything else. 

It is uncertain whether the Department intended the broader interpretation.  If the Department believes athletic personnel are not recruiting for purposes of increasing student enrollment, then it must revisit its position that recruitment of student athletes is “no different” from recruitment of other students.  The Department also must examine its apparent separation of graduation rates from student academic performance, or at least provide a better justification for the different treatment.  The current rationale — that graduation presupposes student enrollment — is insufficient to warrant the distinction.  Academic performance also presupposes student enrollment, and neither enrollment nor academic performance guarantees a student’s graduation.
The Department’s non-binding guidance creates more questions than it answers, but no further explanation is likely to be provided before the final regulations go into effect.  The issue likely will play out in audits, enforcement proceedings, and litigation.  This offers little solace for institutions that have incentive compensation in their existing coaching contracts.  They are burdened with deciphering the Department’s regulations and ensuring their contracts comply with the law.  The ambiguity in the Department’s letter surely means the issue of incentive compensation will resurface.

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