The Last Round of Sparring on Incentive Compensation

Prohibited!  That has been the word on the streets about incentive compensation offered by postsecondary educational institutions.  More specifically, the October 29, 2010, Program Integrity Regulations[1] made this prohibition applicable to individuals involved in the recruitment or admission of students, as well as those involved in making decisions about student financial aid.  These regulations related to incentive compensation were generally effective July 1, 2011.  But, was the ban on incentive compensation for recruiters all encompassing?  What is the latest from ED on the matter?

The Challenge

When the October 29, 2010, regulations were finalized, it was not long before a legal challenge to the incentive compensation section of the rules was presented.[2]  The case brought by the Association of Private Sector Colleges and Universities (APSCU) against the Secretary of the U.S. Department of Education (ED) took some time to work through the system, but the end result was that the Court remanded two items back to ED for a more focused response.  The specific areas to be addressed further were why ED did not adequately:

1)     explain their elimination of the safe harbor provided in the prior November 1, 2002, regulatory rendition that allowed compensation that was based upon students successfully completing their program and,
2)     respond to commenters’ concerns about the adverse affect the regulations may have on minority enrollment.

The Comeback

An initial effort made by ED to respond to the Court’s concerns resulted in ED’s modification to its earlier reply to a comment from the community in the preamble to the October 29, 2010, regulations.  The response ED gave states that “because a student cannot successfully complete an educational program without first enrolling in the program, the compensation for securing program completion requires the student’s enrollment as a necessary preliminary step.”[3]  Therefore, ED’s expressed view was that the ban on incentive compensation for recruiting students was applicable because a student could not successfully complete a program unless first they had been recruited into the program.  Therefore, incentives would continue to not be allowed for compensating an employee based upon his or her success in seeing students recruited actually complete their programs.  However, ED’s reply did not satisfy the Court.  It determined that ED had not adequately explained and supported its rationale to ban schools from compensating recruiters based upon students’ completion of their educational program.  Thus, as a result of a subsequent District Court order, ED was required to provide additional clarification and information about the incentive compensation section of the final regulations issued October 29, 2010.

ED next tried to provide an answer to the questions about the effect the ban on incentive compensation for recruiters would have on efforts at increasing minority enrollment.  The Department’s explanation stated somewhat simply that the regulation was not selective in the reasons an institution may have wanted to provide incentive compensation.   ED’s assertion was that the regulation does not distinguish between incentives for staff recruitment actions that could have certain effects, such as “recruitment of a well-qualified or diverse student body.”[4]  ED concluded its modification to the October 29, 2010, preamble by stating that there had never been a safe harbor provision addressing minority recruitment and that the new Program Integrity rules did not bring about a change in regard to the matter questioned.  Instead, ED encouraged schools to enroll all students in programs that are best for the student’s academic goals and future career success.  The Court found that ED did not adequately address some commenters’ concerns in regard to the potential effect on minority recruitment.  As in the incentive compensation for program completers issue discussed above, the Court sent the matter back to ED to further address those who inquired about the effect on minority enrollment.

The Current State

ED’s most recent clarifications after the last Court order were published in the Federal Register this past November 27, 2015.[5]  In the updated preamble to the Program Integrity regulations contained in this most recent Federal Register, ED acknowledges that the regulations that implement the legislation banning recruitment- or enrollment-based incentives do not also ban compensation based upon students completing their program, i.e., graduating.  It further specified that as a result of the Court’s decision, ED reconsidered its interpretation and no longer construes the regulations to prohibit compensation for recruiters that is based upon students’ successful completion of, and graduation from, educational programs.

The two comments to which ED had to provide further explanation and response were about whether the incentive compensation ban would negatively impact minority recruitment efforts.  The summation of ED’s response was that minority student enrollment was not the goal, but rather, minority student success was.  ED stated that with the elimination of incentive compensation, those students who do enroll will be more likely to succeed because of a better academic fit than those additional potential students who may have been pressured through sales tactics to enroll against their best educational interests.  ED asserted that there were plenty of other ways for schools to ensure a stable or increased minority enrollment without incentive compensation, which is banned in the Program Integrity regulations.  Since both of the commenters represented for-profit institutions, ED referred to the percentage of minority enrollment at for-profits in contrast to those at non-profits and public institutions.  In comparison, the for-profit institutions’ percentage of minorities to overall student enrollment was already significantly higher than at the non-profit or public institutions.  ED also noted that the percentage of minority enrollment in institutions has increased significantly even after the implementation of the ban on incentive compensation.  Thus, ED asserts that while it continues to support all lawful efforts to promote diversity, there is no data to support that the ban on incentive compensation has had any negative effect upon minority enrollments.  The Program Integrity regulations do not provide for treating recruitment programs differently regardless the goal of the recruitment program.

The Caveat

In regard to ED’s acknowledgment that there is no ban on compensation based upon success in program completion or graduation, the Department specifies that it retains the right to exercise enforcement action if a school tries to label a compensation program as being based upon graduation or completion success, but in reality is based upon enrollment success.  As stated in the revised preamble to the regulation:  “Compensation that is based upon success in securing enrollments, even if one or more other permissible factors are also considered, remains prohibited.”[6]

Concluding Caution

In light of the Court directives and ED’s subsequent responses in the November 27, 2015, Federal Register, the resulting revised preamble to the Program Integrity regulations provide the current interpretation regarding incentive compensation in the matters that went before the Court.  As such there were specific clarifications that may allow some areas of consideration for an institution.  However, any institution that may contemplate implementing a compensation plan based upon recruited students’ success in completing a program and graduating should exercise caution in developing any criteria related to such a plan.  It would likely be wise to have legal counsel review the details of such before implementation to ensure it would not violate the Program Integrity regulations.  The overall indication from ED is that they will give any such plan very close scrutiny if highlighted in an audit report and during a program review.  You do not want to find that what you hoped would be allowable still meets with a declaration from ED that, no, it’s prohibited!