Nonprofit Pay
How much is too much for nonprofit executives?
High compensation for leaders of nonprofits can create negative publicity and calls for stricter government regulations. This is understandable, but much that has been written about this subject is off the mark.
Pay for nonprofit executives should be reasonable in terms of what similar nonprofits pay and in the eyes of donors, funders, and regulators. This usually means that nonprofit executives will earn less than they could earn from comparable work in the private sector.
I have no problem with this. However, I disagree with donors who believe that the satisfaction of working for a charity should obviate the need for reasonable wages. Equally problematic are the views of pundits who argue for federal or state limits on what nonprofit executives can earn, such as the proposal that no such executive should earn more than the U.S. President.
Managing nonprofits can be highly complex. Imagine your are the CEO of a YMCA in a major metropolitan organization. You are responsible every day for the safety of hundreds of children in multiple locations, the financial health of the organization, relationships with city and state authorities, developing and motivating staff, and managing operations with significant complexity and risk.
The same goes for university presidents, who must combine fundraising expertise with sufficient diplomacy to influence diverse constituencies (faculty, students, alumnae, trustees) to uphold and improve educational excellent. Ditto for hospital CEO’s, with their financial and regulatory imperatives and extensive health care operations.
Leaders nonprofits are responsible for much more than revenues and profits — they nurture individual growth and development, heal and comfort the sick, shelter the homeless, protect the battered, and in hundreds of other ways improve our communities. Most of them are willing to do this for lower compensation than the could earn in the private sector. But that does not mean their pay should be limited to some arbitrary number.
Good Leadership Makes a Difference
In my nonprofit consulting, I have noticed that each city usually has four or five organizations that are considered the leaders in the community. These leaders vary by location: in City A, the top charities might include a foundation or museum; in City B an arts organization; in City C, a scouting organization or homeless shelter.
Whether a cause or result of their success, these top charities almost always attract a high level of contributions; key executives in the community want to join their boards; they are financially stable; they have a strong and clearly measured record of success.
These charities are not the community leaders because of what they do — there are always equally worthy charities not in the leadership group. But almost always, somewhere in the organization’s development an inspirational, highly effective leader has brought its prominence and performance to a level where its achievements and value become readily apparent to the most important and influential leaders in the community.
So let’s assume that are a trustee of a nonprofit looking for a top executive with the ability to bring your organization to the prominence of the region’s best charities. Or to turn around a struggling nonprofit. The pool of candidates includes existing executive directors, deputy directors ready for the first chief executive job, and for-profit executives, either active or retired. Any of these candidates could be independently wealthy and willing to work for little or no compensation.
But why limit your pool of candidates to the wealthy? The candidate pool undoubtedly contains people with children in college or other financial needs, without independent financial resources, for whom a decent salary is important. The best leader may come from this group.
Why Capping Pay is Wrong
For most nonprofits, the pay caps typically proposed is immaterial — few nonprofits pay their leaders as much as $400,000 or $500,000. But for the few nonprofits that pay more, a cap could create serious problems.
First, any pay limit set by Congress or the IRS or other governing body would be arbitrary. Second, any cap would be unfair to nonprofit executives whose scope of responsibilities genuinely reflect a greater value than the cap itself. Limiting pay for university investment professionals or basketball coaches or heads of cardiology in hospitals to a cap such as $400,000 would create an unsustainable gap between what they could earn in the private sector and what nonprofits could pay.
Third, an arbitrary cap would undoubtedly lead larger nonprofits to look for other ways to compensate their top people, using expanded benefits, or added time off, or special fees or retirement supplements, to keep their best talent. Regulators might try to preclude this through legislation beyond the pay cap, but such legislation would be complex and costly to administer.
Fourth, the pay cap could actually result in higher compensation for leaders of small nonprofits — those well below the salary cap. Even $150,000 is higher than the vast majority of nonprofits should be paying their Executive Directors today — most charities are very small. Providing an official ceiling of $400,000 could put pressure on trustees in some charities to raise executive compensation more quickly than they would do absent a pay cap.
Finally, in the largest charities, a pay cap could cause salary compression, with many executives earning at or close to the cap even though their responsibilities are substantially less than those of the CEO, resulting in serious inequities in the compensation structure.
There is a solution
You won’t get rid of excessive pay entirely in nonprofits, no more than in any other sector. But there are good steps that can be taken to lessen the incidence of egregious pay.
First, the IRS should use existing sanctions more forcefully. These sanctions (known as the “Intermediate Sanctions”) enable the IRS to tax executives and fine trustees in cases of excessive remuneration. But these sanctions are used infrequently. The IRS should be much more proactive going after cases of apparently excessive compensation.
Further, support should come from publications such as the Chronicle of Philanthropy and the Chronicle of Higher Education , and organizations such as the Independent Sector or Charity Navigator. Some of these organizations may be reluctant to bite the hands that feed them, but as the Chronicle of Philanthropy has shown, pointing out specific cases of potential abuse can create change.
Most important, boards of trustees should do their homework with a thorough period review of executive compensation. This review should address:
*Whether the organization has a compensation philosophy, and if so what is the intended position of the organization’s compensation agains the peer groups to which it is being compared.
*Whether the peer group truly is comparable to the organization in terms of its size, mission, scope and geography.
*Whether the targeted compensation of the top executive vis-a-vis the peer group is similar to that of other organization employees in general. If the CEO is the only executive targeted at the 75th percentile and everyone else is targeted at or the median, is there a clear reason for the difference?
*The degree of transparency for the entire compensation package. Are the special benefits that apply only to top executives, and if so is there justification for this? Will this justification stand up to public scrutiny?
With strong board oversight and a more active IRS, together with aggressive publicity about questionable compensation, we can strengthen nonprofit compensation generally and reduce incidents of abuse.
Pete Smith is the founding partner of SmithPilot, a firm specializing in nonprofit compensation issues.