Should nonprofits splurge on execs?

The ethics of high-level “do-gooders”, and what’s really at stake

Left: Photo by Hunters Race on Unsplash. Right: Photo by Patrick Hendry on Unsplash.

There’s a charity that targets poverty in New York City that also pays its president nearly $1 million per year.

Er, cognitive dissonance, much?

Its executive director got a measly $700k in 2016, but in the following year — yes, I checked the 990 IRS form (which you can also do here) — that now former executive director received $1.7 million. And of the 14 top execs, nine got paid in excess of $400k. Of course, I’m talking about the esteemed Robin Hood Foundation.

Nice package, eh? Maybe I should go into charity work so I can get paid a lot…

Said no one, ever. And yet.

The point is: there are 149 paid employees in this organization, and a whopping 570 volunteers who make nothing at all. That’s fine, voluneering is good stuff —

But it goes without saying that it’s a bit — um, weird — to pay a nonprofit director a huge sum when the whole point of the nonprofit’s existence is to fight poverty.

Yes, fighting poverty! They’re fighting the fact that thousands — maybe millions — of people don’t have enough money to support themselves and their families on a day to day basis, yet they’re also paying their executive board about $5 million annually.

So is it just plain hypocrisy, or somehow necessary? Is Robin Hood’s executive pay an anomaly?

And if it’s not an anomaly, what if the nonprofit in question is partially funded by tax dollars —or, what about the fact that 501(c)3s are tax-exempt — are we entitled to make a moral judgement about their payscales since we taxpayers are, in effect, subsizing their very existence?

A comparison of pay

I took a look at some of the biggest and most popular nonprofits, not including universities or religious organizations (which actually often have the highest levels of executive pay).

Guess what: looks like Robin Hood isn’t entirely alone (like RH’s above, these numbers are all from 2016 or 2017).

Take a gander:

• President and CEO, American Red Cross: $603,564 (oddly, the CIO makes even more, at $650,966, and some subsidiary organizations under the ARC make similar amounts)
• Secretary, Smithsonian Institution: $787,720
• President and CEO, Save the Children: $472,381
• President and CEO, International Rescue Committee: $838,903
• Executive Director, Doctors Without Borders: $201,968
• President and CEO, Lustgarten Foundation for Pancreatic Cancer Research: $253,826

I was surprised to see the relatively small numbers posted by Doctors Without Borders and the Lustgarten Foundation. While a $200,000 to $250,000 salary is still firmly an upper-class income, it’s actually on the low range of what an established a doctor or lawyer would make, especially in a big city where many large nonprofits are located.

Still, most salaries are more on the more exorbitant side; compare the $600k that the CEO of Save the Children gets to their harrowing ads asking for just £5 per month from donors. It would take about 92,350 donations of £5 just to pay the CEO.

And let me digress for a moment. Speaking of Save the Children’s ads, they’re pretty incredible: look at these eerie, suggestive works of art à la Gagosian-represented artist Gregory Crewdson. Makes you wonder how much they spend on advertising. Oh wait, I’ll tell you: looks like nearly $6 million all-in in 2017.

“Kitchen Circle” Campaign by Save the Children. Photographer: Ale Burset, Y&R, México

“The Basement,” by Gregory Crewdson, 2014. Courtesy of Gagosian Gallery.

But that’s a story for another time.

The Issue, In Two Parts

Back to the issue: nonprofit executives get paid a lot, and I think at first glance this might seem wrong in some way.

But what’s the real ethical problem here?

Given the nature of nonprofits, the ethical issue around charity executive pay is actually twofold, and it’s important to separate them from each other:

First, executives are making boatloads more than the rest of the organization’s employees — which, granted, is an issue seen across many industries; and

Second, paying a nonprofit executive a lot seems to take away from funds for the cause. This simply isn’t an issue in for-profit entities; how much a for-profit reinvests in itself doesn’t have much moral bearing on outsiders. But nonprofits have different responsibilities.

Issue One: Does unequal pay taint the organization?

That nonprofit executives make a lot more than anyone else in their organizations isn’t an issue limited to nonprofits. After looking at the numbers, it’s pretty obvious that many nonprofits actually do a damn better job at keeping salaries relatively in line than many for-profits.

In some for-profits, the CEO makes more than 1,000 times what the typical worker in that company makes — though to be fair, usually that’s when many of the employees are part-time workers, or work in countries where normal pay is substantially lower than it is in the U.S. On average, CEOs today are paid 271 times what the average American worker is paid, according to the Economic Policy Institute.[1]

In 1965, their research shows, the ratio was just 20:1, and hit an all-time high of 299:1 in 2014.

But in the nonprofits highlighted above, the ratio of highest paid executive to lowest paid employee in that organization was in the range of about 11-to-26:1, even in the near-million-dollar-executive-pay-range scenarios. The International Rescue Committee CEO gets paid nearly $840k, but average pay across the organization is nearly $75k — an arguably decent salary even in the for-profit world.

And let’s be honest: if you’re at the bottom of the payroll at any organization, your work may very well be important, but it won’t make or break the entire operation of the organization. At the top, though, it can. With more responsibility should come more pay, shouldn’t it?

So yes, perhaps Robin Hood does pay their executives a lot, but then again, maybe the reason they’re so effective year after year is because their execs know what the hell they’re doing?

And that’s worth something. A whole lot of something.

This is in fact the argument that is usually made regarding paying nonprofit executives huge amounts: that these nonprofits need the best people to run them, and so the pay needs to be competitive — at least somewhat — with private-sector pay.

And that’s true, to an extent. Why shouldn’t it be? Many of these large nonprofits that pay high salaries are international organizations that require huge amounts of on-the-ground knowledge, management and leadership expertise, and visionary thinking. They employ hundreds (if not thousands) of people around the world in order to execute their mission. And most importantly, they need to be extremely efficient about how they allocate their funds, maybe even more so than any for-profit company.

Let’s go back to the IRC for a second and take a look at the experience of its leader, David Miliband, and why he might deserve a relatively fat paycheck. He’s a former Foreign Secretary of the U.K., with additional experience as Secretary of State for the Environment and as a Member of Parliament. (International governance experience: check. Leadership experience: check. Commitment to serving people and their livelihoods: check.)

He has a degree in Philosophy, Politics, and Economics from Oxford and earned a Masters in Political Science from MIT as a Kennedy Scholar. (Smartypants with sustained interest in political dynamics: check.)

The mission of the IRC, by the way, is “to help people whose lives and livelihoods have been shattered by conflict and disaster to survive, recover and gain control of their future.” And they do that efficiently, immediately, and, as Meryl Streep says, “beautifully,” in 40 countries around the world.

David Miliband also happens to be the son of refugees. (Personal connection to the cause he leads: check.)

All that said, this doesn’t mean Mr. Miliband deserves nearly $1 million in compensation; there are probably many people with similar credentials who earn half that or less in other jobs. But on the flip side, if he wanted to, he could probably earn a lot more than he earns at the IRC.

So now we’ve seen that it may makes sense for a nonprofit executive to earn a lot, not only because they are responsible for so much in their role, but also because they need the very same high-talent executives for-profits go after.

We’ve also seen that the ratio of CEO-to-employee pay is much lower than the average for-profit CEO-to-employee pay ratio.

So maybe the fact that nonprofit executives get paid a lot — and a lot more than their employees — isn’t the biggest ethical issue here?

Moving on.

Issue Two: Does executive pay take away from the cause?

Is this real ethical issue, then — that high executive pay takes away from the cause, and that instead of padding pockets they could be feeding more starving children better food?

To answer this, we need to differentiate between nonprofit funding methods. I’m not an expert in nonprofit structure or taxes, but here’s the general breakdown from my research:

1. Some get their administrative costs completely underwritten by a corporate partner, in which case all donor funding goes toward the cause;
2. Many highly-rated nonprofits make sure that they keep all administrative costs under 15%, meaning donations are split between admin and program expenses;
3. Some nonprofits get government funds in addition to private donations, meaning taxpayer dollars go toward funding the organization; and
4. Any nonprofits spending more than about 15 or at most 20% on administration and fundraising are probably making bad (read: unethical) financial choices, and these should not be receiving your money anyway.

Before Kerri Kaplan entered her role as CEO and President of the Lustgarten Foundation, she was in charge of securing Cablevision’s commitment to underwriting all of Lustgarten’s administrative costs.

But wait!, you might say. Wouldn’t it have been better for her to get Cablevision to donate those millions of dollars to the actual cause instead of just to underwrite their admin costs?

In theory, sure. But then they’d have to hire more people to focus their daily attention on fundraising, and they wouldn’t be able to claim that 100% of donations go toward the cause, which is likely a line that gets more people to donate.

And if the corporate partner who’s underwriting the nonprofit is willing to pony up an extra $500k for a great executive, isn’t that their own choice, and might it not also entice a better person for the job?

Yes, but also no: then the issue becomes whether the corporation is using the charity to further their own interests, or bullies the charity into making decisions for, say, financial reasons beneficial to the company that are unrelated to the cause the charity is supposed to be helping. It’s pretty impossible for a nonprofit to exert its own power when their entire operating costs are contingent upon a corporate sponsor’s approval.

Ironically, a corporation that funds a nonprofit at 100% of its administrative costs can itself easily become a huge moral no-no.

Another questionable issue arises when when a company uses some donor funding to cover its administrative costs. But here, I think as long as the organization is transparent about its financials, donors will either endorse it or reject it with their money. Unlike in the scenario above, it’s a market-based transaction, less beholden to a single stakeholder with its own interests, and with more of a check on power from all sides. In this case, the organization has to keep its financials in check if they want donors to continue supporting them.

This brings us to the slightly stickier issue of when the organization is outright getting government funding. The American Red Cross, for example, receives 7.5% of its total revenue from the government; that means that the CEO’s salary is more than 1.1% of the government funds alone. Still, it’s .02% of the overall revenue of the organization, which is in line with other large nonprofits.

I think the right answer with semi-government-funded organizations is that executive pay should be determined in part by a weighted average of market rates for government and private sector jobs that are similar in scope and expertise; by its board members; and in relation to the pay needs of other employees in the organization. It should also be determined for the next person entering that position, and not for the sitting executive(s).

All these factors taken together allow for a power-capping pay ceiling that is still relatively high, and which could still entice top talent, while at the same time be rationalized to donors.

Again, regardless of if the organization is in part funded by tax dollars, the least common denominator should be that their financials are easy to access and easy to understand. That’s because even if they don’t get tax dollars outright, they’re still exempt from paying taxes, which means we as private citizens are still underwriting their existence in some way.

Today, by law, nonprofits must disclose their annual IRS 990 Form, which gives not only compensation information but all financial information about the organization. If the public can easily see what the CEO is making, and it’s not to their liking, they can choose to give elsewhere.

Of course, this is easier said than done. Even when financials are available they are not always easy to understand. But the donor must bear some responsibility as well; while giving to a good cause is a good thing to do, it should certainly not be done carelessly or willy-nilly. That’s just stupid, and not “good” at all.

The related — but unspoken — ethical question

Is it OK for executives to even want more money when they’re supposed to be helping others who are starving half way around the world? Despite their qualifications, shouldn’t the good cause be enough to entice CEOs to large charities?

The fact is that people — including nonprofit employees — want to make more money, especially when they have the opportunity to do so in extra large amounts. To an executive already making $250k, a few thousand dollars might not make a difference to them if they cared deeply about the mission of their cause. But a few hundred thousand…well, maybe they’d even be willing to look elsewhere.

Look at Jason Cone, who was at Doctors Without Borders for 15 years, rising to Executive Director for his last three and a half years there. Now look at his 2017 salary there, which I posted above: $202k. Well, guess what: as of last month, he’s Chief Public Policy Officer at Robin Hood. I don’t know what he makes there, but judging by the salaries of other executives there, it’s very possibly 50–100% more than what he made at DWB.

I can’t claim to know why he left Doctors Without Borders for Robin Hood. Maybe he rose to the top and was simply ready to move on to something new; maybe he just didn’t jive with his coworkers there. But interestingly, he didn’t even move to an organization with a similar mission to Doctors Without Borders, or even one that supports health as its primary cause. What he did do was move to an organization that, at the top, pays a lot more than his former one did. Can you really blame him? Robin Hood, like Doctors Without Borders, also does amazingly good work. So why shouldn’t he get better paid for it if he’s still making a difference in the world?

Like I said, this is just an observation. I don’t mean to single him out or make assumptions about his behavior. I’m just pointing out that people care about money and career upward mobility in the nonprofit world just like they do in the for-profit world. We are still human, we go after bigger and better, and not everyone’s willing to sacrifice their paycheck when they realize they can make more.

And I think that’s OK.

[1] The Economic Policy Institute is a nonprofit think tank devoted to including “the needs of low- and middle-income workers in economic policy discussions”.

Danielle Mund is an art historian by training and moral philosopher by nature. She writes from Puerto Rico, sometimes holed up in a cool dark room and sometimes beachside at the Ritz.