September 18, 2011 | Read Time: 4 minutes
Setting the salary of the chief executive has always been an important role for charity boards, but increasing scrutiny of executive compensation by state regulators means boards now need to be more vigilant than ever in documenting their decisions, experts say.
In the past year, at least three states have started inquiries into excessive compensation or introduced legislation to cap payments to charity executives.
The highest profile case is in New York, where Gov. Andrew M. Cuomo in August appointed a committee to review executive compensation at certain charities that receive state funds. The review followed an article in The New York Times that highlighted the nearly $1-million salaries earned by two executives at the Young Adult Institute, a charity that provides services to developmentally disabled New Yorkers.
A state lawmaker in Massachusetts has introduced legislation that would cap total compensation at $500,000 for leaders of charities with revenue greater than $1-million. And last year, New Hampshire’s attorney general announced he would review the salaries of all CEO’s of nonprofit hospitals in the state.
Although limited mostly to the Northeast for now, the trend is being followed throughout the country by nonprofit executives, board members, and their advisers.
Many of them are critical of the moves. “If you start to limit nonprofit compensation, you could lose a lot of great talent,” says Ellis Carter, a lawyer in Phoenix who advises boards on compensation. “I don’t think the states are in the best position to make those decisions.”
Gathering Data
The governor’s committee in New York is sending letters to more than 600 charities that receive state funds, including Medicaid providers and other health and social-service providers. The letters request detailed financial information through June 2011 and ask that the information be compiled by the charity’s board, since executives would have a “significant interest in the size of their compensation.” In the 39-question letter, board members are asked to “justify” the compensation paid to the executives and to state whether they have considered asking executives to give salary or benefits back to the nonprofits “given current economic conditions.”
The committee is headed by Benjamin M. Lawsky, the superintendent of the New York State Department of Financial Services, who has said the information could lead to public hearings and proposals for new laws or regulations.
David Neustadt, a spokesman for the committee, said it might also take action against individual charities “if that seems appropriate.”
Some advocates for charities say they worry that the letters represent another time-consuming and costly reporting burden for groups that are grappling with the expanded disclosures required on the new version of the federal informational tax return, known as the Form 990.
“We’re concerned that this process may be much more laborious than is necessary to identify the people the state cares about,” says Jonathan A Small, a senior consultant for government relations at the Nonprofit Coordinating Committee of New York, which has 1,500 members in the New York City area. “The question is, how much extra work are the people who aren’t bad apples going to have to do?”
A press release by the governor’s committee late last month noted that 1,926 employees of charities that contract with the state’s “mental hygiene” agencies earned more than $100,000 a year. Charity advocates worry that the state may deem salaries above a certain level excessive, despite an organization’s size or its CEO’s expertise.
“It fosters a misperception that anything over $100,000 is excessive,” says Doug Sauer, chief executive of the New York Council of Nonprofits, with more than 3,000 members statewide. He notes that many health charities are led by people with advanced degrees, who might make well over $100,000 in private practice.
Even so, boards must take the increasing scrutiny seriously—expect more of it, says Michael W. Peregrine, a Chicago lawyer who advises charities. Boards can’t rubber-stamp the advice of compensation consultants, he says, and they should consider other steps, like adding a clause that allows the nonprofit to ask executives to return bonuses if the group falters.
“Other states are going to jump in,” Mr. Peregrine says. “The attorney generals in states that have staff to pursue nonprofit compensation will find it politically expedient to do so.”
