Executive Pay Rises 4.6%

Compensation growth for CEO’s outpaced inflation, survey finds

Compensation for the leaders of the nation’s largest nonprofit organizations rose at more than twice

the rate of inflation last year, even in the face of intensifying public and government scrutiny, according to The Chronicle’s 15th annual survey of executive compensation and benefits.

The chief executives at the nation’s biggest charities and foundations received a median pay increase of 4.6 percent in 2006, a year in which the inflation rate was 2 percent.

The leaders of the 249 organizations that provided data for 2005 and 2006 earned a median compensation of $315,969 in 2006. In 2005, the median compensation was $316,500, meaning that half earned more and half earned less.

The results reflect a decade-long trend in which compensation growth for executives of large nonprofit groups outpaced inflation.

Median compensation for chief executives grew by 5 percent from 2002 to 2006, after inflation, according to an analysis of 159 groups that have provided data to The Chronicle in each of those years.

Charities and foundations are not required by the Internal Revenue Service to list the base salaries of their top executives on their public tax forms. As a result, the Chronicle survey’s compensation numbers can also include payments like bonuses, pension contributions, and allowances for housing and transportation.

The ‘Giggle Test’

Nonprofit executives are achieving bigger percentage gains in pay than leaders in the business world.

For the 52 charities and foundations that broke out their figures for 2005 and 2006 for the Chronicle survey, chief executives earned a median salary of $288,558. That figure is up 7.6 percent from 2005, when the median salary was $268,207.

The median base salary of chief executives at large companies grew by just 0.1 percent to $1-million in 2006, according to a survey by Equilar, a San Mateo, Calif., company that studies executive and board pay for the for-profit world. The Equilar survey measured 194 Standard & Poor’s 500 companies that had chief executives in place for at least two years.

But even though business executives’ salaries were flat in 2006, nonprofit leaders aren’t necessarily closing the gap on their peers in the for-profit world. The Equilar survey also found that the median total compensation for chief business executives, a formula that includes salary, bonuses, incentive plans, and stock awards, increased by 6 percent to more than $8.5-million.

Once these factors are accounted for, the increase for corporate leaders is actually higher than the 4.6 percent compensation growth for executives in the Chronicle survey — a difference that has only widened the gap between what many nonprofit organizations pay their leaders and what executives are offered in the business world.

And executive-compensation experts say that gap is likely to persist as the IRS more aggressively audits tax-exempt organizations’ pay practices, and watchdog groups and journalists continue to focus on salaries and benefits that appear excessive.

In the face of such pressures, more nonprofit boards are attempting to structure compensation packages that are in line with what is being offered by their peers.

“Lots of boards of $100-million-plus charities would be happy to pay seven-figure compensation to the CEO’s,” says Jerald Jacobs, a Washington lawyer who advises large nonprofit organizations on executive-compensation issues. “They can certainly afford it. The problem is, how does it look? They have to honor what I call the giggle test. They have to assure the appearance of propriety because these are fund-raising organizations first and foremost.”

Despite such concerns, the Chronicle survey included 26 executives who earned compensation totaling more than $1-million in 2006.

The survey was based on information provided by 239 organizations that are among those that raised the most money from private sources in 2005, as well as grant makers that held the most in assets that year. The median income of the charities that provided data was $144.3-million. The median assets of community foundations in the survey was $699.9-million, the median assets of the private foundations was $3.3-billion, and the median assets of operating foundations was $437.5-million.

The Chronicle survey does not necessarily show the highest salaries in the nonprofit world. Executives at smaller organizations might be paid more than the leaders of the wealthiest groups.

The Millionaire Club

Executives at hospitals and major universities usually dominate the top of The Chronicle’s annual survey. But in 2006, the highest-paid chief executive in the survey came not from health care or academe, but from the world of museums.

Philippe de Montebello, director of the Metropolitan Museum of Art, in New York, had the highest reported compensation among top executives, with $4,557,342.

Much of that total — $4-million — was given to Mr. de Montebello as a one-time deferred compensation benefit that rewarded him for guiding the museum through the period following the 2001 terrorist attacks and to keep him as the museum’s leader beyond his 70th birthday to oversee a major expansion, according to a spokesman. Mr. de Montebello, 71, had earned $533,462 in 2005, which means his total compensation increased by more than 754 percent in 2006 — largely the result of the one-time benefit. Without that sum and other nonsalary payments, Mr. de Montebello’s base pay increased by a much more modest 2.9 percent.

The rest of the top five, however, followed tradition and included leaders from big-budget hospital systems and universities.

Lloyd H. Dean, president of Catholic Healthcare West, in San Francisco, was the second-highest earner in the Chronicle survey, with compensation of $4,001,892. Mr. Dean’s total includes a bonus payment of $2,738,656. The hospital based the bonus on improvements in the organization’s finances that Mr. Dean spearheaded, a spokesman said.

He was followed by William R. Brody, president of the Johns Hopkins University, in Baltimore, who earned $1,492,220. That total included a deferred-compensation benefit of $920,438 that had been accrued in previous years.

Next on the list were James J. Mongan, chief executive of Partners HealthCare System, in Boston, and Peter Traber, chief executive of Baylor College of Medicine, in Houston. They earned $1,341,650 and $1,271,246, respectively, last year.

Highly Paid Employees

The biggest earners in the Chronicle survey, however, were not chief executives. Rather, the most lucrative pay packages were offered to officials who played a secondary role in their organizations.

And most of the biggest earners were in academe.

David N. Silvers, a clinical professor of dermatology at Columbia University, had the highest compensation of any official in the survey. Dr. Silvers earned $4,837,877 last year.

He was followed by four other officials from major universities: William Spitz, vice chancellor of investments at Vanderbilt University, in Nashville, with $2,970,611; James Grifo, a professor of obstetrics and gynecology at New York University, with $2,823,406; Peter Carroll, head football coach at the University of Southern California, with $2,451,898; and Edward Manche, director of the Eye Laser Center, at Stanford University, with $2,377,211.

Collectively, those five nonprofit employees received nearly $15.5-million in compensation in 2006 — nearly $2.8-million more than the combined $12.7-million in compensation awarded to the five highest-paid chief executives.

Of the 26 executives who earned more than $1-million in 2006, only eight were the chief executives of their organizations.

And none of those who earned more than $1-million were women.

Risa Lavizzo-Mourey, president of the Robert Wood Johnson Foundation, in Princeton, N.J., had the highest reported compensation among women in the survey, with $958,493. Dr. Lavizzo-Mourey, who was also the highest compensated chief executive among private foundations, received a deferred-compensation benefit of $399,643 as part of that total.

Lorie Slutsky, president of the New York Community Trust, received the highest compensation among the leaders of community foundations, earning $589,800.

Barry Munitz, former president of the J. Paul Getty Trust, in Los Angeles, remained the top earner among chief executives of operating foundations. His compensation totaled $898,361, even though he resigned from his post in February 2006. Mr. Munitz’s 2006 compensation comprised $487,340 in salary, which covered his pay for the first eight months of the trust’s fiscal year, and a $411,021 payment for federal and state taxes on his supplemental executive retirement plan.

Mr. Munitz resigned from his post amid allegations of misuse of funds and an investigation of his spending by the California attorney general. The attorney general’s investigation followed a series of Los Angeles Times articles about the perks Mr. Munitz had received from the trust — the wealthiest operating foundation in America. The investigation determined that Getty trustees had improperly allowed Mr. Munitz to use charitable funds to pay for the travel expenses of Mr. Munitz’s wife and to buy gifts of artwork for retiring board members. Mr. Munitz also agreed to repay the organization $250,000 and to forfeit benefits valued at more than $2-million, according to the trust.

IRS Gets Tough

The growth at the highest end of the pay scale comes even as the IRS escalates its crackdown on excessive compensation and as the leaders of some high-profile nonprofit groups have come under fire from the public for their perks.

The IRS in March assessed $21-million in excise taxes to 25 nonprofit organizations for what it determined to be excessive compensation packages involving 40 executives.

The levies were part of an IRS review of executive compensation at nearly 2,000 tax-exempt organizations. The federal agency is now scrutinizing the pay practices at 20 nonprofit hospitals following a preliminary examination of the financial records of 500 hospitals. It plans to begin a similar review of pay packages at colleges and universities in 2008, says Lois Lerner, director of the IRS’s exempt-organizations office in Washington.

Because of the IRS effort, many nonprofit boards are becoming more cautious about compensation decisions, says Karl Emerson, who retired in June as director of Pennsylvania’s Bureau of Charitable Organizations and now works in Philadelphia as a lawyer representing nonprofit clients.

“It’s crucial that nonprofit boards now more than at any time in the past make sure they are paying their executives reasonable compensation and that they have followed all of the appropriate procedures that the IRS has laid out,” Mr. Emerson says. “The IRS has sent a very clear signal that this is an area that they are going to put a lot of effort into.”

In addition to levying taxes on nonprofit groups for excessive executive pay, the IRS also reviewed more than 780 charities and foundations and found that more than a third were improperly reporting executive pay on their tax forms.

As a result of that examination, the tax agency issued new guidance on topics like the proper reporting of retirement payments to top executives. Some organizations had misinterpreted a rule that required them to list the benefits accrued in those plans on their annual tax forms — opting instead to report the income only after the executive had been vested. As a result, some groups in the Chronicle survey are reporting those payments for the first time.

Some nonprofit boards have also come under fire for failing to control and manage the pay and expenses of their top executives.

In June, for instance, a review committee determined that the Board of Regents of the Smithsonian Institution, in Washington, did not properly manage the spending of its former chief executive, Lawrence M. Small. The review, which received scrutiny from the news media and Congress, found that Mr. Small had racked up almost $90,000 in unauthorized expenses, such as chartered flights, a trip by Mr. Small’s wife to Cambodia, and catered staff meals.

As a result of such cases, many organizations say they are being more deliberate about setting compensation.

For the YMCA of the USA, in Chicago, that has meant analyzing pay levels for similarly sized national charities, nonprofit groups in its region, and service-oriented businesses before it hired its new chief executive, Neil J. Nicoll.

Mr. Nicoll receives an annual salary of $405,000; his predecessor, Kenneth Gladish, earned $347,760 in 2005.

“As the regulatory environment has continued to tighten up, we have sought to bring greater sophistication to our processes,” says Dan Casey, a lawyer in Miami and immediate past chairman of the YMCA of the USA. “But regardless of the regulatory environment, nonprofits are always the bearer of media scrutiny. Even if you’re not, you have the mission of the organization always at your heels nippin’ and making sure you are staying in line.”

Such processes are common for large nonprofit groups, especially at a time when turnover is high for top executives. Nearly one-third of the 298 nonprofit organizations that participated in the Chronicle survey had to replace one of their top two executives in 2006.

Because of the turnover — and the expected retirement of many baby-boomer-generation leaders in coming years — compensation experts say nonprofit employers are becoming more likely to use corporate-style tactics to lure talent.

Scott Walker, an executive recruiter in Atlanta who works for nonprofit clients, says many more large charities and foundations are also turning to executives with business experience, and, in some cases, they are focusing on candidates who are in their 30s and 40s, rather than for-profit veterans. And many of those younger executives are not willing to take a discount to work for a charity.

Making matters more difficult for boards, Mr. Walker says, is that the supply of young executives interested in nonprofit careers isn’t enough to satisfy the demand.

“This crop of young, motivated, mission-focused, and very successful, very accomplished professionals is raising its hand,” he says. “But the net effect is there is a much faster loss of senior executives who are facing retirement and leaving the field. The outflow is still significantly greater than the inflow.”

Still, nonprofit groups can compete for high-level executives even if they cannot offer salaries that mirror those in the business world, says Brian Drum, an executive recruiter in New York. Mr. Drum points to a recent search involving a chief information officer at an investment bank who was earning more than $700,000. The executive took a job at a nonprofit group that offered about one-third his previous salary.

“The reason he did it was obviously not for the money,” Mr. Drum says.

“The work was more intriguing for him than the compensation. People have a lot of motivation for doing things. Sometimes, it’s the quality of the work, the content of the position. It’s not just compensation.”

Maria Di Mento and Sam Kean contributed to this article.