October 3, 2010 | Read Time: 7 minutes
Salaries for nonprofit executives appear to have edged up only slightly in 2009 and may stay constrained for some time, even if a rebounding economy sends compensation in the business world flying again.
Compensation experts say the weak economy and increasing scrutiny of charity salaries by Congress, attorneys general, and the public is keeping a lid on salary increases.
“The nonprofit sector was the last to experience the pullback in compensation, and it may be the last to emerge from the downturn,” says Jose Pagoaga, an executive-compensation consultant at Mercer.
In a recent spot check of executive compensation at some of the nation’s biggest charities and foundations, The Chronicle found that 55 chief executives were paid more in 2009 than in 2008, 34 were paid less, and 4 saw no change. (Our database of nonprofit-executive pay from charities and foundations is available here.)
Some surveys—including those conducted in Northern California by Nonprofit Compensation Associates, in Oakland, Calif.; in New York City by the Nonprofit Coordinating Committee of New York; and in New Jersey, New York, and Washington by the recruiting firm Professionals for Nonprofits—suggest that salaries for nonprofit executives are remaining flat or rising by only a few percentage points.
For the second straight year in 2009, nonprofit executives appear to have avoided the deep cuts in compensation that their for-profit counterparts endured. A survey by Equilar, a Redwood City, Calif., company that researches executive compensation, found that leaders of companies in the Standard & Poor’s 500 suffered pay cuts of nearly 8 percent in 2009. Nonetheless, a huge gap remains. For-profit executives made a median salary of $7.5-million in 2009, according to Equilar, far more than even the highest-paid nonprofit and foundation chief executives for whom The Chronicle has 2009 pay data.
Populist Anger
At many charities, revenues remain weak, due to reduced support from individuals, foundations, and state governments that were hard hit during the recession.
“There is downward pressure on pay because there is downward pressure on revenues,” Mr. Pagoaga says.
But some experts say an equally important factor is growing populist anger at high salaries for any executive whose organization depends on federal or state support. Big bonuses for bank executives who needed federal bailouts and the huge salaries paid to city leaders in Bell, Calif., are recent flashpoints in business and government.
The charity world came under the microscope in March, when four U.S. senators questioned the $988,591 in salary, bonus, and benefits paid in 2008 to Roxanne Spillett, president of the Boys & Girls Clubs of America, in Atlanta. The senators’ concerns about Ms. Spillett’s salary and other spending at the charity continue to hold up legislation that would extend a large annual grant to the charity from the Justice Department.
“It’s fair to say that in what I would call a Tea Party environment, charity compensation is surely going to be an explosive political if not also a regulatory issue,” says Michael W. Peregrine, a Chicago lawyer who advises several charity boards.
Both existing and incoming chief executives may be contributing to the flat trajectory by reining in their own compensation. The leaders of 27 organizations in The Chronicle’s spot check took pay cuts in 2009, and 21 of the cuts were proposed by the chief executive. Susan Egmont, an executive recruiter in Boston who works with nonprofit clients, says some new hires are not insisting on a big jump in pay, in part because they don’t want immediate friction with the people they will manage.
“The candidates realize that if they push really hard on salary, they’ll come in to an untenable position,” Ms. Egmont says. “They’ll be resented by staff members who have not had increases or who have actually suffered cuts in salary.”
Compensation experts say the moderation in salaries is not being driven by boards trying to make new hires on the cheap. “Imagine the risk,” says Wayne Luke, who heads the executive-search practice at the Bridgespan Group, which has offices in Boston, New York, and San Francisco. “If things went bad, critics would say, ‘Of course you didn’t get what you wanted—you hired the less-experienced person to try to cut corners.’”
Careful Calculations
Calculating compensation in this environment takes care, say recruiters and nonprofit board members. For example, when the Greater Twin Cities United Way, in Minneapolis, began a search for a new chief executive in early 2009, the organization set a broad salary range for the job early in the process, and the search committee focused on identifying the right candidate through a national search, says Chris Policinski, who chaired the committee.
When the board tapped Sarah Caruso as its top candidate, it used several types of information to determine what she should be paid, says Mr. Policinski, the president of Land O’Lakes, in St. Paul, and chairman of Greater Twin Cities United Way’s board. The board used data provided by United Way Worldwide on salaries paid at comparable-size United Ways and “real time” data from its executive-search firm, Spencer Stuart, about what new hires at other charities were being paid.
The board also assessed whether Ms. Caruso’s compensation would attract unwanted news-media attention. “We did think about how her compensation would be perceived,” Mr. Policinski says. “Anybody who runs a senior-level search now, particularly in the nonprofit arena, needs to be concerned about that.”
In the end, Ms. Caruso’s “base pay” was set at about the same level as that of her predecessor, Lauren Segal, says Mr. Policinski. Ms. Segal earned a salary of $256,770 for 11 months of work in 2009 (plus another $115,567 in deferred compensation and other payments).
Augmenting Salaries
Some charity and foundation leaders augment their salaries by serving on the boards of for-profit companies. For example, Risa Lavizzo-Mourey, president of the Robert Wood Johnson Foundation, in Princeton, N.J., earned total compensation of $1,041,330 in 2009. Her pay included a $409,806 deferred-compensation payment, earned over three years, that was “designed to encourage her continued leadership of the foundation,” says David J. Morse, a foundation spokesman.
In addition, Dr. Lavizzo-Mourey received $269,000 for serving on the board of Hess Corporation and $160,000 for serving on the board of Genworth Financial. Combined with her total compensation from the foundation, Dr. Lavizzo-Mourey earned more than $1.47-million in 2009.
While salaries for charity executives aren’t expected to rise much in the near term, experts say, some forces may drive compensation higher eventually.
The skills required to run large charities now, when cash is tight, are significantly different than they were just three years ago, says David E. Edell, an executive recruiter in New York. That means an employee who was being groomed for the top job in 2007—perhaps someone skilled at managing programs—may no longer be the right person to lead the charity in 2010.
Meanwhile, some of the talented midlevel executives Mr. Edell tries to recruit for CEO positions say they aren’t interested, fearing that too much of their time will be consumed with maximizing revenues and minimizing costs. “Many people, when you reach out to them, say, ‘You know what, that’s not the job I want to do,’” Mr. Edell says.
Compensation experts note that the laws of supply and demand suggest that with a smaller pool of potential executives, salaries should rise as a result. Alternatively, if pay continues to stagnate, the nation’s charities might end up with a weaker group of leaders.
Larry Reissman, a Boston-based principal at Buck Consultants, an executive-compensation company, points out that just three or four years ago, recruiters talked about increasing salaries to make the jobs more attractive to managers at for-profit companies. If nonprofit salaries remain constrained, he says, fewer of those talented managers will want to cross over.
“How low is low enough?” Mr. Reissman asks. “And how low is too low?”
Tips for Nonprofit Boards on Setting CEO Compensation
Charity boards should consider restructuring executive-pay packages that may give the appearance of lavish compensation, even if the contracts were justifiable when they were signed, says Michael W. Peregrine, a Chicago lawyer who works with several charities. Among his recommendations for boards:
- Consider revising existing contracts to avoid making large deferred-compensation payouts that will attract unwanted attention to the charity.
- Eliminate “tax gross-ups” that cover the tax that an executive would have to pay on certain fringe benefits, like cars and social clubs.
- Add a “clawback” provision to allow the charity to recoup some incentive payments to the chief executive if the organization’s financial or program achievements falter in the future.
- Make sure the paper file that justifies the chief executive’s salary, including benchmark comparisons, is pristine.
- Check in regularly with a compensation consultant, as the standards for executive pay appear to be in flux.
