January 25, 2001 | Read Time: 2 minutes
By HARVY LIPMAN
The journal The Public Interest (Winter 2001) examines the question of whether top executives at nonprofit organizations are paid too much and discusses how their salaries could be regulated.
Peter Frumkin, assistant professor of public policy at Harvard University’s John F. Kennedy School of Government, writes that, in light of recent financial scandals at a variety of major nonprofit groups, “the question of how much their CEO’s should earn has become a major issue.”
Citing The Chronicle‘s survey of salaries at 246 large nonprofit organizations, Mr. Frumkin notes that pay for charity chief executives rose slightly faster last year than the compensation paid to leaders of for-profit companies.
New Internal Revenue Service regulations, which interpret legislation passed by Congress in 1996, attempt to define what constitutes excessive compensation. Mr. Frumkin notes that the rules allow charities to justify salaries based on comparisons with similar organizations.
“But the universe of organizations to which nonprofits can compare their salaries include for-profit organizations,” Mr. Frumkin writes. “Herein lies the fatal flaw. The problem is that cross-sector comparisons are often subjective. In the case of the Red Cross, the ‘comparable list’ would have to take into account both the salary paid to senior business managers and the stock options that are part of many compensation packages. In many corporations, a senior executive’s stock options can amount to millions of dollars of deferred compensation.”
Perhaps the biggest problem posed by rising salaries for executives of nonprofit organizations, he says, is their potential for undermining the trust that must be maintained between charities and their donors, clients, and the communities they serve.
“What then should be done?” he writes. “The best strategy for effectively regulating and preserving the nonprofit sector is to create a reliable supply of information about the financial management of charities and to encourage donors, clients, and the general taxpaying public to make use of it.”
