Charity Chief Executives Should Lead the Way in Saving Money

Across the United States, chief executives at some corporations have been taking salary cuts in response to public pressure and the economic downturn that so many of their businesses have suffered.

So too have several leaders of nonprofit organizations. But at the vast number of charitable organizations, salaries and benefits of chief executives — which exploded during healthy economic times — continue in place even in these days of financial distress.

The lack of action to curb exorbitant compensation levels raises serious questions about the mission and management of charities, the values and qualities of their leadership, and the role of their boards in determining and overseeing compensation systems.

It has become a popular myth in the nonprofit world that only highly paid executives are qualified to run nonprofit groups and that the only way to keep them on the job is to pay them well. That has never really been the case at nonprofit organizations, where service to the common good is part of the reward, not high pay. But it is even less true now, when large numbers of highly qualified people have lost jobs to the recession.

Moreover, the recent recruitment of CEO candidates from the business world is adding to the inflationary surge in compensation in the often-mistaken belief that business executives are better managers than people who have spent their careers at nonprofit organizations.

It should trouble lawmakers, donors, and everyone in the nonprofit world that:

• Fourteen leaders of public universities received more than $700,000 in total compensation in 2007-8, according to The Chronicle of Higher Education’s most-recent compensation survey. At least 12 presidents of private colleges and universities earned more than $1-million.

• What’s more, one-third of college presidents sat on at least one corporate board, The Chronicle reports. Typical payment for such service on each board is $50,000 in fees plus a similar amount in stock options, The Chronicle reports. Such board service raises questions about how much they spent running their own institutions.

• The average annual pay of managers of nonprofit hospitals was $490,000, according to a report released this winter by the Internal Revenue Service. Some 20 of the largest hospitals paid their chief executives an average of $1.4-million.

• The median pay of foundation leaders is $538,450, according to The Chronicle of Philanthropy’s latest study.

• Many leaders of other types of nonprofit organizations are paid $400,000 or more. At least one museum leader received more than $1.5-million in salary and benefits, according to The Chronicle of Philanthropy. Many nonprofit groups are masking some of the pay in bonuses that are awarded on top of salary: Thirty-seven of the nonprofit groups surveyed by The Chronicle of Philanthropy gave their top leader a bonus, 15 of them offering bonuses of more than $75,000.

The growth of CEO compensation at large organizations sets the tone for the entire nonprofit world. Many midsize and small groups have come under pressure to follow suit and inflate the pay of their leaders.

As the nation continues to face a severe financial test, it’s time for nonprofit groups to take action — and for Congress and the Internal Revenue Service to take steps to remind nonprofit leaders that their role is to serve the public interest, not their own pocketbooks.

Among them:

• Limit nonprofit salaries. The president of the United States, who holds one of the toughest and most important jobs in the world, receives $400,000 a year. It would not be unreasonable for Congress to limit nonprofit salaries, including deferred compensation and bonuses, at $400,000.

• Those organizations that want to give their CEO’s larger salaries could do so, but they would have to pay a 100-percent tax on the amount of compensation they pay that exceeds the limit. Such a tax would force boards of directors to think twice before awarding excessively high pay.

• Redefine federal regulations on excessive compensation. The IRS should clearly spell out what it means to pay a nonprofit leader too much.

• Under current regulations, nonprofit leaders and their consultants are allowed to judge whether they are paid market rates by looking at how much people in comparable corporate jobs are paid. That should not be allowed any longer; nonprofit groups should just compare their own salaries.

• Prohibit nonprofit leaders from serving on corporate boards. Nonprofit CEO’s should not be permitted to serve on corporate boards in part because such service is time-consuming, deflecting attention of the CEO from his or her supposedly full-time job. What’s more, it can create serious conflicts of interest; and the corporate-board fees and stock benefits add to the inflationary spiral of nonprofit compensation.

• If a nonprofit group felt strongly that its chief executive needed to sit on a board, it could allow him or her to serve on one company board without pay.

• Reduce the disparity between the salary and benefits awarded to top executives and those awarded to the second-highest-paid staff member, as well as to other staff members. Nonprofit boards should avoid awarding special privileges to senior executives, since that does not promote effective teamwork or could cause top-notch staff members to leave.

• Urge boards to do a better job of overseeing compensation. Boards of directors have a special role in maintaining reasonable compensation packages for top executives and other staff members at the organizations they govern. They should not forget that they are responsible for overseeing a nonprofit organization, not a for-profit company, something that corporate executives serving on nonprofit boards often forget.

At a time when nonprofit groups have been asked to do more with less, chief executives of the biggest organizations must demonstrate that they too are capable of doing a lot more with a lot less money in their paychecks. To show their commitment to the common good, each of the leaders of the 200 largest nonprofit groups should volunteer to reduce their pay by 10 percent to 20 percent.

It is urgent that nonprofit groups take steps to shift away from the corporate culture that has insinuated itself into the life of the largest organizations. Stemming the growth of compensation packages is a major way to accomplish this goal.

At stake is the confidence of donors and taxpayers, who are themselves sacrificing their own financial needs as the recession continues.

Pablo Eisenberg, a regular contributor to these pages, is a senior fellow at the Georgetown Public Policy Institute. His e-mail address is pseisenberg@verizon.net.