Excessive Executive Compensation Needs to Be Stemmed

Fast-spiraling salaries have become the norm for top officials of large foundations — and a growing number of executives seem to see fat paychecks as an entitlement. This corporatelike pay structure is beginning to undermine the integrity of major foundations and public confidence in them, as well as in the small foundations that mimic their big sisters’ grandiose spending habits.

Nothing could have made it clearer that chief executives and their boards believe a high salary is paramount than the situation at the Daniels Fund, in Denver. Just as Hank Brown, president of the fund, was laying off 21 staff members and closing the foundation’s offices in New Mexico, Utah, and Wyoming to cut spending on administrative costs, he accepted a $30,000 raise, bringing his annual pay to $400,000. Although Mr. Brown said the board did not accept his offer to take a pay cut, his objections appeared to lack much conviction. He could just have said “no” or perhaps that the devil made him do it.

Mr. Brown’s salary is now the same as that paid to the president of the United States, and compared with other foundation executives, both Mr. Brown and George W. Bush rank fairly low on the salary scale. More than two dozen chief executives received more than $400,000 in salary in 2002, not to mention generous benefits, according to The Chronicle’s most-recent survey (October 2, 2003). Of those, 12 were paid more than $500,000, and two received more than $600,000. Several others were within $5,000 of reaching the $400,000 level.

Leading the pack was Thomas Lofton, chairman of the Lilly Endowment, who earned $822,000 in 2002. The endowment’s president, N. Clay Robbins, received $660,000, the second-highest salary among top foundation officials. Taking into account their generous benefits — a combined $590,000 — the two received more than $2-million in compensation.

Many foundation heads receive perks such as cars, deferred compensation, club memberships, parking allowances, and supplemental disability and life insurance. Quite a few have sizable expense allowances. Among the largest: $139,476 for Charles Overby, chairman of the Freedom Forum; $117,375 for Vartan Gregorian, president of the Carnegie Corporation of New York; $89,964 for William Bowen, president of the Andrew W. Mellon Foundation; and $66,600 for Jonathan Fanton, president of the John D. and Catherine T. MacArthur Foundation.

Such compensation practices show how many foundations have begun to borrow the corporate cult of the chief executive, with its increasingly high pay, large benefits, special perks, and separation from the rest of the staff. In many cases, the second-highest ranking official in a foundation — not counting the investment officers who are a special case — receives half or less of the CEO’s salary, while excellent program officers may get one-third or less of the salary their CEO receives.

The corporate influence on foundations often comes from direct interaction with the business world. Many foundation CEO’s have joined corporate boards, thereby considerably increasing their already generous compensation and, in some cases, exposing themselves to potential conflicts of interest. Their board responsibilities could lead to conflicts over missions of the business and their foundations, as well as over environmental standards, investment practices, corporate-accountability issues, and much more.

Among the highly paid chief executives who received extra income from their corporate-board service: William Richardson, president of the W.K. Kellogg Foundation, who earned $530,250 in 2002, and received $125,000 that year from three corporations on whose boards he sat, in addition to stock shares and an unspecified amount of money for attending board meetings. Joan E. Spero, president of the Doris Duke Charitable Foundation, who earned $526,933 in 2002, also sat on three corporate boards, for which she received at least $75,000 in fees plus money for attending board meetings, as well as shares of stocks and stock options.

As in the corporate world, executive compensation at foundations is not often tied to performance measures, such as the growth in a foundation’s assets; reductions, increases, or innovations in grant making; effective management of the foundation; the ability to serve as mentors to young staff members; success in meeting urgent public needs; or a willingness to speak out with courage on key issues facing American society.

Aside from the desire to act like businesses, foundations often seem to pay high salaries and benefits because they think the size of the compensation package gives a position legitimacy. They don’t tend to set a salary based on what it takes to attract a very qualified candidate. Executive-search firms that are increasingly employed to find the “right” candidates for top foundation jobs fuel the problem, partly because many of them conduct corporate searches. They often focus on recruiting well-known academic or establishment figures to fill such posts and are likely to overlook first-class people from the ranks of foundation program officers and nonprofit organizations.

But the blame for out-of-control salaries falls most clearly on foundation trustees. Boards of directors are composed largely of wealthy people and highly paid professionals. They are quite naturally influenced by the levels of compensation earned by their peers; on this issue they often lack the perspective of working-class and middle-class people. They are quite comfortable dispensing high salaries, equating them to indicators of excellence.

That is in part what caused such a tragic situation at the James Irvine Foundation, arguably the West Coast’s most innovative and risk-taking large foundation. Its board allowed itself, and its chief executive, Dennis Collins, to get caught in a growing web of corporate-foundation culture with its greed and sense of entitlement.

Mr. Collins’ salary of $382,540 was much less than many of his peers, but he also received nearly half a million dollars in deferred compensation when he retired, a sum both he and the board felt would guarantee that his retirement benefits would be on a par with those given to corporate executives.

The foundation became the subject of several articles featured in the San Jose Mercury News about excessive compensation and inappropriate spending, stories that prompted a spate of investigative reporting about foundation scandals nationwide.

In setting compensation packages, many boards and their experts tend to rely on comparison data that can be both misleading and unreliable. They are likely to look at comparable salaries in the corporate world and among large foundations, thereby reinforcing the notion that high salaries are warranted. They tend not to look at the salary of an outstanding director of a small foundation who earns $100,000 or an exemplary nonprofit executive who earns $150,000, both of whom might be superb at running a large foundation.

The size of an organizational budget — or, in the case of a foundation, its asset size — as a key influence in determining executive compensation often has little bearing on the quality of a candidate to be hired. Big foundations have professional investors on their staffs, and many also hire investment experts as consultants; the chief executives don’t need financial expertise to do their jobs. What they do require is a vision, an understanding of public needs and priorities, a sense of innovation and risk taking, and a commitment to the needs of their nonprofit grantees.

Those of us who have run nonprofit organizations, large and small, also know that the size of an organization’s budget is often not an indicator of the challenge and difficulty of running the institution. In many cases, it is more difficult and demanding to run a small operation than a large organization that has the advantages of enormous resources and expertise.

Many foundation leaders came to their current positions from jobs that paid them far less. Hundreds, if not thousands, of excellent people from nonprofit groups, small foundations, government, business, and academe would make terrific foundation CEO’s and would be satisfied with an annual salary of less than $300,000. If foundation boards had a mind-set that excellence doesn’t necessarily carry a high price tag, they might have selected outstanding program officers and nonprofit officials to fill the positions currently occupied by some lackluster leaders. For those would-be CEO’s of major foundations who want inflated compensation packages, they should look to the business world for employment.

What can be done to stem the rapid increase in top executive salaries, benefits, and perks, which are fast becoming excessive? Jon Van Til, a professor of urban studies and community planning at Rutgers University at Camden, has suggested that the president’s salary of $400,000 should serve as the benchmark maximum salary for foundation executives.

Congress would do well to impose some limits on executive compensation. It could provide incentives for reasonable compensation packages. For example, foundations could be taxed on the amount they paid over the benchmark figure, perhaps at a rate of 50, 75, or 100 percent. In addition, foundations that paid more than the benchmark figure might be required to provide a detailed rationale for their compensation packages in the informational tax returns they submit to the Internal Revenue Service. Or the large foundations could be given a slight reduction in the excise tax they pay if their top executive salary falls below the benchmark.

At a minimum, Congress should order foundations to disclose compensation that any of their executives received from corporate-board duties in detail on their annual tax returns so that the public knows who is receiving what from whom.

The most effective brake on executive compensation, however, can only come from foundation boards of directors. They should be encouraged by trade associations such as the Council on Foundations and by nonprofit groups, as well as the general public, to give serious attention to this matter before the news media expose additional egregious examples of excessive compensation and the public begins to demand that foundations make changes, either voluntarily or because the government takes action.

After all, foundation money is supposed to be used for productive public purposes, and that’s why donors get tax deductions for the amount they give to their foundations and why grant-making organizations are exempt from most taxes. Unreasonably high salaries, fat benefit packages, and unnecessary perks undermine the very spirit of charity, which is to provide as much money as possible for societal benefit and to those in need. Foundation money spent on excessive compensation is money that should be supporting the social-service, research, educational, and advocacy activities of financially strapped nonprofit groups.

Foundation boards have a responsibility to the American public. They should exercise it diligently. Excessive compensation is a runaway train that should be stopped now.

Pablo Eisenberg is senior fellow at the Georgetown University Public Policy Institute and a regular contributor to these pages. His e-mail address is pseisenberg@erols.com.