August 13, 1998 | Read Time: 5 minutes
In recent years, the non-profit world has been shaken by a series of scandals and news-media exposes that have undermined the public’s trust in the integrity of charitable organizations. One of the major reasons for that shaken trust has been the high salaries and benefits received by some officials of large charities and foundations.
Public doubts were stirred once again by a recent front-page article in The Washington Post that reported that the chief executive officers of the country’s seven richest foundations last year received salary increases of five times the rate of inflation. The average salary of those officials was $363,000 a year, with some receiving annual total compensation packages exceeding $500,000.
When the large majority of charities are struggling not only to make their modest budgets but also to give their executive directors a reasonable salary and benefits, such increases are clearly inappropriate. The time has come for the government to help establish limits on the compensation packages earned by non-profit leaders.
Congress passed the so-called intermediate-sanctions law in 1996, in part to crack down on excessive salaries and other instances of unfair financial benefits that have accrued to officials at non-profit organizations. Last week the Internal Revenue Service issued its proposed rules on how it will enforce the law.
Yet the law and the proposed rules don’t set any dollar limits on salaries or benefits. They simply ask charities to insure that their salaries are in line with the salaries paid at comparable for-profit and non-profit organizations. Such a requirement does little to deal with the fact that salaries are now out of line — and it misses the critical distinction between the for-profit and non-profit job markets.
Foundation officials and board members usually cite two reasons as justifications for high salaries and benefits. The first is that, like leaders of large businesses, the leaders of major foundations are responsible for managing hundreds of millions or billions of dollars. Therefore, they argue, it is reasonable to pay foundation leaders what their counterparts in the business world earn.
That argument is based on the belief that there must be a strong correlation between the size of assets and the size of managers’ salaries. But the strength of the non-profit world — indeed, of civil society as a whole — is that it is based on more than financial considerations. The notions of caring, social commitment, public service, community improvement, and satisfaction in making society better are the pulse that drives the work of non-profit organizations and earns the respect of the general public. Focusing on “market factors” that can dictate exorbitant salaries erodes that trust.
Foundation officials also claim that high salaries and benefits are necessary to attract the very best talent available. Colburn S. Wilbur, executive director of the David and Lucile Packard Foundation, was quoted in The Washington Post as saying, “We have to compete to get qualified people. . . . We want people who will make a big difference, alleviate problems, change things, make the world a better place. This is much more important than asking individuals to sacrifice to save a few dollars.”
That claim is nonsense. The truth is that you don’t need salaries of $300,000 to $600,000 to recruit top talent to jobs at major foundations. Plenty of talent is available for charitable organizations — at much lower compensation packages than those currently in vogue. Foundations need leaders with vision, courage, connections with communities, and a willingness to take risks. Such admirable qualities don’t carry a price tag.
It is not the pool of talent that is lacking. Rather, the problem is that foundation boards and their executive-search firms appear to be seeking only a particular type of candidate — current or former university and college presidents, high-profile people with name recognition, or safe, predictable establishment insiders.
Using the standards set by some foundations and corporations, many charities also award excessive salaries to top executives chosen from a limited pool of candidates. This growing cult of the C.E.O. among non-profit groups — charities and foundations alike — is neither beneficial to the morale and effectiveness of the organizations nor helpful in maintaining the public trust in the non-profit world.
Since not all charities and foundations seem to understand why it is wrong to try to match the salaries paid by big business, government regulation is essential. Federal or state legislation could put a firm ceiling on non-profit salaries and benefits, but such an approach would be politically impossible to implement.
More feasible would be a federal incentive — written into the tax law and overseen by the Internal Revenue Service — for non-profit groups to give their top employees more-reasonable salaries and benefits. For example, I.R.S. regulations could be modified to require that all non-profit organizations, including foundations, paid a 25- to 40-per-cent tax on that portion of a staff member’s salary and benefits that exceeded, say, $250,000 or $300,000.
Federal regulations to put a brake on the growth of excessive compensation packages would be a clear signal to charitable organizations and their boards. It would help restore public confidence in the work and integrity of the non-profit world. Because it would be in their long-term self-interest, it is a measure that charitable organizations themselves should champion.
Pablo Eisenberg, co-chair of the National Committee for Responsive Philanthropy and former executive director of the Center for Community Change, in Washington, is a regular contributor to these pages.
