Questioning Compensation

Chronicle analysis finds executive pay at many smaller charities makes up a large portion of the budget

When the Internal Revenue Service announced in June that it would more aggressively investigate excessive

compensation for top charity officials, its primary focus seemed to be on large charities, with the agency pledging to take a close look at any executive making $1-million or more.

Yet the problem may be just as bad — or worse — at small and midsize charities, which are subject to less public scrutiny than the biggest nonprofit organizations. One way the IRS might try to identify abuses among the smaller charities is to examine charities that spend a very large portion of their budgets on the salary of just one executive. Using GuideStar’s database of Form 990 tax returns (the latest available data was from 2002), The Chronicle analyzed salary information filed by smaller charities, to see what such an approach might yield.

The Chronicle grouped charities by the amount they spend each year, and then ranked them by the percentage that goes to executive compensation. While the analysis found many errors in reporting and aberrations caused by unusual circumstances, it also found that at 183 organizations with annual spending of less than $2-million, the salary of one official represented at least 40 percent of the organization’s budget.

Defending Pay

While many nonprofit officials whose pay represented a significant portion of their organizations’ budget declined to discuss the reasons behind their pay levels, those who were willing to talk offered strong arguments in defense of their salaries.

For example, Michael J. Widmer, president of the Massachusetts Taxpayers Foundation, which provides research and recommendations for strengthening that state’s finances, earned $309,206 in salary and benefits in the 2002 fiscal year — roughly 36 percent of the nonprofit group’s total spending ($867,629).

In an interview, Mr. Widmer said that his compensation was comparable to that of executives at similar organizations in the Boston area, including the Greater Boston Chamber of Commerce and the Massachusetts Business Roundtable. He noted that he had worked at the charity for 12 years, and that he had built its cash reserves from nothing when he started to covering more than one year’s annual budget today. In 2003, the organization won an award for “outstanding policy achievement” from the Governmental Research Association, a national group of professionals engaged in government research.

“For an annual budget of less than $1-million, we have an enormous impact,” Mr. Widmer said. “I think I’ve demonstrated that I’ve earned this salary.”

How Useful a Screen?

Scholars, legal experts, and compensation consultants interviewed by The Chronicle offered differing opinions on how useful it is to judge the fairness of executive compensation by looking at the portion of a charity’s budget eaten up by salaries.

“This is the kind of thing that the IRS should do,” says Marc Owens, formerly the IRS’s top charity regulator and now a lawyer in Washington. “They should do some screening using the 990 data to target their audits. You can’t make conclusive determinations based on the 990, but it does give you a way to winnow down a large stack of forms.”

Others believe such screening would be a waste of time for the IRS, consuming lots of staff time with no clear payoff.

“There’s no cookie-cutter solution,” says Sheldon S. Cohen, a former IRS commissioner. “You can’t just say if anybody pays out 40 percent of expenses as compensation that they’re suspect. It would be a long list, with no rhyme or reason to it.”

Steve J. Pyrek, an IRS spokesman, said the IRS is “using some comparisons similar to those The Chronicle used” in a new enforcement effort in which the agency will contact 2,000 nonprofit organizations about their compensation practices. “We can’t go into that in any detail,” he said.

In a news release in August, the IRS said it would use compensation information found on the 990 in deciding which organizations to contact.

“The IRS has an obligation to investigate questionable compensation practices and put a stop to abuses we find,” Mark W. Everson, the IRS commissioner, said in a statement accompanying the release.

One Person Does It All

While at first blush it may seem unreasonable for charities to spend 40 percent or more of their budgets on the compensation of one official, many such groups are one-person operations with few expenses beyond the services they provide.

Donald Lubin, president of the Suburban Essex Housing Development Corporation, in Glen Ridge, N.J., made $131,125 in 2002, which accounted for 91 percent of the total spending by the charity ($143,799). Mr. Lubin is now the sole employee of the organization (it once had three workers), which helps other charities obtain state and federal grants to build low-cost housing. That is a service that many for-profit consultants also provide, but Mr. Lubin says his organization sought tax-exempt status because it is driven by mission rather than profit.

“We thought we were filling a special niche,” he says. “Much of what we do is mentoring.” As for his salary, he says “it’s not nearly enough, but it’s all that the company can afford based on the fees that we generate,” he says.

At the Musella Foundation for Brain Tumor Research and Information, in Hewlett, N.Y., Albert Musella, the charity’s president, made $150,000 in 2002, roughly 58 percent of the organization’s $259,964 in total spending.

Dr. Musella, who founded the charity to collect and distribute information on brain-tumor treatments and is the only paid staff member, says he spent several years working as many as 60 hours a week on the project as a volunteer. “It got to the point where I couldn’t maintain my medical practice at the same time,” he says. He notes that his salary at the charity is not “out of line” for a physician.

The organization’s revenue comes from sponsorships on its Web site and other private donations, and both are lagging now. Dr. Musella says he continues to practice medicine eight hours a week to keep his skills sharp in case he is forced to close the charity.

Charity experts say such examples — in which the executive’s salary consumes the bulk of the spending — shouldn’t necessarily worry donors.

“It may be that the only way the organization can be that effective is that that person has all the right information and all the right contacts, and they’re worth every penny they’re making,” says Rikki Abzug, an associate professor of nonprofit management at New School University’s Milano Graduate School of Management and Urban Policy. “What is program delivery in the service sector except people working? I wonder what would happen if donors found out that all the money they gave was going to the computer system.”

Many experts, including Evelyn Brody, a professor at Chicago-Kent College of Law who specializes in nonprofit tax law, believe more charities should merge, given that more than 950,000 charitable organizations are registered with the IRS. “It feels wasteful somehow,” she says. “It just feels like there are just too many charities.” But Ms. Brody says that there could still be some social value in a tiny charity that spends every nickel on executive compensation. “Presumably they’re doing something — they’re reaching the public in some way,” she says. “One person could be the chief cook and bottle washer. You’re going to find ‘founders syndrome’ cases all over the place.”

Start-Up Charities

For charities that are in their earliest stages of development, the decision about how much to pay a chief executive is especially tricky.

William P. Gordon, director of the Institute for Brain Potential, in Los Altos, Calif., made $284,913 in salary and benefits in the 2003 fiscal year, which consumed 52 percent of the charity’s $548,757 in total spending. The institute sold assets related to its seminar work in 2000, and since then has been solely focused on developing a new publication, Best Practices in the Behavioral Management of Chronic Disease. Behavioral medicine, according to Mr. Gordon, is “the study of how to get patients to do what the doctor tells them to do, such as physical fitness or just taking the pills that are prescribed.”

“We’ve been working for years to get this ready,” Mr. Gordon says.

The years of planning have kept revenues and expenses low — which is why Mr. Gordon said his salary might seem out of line. Soon, he says, revenue and expenses will be much larger, and his salary will consume a much smaller piece of the total pie.

Mr. Gordon believes the Form 990 provides a misleading picture for any small charity with big ambitions. “There may be years of dormancy that appear on paper that are actually integral to the future development of the charity,” he says.

Other charity officials maintain that identifying excessive compensation by the percentage of spending going to one person’s salary is wrongheaded, since it could reward charities that add unnecessary employees and bloat the payroll. The additional spending would make the chief executive’s salary consume a smaller chunk of the total budget.

Rabbi Charles Rosenzveig, founder and executive director of the Holocaust Memorial Center, in Farmington Hills, Mich., earned $300,522 in salary and benefits in the 2002 fiscal year, some 43 percent of the total amount spent by the museum that year. That salary is also about $65,000 more than the $235,000 that Sara Bloomfield, director of the critically acclaimed United States Holocaust Memorial Museum, in Washington, earned in the same year. (Ms. Bloomfield earned $262,400 in 2003.) However, Rabbi Rosenzveig’s salary lags far behind that of Rabbi Marvin Hier, dean and founder of the Simon Wiesenthal Center, a Los Angeles museum focused on the Holocaust. Rabbi Hier earned $485,000, including benefits, in the 2002 fiscal year.

Rabbi Rosenzveig argues that he is paid appropriately because he runs educational programs for visitors, handles fund raising, and undertakes other tasks all by himself — duties that are handled by other people at other Holocaust centers. (A portion of his salary — $50,000 — was compensation for his work getting the center started, and 2002 is the last year he received such a payment. He received no salary from the charity from 1967 to 1981 while working to raise money to open the center’s original building.) The Holocaust Memorial Center, which has student visitors from nearly every school district in Michigan each year, according to Mr. Rosenzveig, employs just 11 full-time people in its new, 50,000 square-foot building. The Washington museum has a building that is five times the size of the center in Michigan, but a budget that is 92 times as big ($63.4-million).

“You have to ask yourself, why is the budget so high there?” Rabbi Rosenzveig says. “I believe I can say with authority that for a like service, we are the lowest-cost provider in the country. Instead of hiring different people to do this and that, we are doing all those things ourselves.”

Andrew Hollinger, director of media relations for the United States Holocaust Memorial Museum, declined to comment on Rabbi Rosenzveig’s statement.

Even experts who favor greater disclosure of compensation for charity officials say that Congress and the IRS should be careful not to go too far, such as setting caps on what percentage of a budget executives of organizations can earn.

“We can’t make compensation the be-all and end-all,” says Ms. Brody of Chicago-Kent College of Law. “There are organizations that aren’t paying too much that aren’t doing a whole lot, and organizations where compensation is high that get a lot of things accomplished.”

Harvy Lipman contributed to this article.