Why Foundation CEO’s Deserve to Be Well Paid

To the Editor:

Pablo Eisenberg argues that excessive pay for foundation executives needs to be curbed (“Excessive Executive Compensation Needs to Be Stemmed,” April 29). He notes that the president of the United States makes $400,000 and suggests that should serve as a ceiling for foundation CEO’s.

The president’s salary is one valid benchmark, but let’s look at a few others: The average compensation for the CEO of a major company in 2003, according to The New York Times, was $9.2-million. At the other end of the career ladder, the median starting salary for someone who just received a master’s degree at a top business school was $160,000. And both of those numbers reflect the middle of the ranges.

Now compare those benchmarks to the compensation of a major foundation CEO who is at the pinnacle of his or her career and responsible for hundreds of millions of dollars in annual grants. Should the limit be two-and-a-half times the average compensation of a 25-year-old holder of an M.B.A.? Is a 96-percent pay cut from the average salary of a CEO at a major company somehow an insufficient adjustment?

One may dismiss those benchmarks as inappropriate, but take a closer look at Mr. Eisenberg’s own choice: the president’s salary is certainly not his total compensation. One would have to factor in a tax-exempt housing allowance for living in the White House; meals and transportation, including travel by private jet; a complimentary country retreat at Camp David; a $50,000 tax-free expense allowance; and a pension of $160,000 per year for life, vesting after only four years on the job. Those particular perks, worth millions, can’t be found in the employment agreements of any foundation CEO’s.

I’m not sure what motivates someone to run for president, but I know the salary is irrelevant. Perhaps that is why every president in recent memory has been a millionaire. Maybe the best way to govern the country is to pay so much less than the private sector that only those who are already wealthy choose to run for public office. On the other hand, depending almost entirely on millionaires to set government policy might be part of the problem. More tax cuts for the wealthy, anyone?

In fact, it is just conceivable that the selection bias from the below-market compensation of our government leaders has cost our society many billions or trillions of dollars more than the minuscule savings. And I believe that something similar is happening in the nonprofit sector.

I would never defend the multimillion-dollar salaries of corporate CEO’s, and no one needs $400,000 to live comfortably. But the issue is much broader than that. Across the country, nonprofits and foundations seriously underpay their staff at all levels, and the result is deeply detrimental to the level of social impact those organizations achieve.

Like the president, there are always a few lucky people who can afford to choose their work without regard to compensation. There is another small group of missionary social entrepreneurs who surrender their standard of living in order to serve society. Depending on the lucky and the missionary, however, excludes a great many talented people who could contribute greatly to our nonprofit sector and would gladly join if the sacrifices weren’t quite so extreme. Taking a vow of poverty shouldn’t be required to work constructively for the betterment of society.

This issue is exactly what holds the nonprofit sector back from vastly greater social impact. We are penny-wise and pound-foolish on an extraordinary scale. Congress isn’t worried about whether the $25-billion in annual foundation grants is spent well, but lawmakers would like to pass a law that restricts foundation staff from flying business class overseas. We judge everything foundations do, except the results.

There have been embarrassing abuses to be sure, and newspapers have recently highlighted a number of them. Paying millions to part-time trustees of small foundations is egregious and illegal. But surely we can tell the difference between coming closer to market-rate wages throughout the sector and the unmitigated greed of a few bad apples.

If a foundation CEO can increase by even 10 percent the social impact of $50-million in annual grants, it makes economic sense to pay that person a salary even beyond the current limits that cause Mr. Eisenberg such concern.

Mr. Eisenberg argues that as much money as possible should go to the needy, and he points out that there are many well-meaning and financially strapped nonprofits eager for the money that goes into a foundation executive’s pay. But being needy isn’t the same as being effective. Our society, and the needy themselves, might be better off with less charity and more effective social programs that truly meet their needs and help them become self-sufficient. And it will take exceptional creativity and management talent to accomplish that.

Where Mr. Eisenberg and I agree is that compensation today is rarely linked to performance. Without measuring foundation performance, and thereby CEO and board performance, one cannot know whether the relatively high salaries of foundation CEOs are justified or excessive. It is this linkage to performance, rather than the salaries themselves, that must be examined.

Mr. Eisenberg concludes that excessive compensation undermines the “spirit of charity.” I would agree, except that I define excessive not in absolute dollars but relative to the results achieved. And I believe that charity would be improved with a little less spirit and a few more results.

Mark Kramer
Managing Director
Foundation Strategy Group
Boston