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Nonprofit Salaries Too High?

A handful of nonprofit CEOs are making upwards of a million dollars a year in salary and compensation.  The government isn’t pleased.

State and federal officials are starting to take their knives to the pay of leaders of nonprofit groups they do business with to help share the pain of tighter budgets.

A provision in New Jersey’s recently passed budget, for example, includes a limit on what nonprofit groups can pay their chief executives if they are providing social services under state contracts. The cap, based on a formula that also applies to for-profits providing such services on behalf of the state, is part of a broader effort by Gov. Chris Christie to rein in salaries on state workers.

In New Hampshire, Attorney General Michael A. Delaney is investigating compensation among nonprofit hospital executives. And Vermont legislators are trying various ways of curbing salaries paid by nonprofit groups that have contracts with the state.

On Capitol Hill, four senators this spring refused to approve a $425 million package of federal grants for the Boys & Girls Clubs of America after staff members looked at the organization’s tax forms as part of a routine vetting process and were surprised to learn that the organization paid its chief executive almost $1 million in 2008 — $510,774 in salary and bonus and $477,817 in retirement and other benefits. “A nearly $1 million salary and benefit package for a nonprofit executive is not only questionable on its face but also raises questions about how the organization manages its finances in other areas,” said Senator Tom Coburn, Republican of Oklahoma. Another senator, Charles E. Grassley, Republican of Iowa, has told Treasury Secretary Timothy F. Geithner that he is concerned that the Internal Revenue Service is not tough enough in policing pay in the nonprofit sector and that regulations governing compensation are too weak. “I’ve asked him to review these regulations to see how they can be made effective,” Mr. Grassley said. “What’s there now doesn’t seem to be working.”

[...]

The compensation awarded to nonprofit leaders follows no discernible pattern, even among similar types of nonprofits.

Roxanne Spillett, the chief executive of Boys & Girls Clubs, was paid $988,591 in 2008, a year in which the organization took in $107 million. Dr. Jennifer Howse, chief executive of the March of Dimes, was paid a total of $627,104 by her organization, which raised $237 million.

Compensation also varies by type of nonprofit. Museum directors and hospital chiefs generally are better paid than leaders of other nonprofits. Median compensation among the organizations that participated in the Chronicle of Philanthropy’s annual survey examining pay at the wealthiest charities and foundations was $361,538 in 2008 — but the median compensation among hospital executives was $848,802.

There are no clear rules for the I.R.S. to assess pay at nonprofits. Organizations it questions can make their case using opinions from compensation consultants, among other things.

This story conflates two issues:   The parameters under which an entity should enjoy nonprofit tax status and what practices the government should use in contracting out work to nonprofit groups.

With respect to the first — and, full disclosure, I work at a nonprofit but one where executive salaries are a fraction of those being discussed here — it seems to me that, if we’re going to recognize groups as nonprofits, it should be on the basis on their work product.  If their main effort is charitable or educational, they they’re a nonprofit.   It’s not clear why it matters if an established charity pays its CEO a princely salary, since that’s taxable under personal income tax just as if he worked for a for-profit firm.

We need to distinguish cases of fraud, of course.   If a few people get together to start a “nonprofit” whose main purpose is to funnel money into the pockets of the founders, it obviously shouldn’t enjoy tax-exempt status.  But the law presumably handles that sort of thing well enough.  Although, frankly, it would be pretty hard to raise money for such a cause anyway.

The question of contracting out to nonprofits is interesting in a different way.   First, it’s quite debatable whether these public-private partnerships ought exist at at.  I don’t have a firm position on the issue.   Second, if they do, then it makes sense to evaluate them on a cost-benefit basis.   And I’m not sure why that would be done on a line-item basis.   Either Boys & Girls Clubs of America is providing whatever service the government wants provided at a level of cost and efficiency that outcompetes other potential bidders or it doesn’t.  A high CEO salary should make them less competitive than outfits paying lower salaries, all things being equal.   But if they still come out on top even with that drag, what’s the problem?

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About James Joyner
James Joyner is the publisher of Outside the Beltway, an associate professor of security studies at the Marine Corps Command and Staff College, and a nonresident senior fellow at the Atlantic Council. He's a former Army officer and Desert Storm vet. He has a PhD in political science from The University of Alabama. Views expressed here are his own. Follow James on Twitter.

Comments

  1. Brummagem Joe says:

    ” But the law presumably handles that sort of thing well enough. Although, frankly, it would be pretty hard to raise money for such a cause anyway.”

    This is not an unknown phenomena although it’s only a small part ot the problem. But it’s hard to deny there is not a lot of abuse in the system with executives at non profits with not particularly demanding jobs and/or taking a disproportionate share of their organization’s endowment. On the other hand there are some huge and complex non profits particularly in the medical field that need top quality management talent to ensure they are run efficiently. It seems to me that this is a not dissimilar problem to that one encounters in the relationship of corporate shareholders and managers. Theoretically the stockholders own the company but in reality the management does. The same thing happens at richly endowed non profits. It isn’t very long before the management thinks the non profit exists for their benefit and not the benefit of whatever purpose it was created for. Hence fat salaries, BMW’s, “conferences” in exotic locales, fat pensions etc etc. The govt needs to take a look at it.

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  2. just me says:

    While I am not sure I want the government dictating how much nonprofit executives can or should make, I consider this when deciding where to send my charitable contributions. I refuse to donate to United Way because I find the salaries of its executives appalling. So that in combination with the fact that I don’t like paying high salaries to middle men, I refuse to give a dime to United Way.

    But I do think it is ridiculous to expect a non profit executive to make peanuts given that running an organization requires a certain skill set that just anyone off the street is unlikely to have. For instance I highly doubt just anyone could run a hospital, it would require a certain knowledge base, education and training level, and people with that skill set should be fairly compensated and at a wage that is close to competitive to the work being done. I am not sure myself where the line of fair compensation is or should be and not all non profits are the same with similar goals and similar clients.

    An art museum is very different from a hospital administrator which is different from running a camp for special needs children or a program that places children with foster parents.

    But I will say when it comes to government contracts, I am not too bothered if the government set a certain ratio for how much per dollar is spent on the program delivery and how much is spent on overhead or some other method to determine who should receive government contracts. If the government sees a super high executive salary and more than 50% of the donations going to overhead, I wouldn’t be bothered if the government decided to send their contracts to a program that only had 30% or 20% overhead with the bulk of donations going towards the delivery of services.

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  3. Dantheman says:

    James,

    Years ago, I was a young attorney involved in a case to determine if a center for treating handicapped children should be considered a charity, and thus not have to pay real estate taxes on its several large (50+ acres in Philly suburbs) campuses. The CEO (who in the early ’90′s was making over $400K) testified at a deposition (going from nearly 20 year old memory) “One of the problems I have with the thrust of some of these questions is that we should just be opening the doors and letting in anyone without regard to their ability to pay. Doing that would be simply irresponsible”.

    Since providing services to those unable to pay _is_ a large part of being charitable, we used that quote to push for summary judgment (i.e., winning the case before trial). The settlement offer from the non-profit came in soon thereafter.

    I think the question becomes whether paying such large salaries to executives prevents the entity from providing as much services to the needy as possible. I tend to agree with just me, that the level of overhead is something governments should look at to see which non-profits to patronize.

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  4. steve says:

    As a purchaser of services provided by charitables, the government should look for the best rate of return and not concentrate on internal pay structure. As a contributor to charities, one should always look at salaries and cost overhead. I avoid large charitable organizations with high administrative overhead. Always look at their financial statements.

    Steve

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  5. wr says:

    Isn’t this interesting? When some in congress suggested there might be some restrictions on multi-million dollar salaries and bonuses paid to bankers whose firms had taken billions in government money, Republicans screamed that this was Communism and Fascism, that employment contracts were absolutely sacred and untouchable, and that government never never never had any business telling a company what they could pay their workers.

    Now some on the right want to make sure that non-profits can’t pay their leaders salaries that are remotely competetive with those in the free market — and not a peep from the Republicans.

    Because big banks give money to Republicans. And non-profits help poor people.

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  6. john personna says:

    I remember a story from the 80′s, when estate taxes where high. A high tech billionaire set up an ocean research foundation, and set up his kid as director. The charter of the foundation was pretty broad: reef ecology, underwater archaeology, etc.

    I remember thinking “what a great scam.” You beat estate tax, and your kid gets to sail and scuba dive and live on beaches for the rest of his or her life.

    I suppose the morality of that foundation came down to how much good they did, and yeah, what kind of salary they ended up paying the director. Make the salary 100K and I might think it is structured for good works. Make the salary 1M and I might think the dodge is a little obvious.

    That is where “salary” in a “non-profit” interact, and a reason they aren’t “conflated.”

    Salary is a way to extract “profit” from a seeming “non-profit.”

    (I agree on most of the rest, and would still close out many public-private partnerships. Though, if a genuine non-profit competes bid-to-bid with everyone else and comes in lower … that might be a way to identify a genuine advantage.)

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  7. john personna says:

    BTW, there is a parallel which might be important: those Bell, California, salaries.

    If we have widespread “looting” in our for-profits, non-profits, and governments it might say something bad about our stage of civilization.

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  8. James H says:

    Hmph. I don’t know about full-on seven-figure salaries, but it seems to me that managing a large nonprofit is a challenge equivalent to managing a large corporation. And the needed office people — the lawyers, the accountants, the secretaries, the compliance officers — all need to be paid. You would hope they work for the nonprofit for the warm fuzzy feeling of helping to help others, but the warm fuzzy feeling doesn’t pay the landlord.

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  9. john personna says:

    James H, wouldn’t you agree that we could have a little more confidence that people being paid just slightly “under market’ compared to for-profits are there for the right reasons?

    If someone has demanded an “over market” price, maybe he’s in the wrong business.

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  10. just me says:

    Hmph. I don’t know about full-on seven-figure salaries, but it seems to me that managing a large nonprofit is a challenge equivalent to managing a large corporation.

    I think this is a good point, which is why I don’t really think the government should be defining salary. But I think if that full on 7 figure salary ends up being a large chunk of a charity’s proceeds then there is a problem. That’s why I wouldn’t really have an issue with the government awarding contracts based on a reasonable ratio between funds spent on overhead/salaries etc and funds spent on providing whatever service the entity provides.

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  11. Dave Schuler says:

    I think there are essentially two questions: fraud and taxation.

    501(c)3 corporations don’t have restrictions on internal salary structure but they do have restrictions on their sources of revenue. Essentially, they need to receive donations from the public, not simply from a single individual or a small handful of individuals. IIRC 2% is the limit. A tax-exempt not-for-profit corporation that solicits donations from the public purportedly for any of the broad range of charitable, scientific, and other causes for which such things are authorized would appear to me to be defrauding its donors if it uses more than a small proportion of its revenues to pay salaries rather than for its chartered purposes. At least de facto if not de jure.

    Secondly, as I’ve noted above these organizations are exempt from taxes. Should that be the case if the organization is primarily a conduit for channeling money to a handful of top executives? I don’t think so and I think we’ve got a perfectly legitimate grounds for seeing that not-for-profits are actually not for profit.

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  12. john personna says:

    Speaking of peer-pay …

    Corporate boards appear to routinely use compensation peer groups to artificially inflate pay for their chief executives, helping to contribute to the cascading increases in executive compensation over the last several years, according to an academic study on corporate governance.

    http://dealbook.blogs.nytimes.com/2010/07/26/study-boards-use-peers-to-inflate-executive-pay/?ref=business

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