Are nonprofit CEOs overpaid?

Public Interest, Wntr, 2001 by Peter Frumkin

THE nonprofit sector has acquired a black eye in recent years. Financial scandals at the United Way, NAACP, Adelphi University, and the Baptist and Presbyterian Churches have shaken public confidence in the stewardship of charitable organizations. As money flows in and out of nonprofit organizations at record levels, the question of how much their CEOs should earn has become a major issue.

One recent survey of compensation levels in 246 large nonprofit organizations found that the average salary was $207,990. Twenty-five CEOs earned more than $400,000; 114 earned between $200,000 and $399,999; 77 earned between $100,000 and $199,999; and 30 earned less than $100,000. At the high end in their respective fields were the president of Sloan Kettering Cancer Center ($1,077,500), the president of the University of Pennsylvania ($529,677), the CEO of the Cystic Fibrosis Foundation ($389,327), the general director of the San Francisco Opera ($425,000), the executive director of the American Olympic Committee ($483,665), and the Chief Scout Executive of the Boy Scouts of America ($388,845). At many of the organizations, an employee other than the CEO was the highest compensated, including the chairman of the cardiothoracic surgery department at Cornell University ($1,731,922), the football coach for the University of Southern California ($750,000), and the music director of the National Symphony Orches tra ($829,916). As a whole, salaries in the nonprofit sector rose slightly faster last year than those in the business sector, reflecting the belief that charities need to "catch up" with what for-profit firms pay their leaders.

For years, government largely ignored the difficult ethical and regulatory issues raised by increasing compensation levels in the nonprofit sector. In an effort to address growing concerns about the financial management of nonprofits, Congress enacted legislation bearing on nonprofit compensation as part of the Taxpayer Bill of Rights in 1996. After drafting regulations and seeking public comment, the Internal Revenue Service has now put in place a new regulatory framework to guide compensation in public charities and a system of sanctions for delinquent organizations. Yet fundamental questions remain: Are salaries in the nonprofit sector really too high? Should salaries be regulated to block the unwise transfer of charitable resources? Will the IRS's new regulatory effort succeed in controlling nonprofit compensation? It is unclear whether salaries are so high that they jeopardize the mission of charitable organizations. But what is clear is that the new regulation scheme will accomplish little.

Why regulate?

Two competing perspectives on nonprofit compensation have emerged in recent years. For some, the idea of paying nonprofit executives salaries that rival those in the business world is absurd. After all, the reasoning goes, those who choose to work in the nonprofit world do so knowing that few charitable organizations can afford generous financial rewards and that psychic pleasure is the coin of the realm. Accordingly, anyone seeking a generous compensation package should look to other parts of the economy for more lucrative opportunities. Looking at the intersection of mission, stewardship, and accountability, this side of the argument concludes that nonprofits cannot responsibly devote substantial charitable resources to paying their employees when the same resources could in many instances be used to serve needy clients or fulfill the organization's mission.

But not everyone sees nonprofit employment as demanding a vow of poverty. Increasingly, some have argued that the nonprofit sector needs to pay its best workers competitive wages if charitable organizations are to attract and retain the most talented and capable people. Those embracing the idea of comparable pay across sectors sometimes argue that it is precisely because there is no clear bottom line in the nonprofit sector that good managers are essential. With reliable indicators of achievement hard to define in the absence of such measures as earnings per quarter, share price, and debt to equity ratio, nonprofit managers must be especially creative and resourceful in how they deploy an organization's human and financial capital. Leaders of large nonprofit organizations must be able to juggle multiple tasks and motivate both professionals and volunteers. These tasks require people with strong management and leadership skills. For this reason, compensation packages competitive with those in the for-profit s ector are necessary; otherwise, nonprofits will become employers of last resort.

Why would government want to regulate how much nonprofit managers earn? Four different reasons have been offered: because existing disclosure mechanisms are flawed and unreliable; because nonprofit boards have little incentive to monitor manager salaries; because several categories of nonprofits are substantially insulated from any market test; and because, even if stakeholders diligently monitor salaries, regulation may be necessary to ensure that charitable dollars are used for public purposes.