Are nonprofit CEOs overpaid?

Public Interest, Wntr, 2001 by Peter Frumkin

Ironically, far from eliminating or discouraging financial abuses, the new rules may pressure nonprofits to pay "comparable worth," thus increasing salaries. As boards begin to consult studies of what other organizations pay and what businesses offer to their executives, it is possible that there will be a slow but steady regression to the mean. Concerned with not paying too much, nonprofits may collect data on what others are doing and gravitate toward what they believe is the mean salary for a given position. But while there is nothing inherently wrong with paying the mean salary, it may often be that a charity could have hired someone who would have done the same work for less money.

Regulating through information

What then should be done? The best strategy for effectively regulating and preserving the nonprofit sector is to create a reliable supply of information about the financial management of charities and to encourage donors, clients, and the general taxpaying public to make use of it. By opening up nonprofits to public examination and empowering stakeholders with information that can help guide their contributions and use of services, it may be possible to improve accountability.

Making IRS Form 990s easier to access is a good start, but it is not the only alternative. Some critics of nonprofits have long argued that only the creation of independent accrediting agencies will increase information. Watchdog organizations are needed not only to collect data but also to analyze it and explain it to the public. Independent accrediting and oversight agencies have in fact been established in certain areas, though the results have been mixed. The Better Business Bureau, for example, reviews charities' compliance with standards regarding (among other things) using a high percentage of funds for program activities, having active governance, and providing complete and accurate information to donors and potential donors. It also catalogues government action against national charities. The National Charities Information Bureau acts as a kind of accreditor for charities by collecting information on nonprofits and reporting which organizations have complied with requests for information and which h ave not. Such voluntary systems rely on the good will of charities both to provide information and to record data accurately. The main problem with this approach is that it does not effectively monitor the organizations that ignore requests for information.

As a result, some argue that the only real solution to the accountability problem in the nonprofit sector--and the narrower question of compensation--may lie in the establishment of an SEC-type organization that could ensure openness and disclosure. This would be a way of "regulating through information." The principal role of an SEC for nonprofits would be to bring uniform accounting techniques to public charities, disseminate information on the financial condition of organizations, and create channels through which donors, volunteers, clients, and community members could access and use this information. Of course, this would be a far more complex proposition in the nonprofit sector, where lines of ownership are overlapping and ill-defined, than in the business sector, where one group of owners, namely shareholders, have clear interests in solid information. For such a strategy to work, a major transformation would be needed not just in the kind of information made available but in the outlook of nonprofits ' many stakeholders.