Are nonprofit CEOs overpaid?

Public Interest, Wntr, 2001 by Peter Frumkin

There is at least one major development on the horizon that may help significantly improve the supply of information. A new nonprofit organization has been formed to disseminate financial information on nonprofits over the Internet. The project, known as GuideStar, is still in its early stages, but it promises to overcome at least part of the information problem. The GuideStar website will allow any person to access the essential financial data for a large number of nonprofit organizations. Information about operating expenses, administrative overhead, and fund-raising costs will all be available to potential contributors and volunteers. The goal of the project is to make research on nonprofits easier for the average donor by putting this data where it is easiest to access.

The responsibility of stakeholders

To make the idea of "information as regulation" a success, the public must take a more active interest in the activity, leadership, and direction of nonprofits. Although nonprofits do not have owners, they do have important stakeholders. These various constituencies (donors, clients, and the general public) all have an interest in the compensation issue, and each is affected differently by charities that compensate excessively. Clients may be hurt because excess salaries drive up the cost of services and make the use of nonprofits less attractive. Donors may be hurt because less resources are used for the charitable programs they support. The public is hurt because tax dollars are not being used in ways that most help the community.

Over the past two decades, earned income--revenues derived from client fees or commercial ventures--has quietly become a central part of nonprofit revenue. While there are still some nonprofits that depend entirely on charitable gifts, the vast majority rely in part or in great measure on revenue from fees and other commercial activities. The clients of nonprofits look more and more like consumers. But because many nonprofits engender trust and are often viewed as community resources, it is rare that clients ask tough questions before using charitable services.

A different set of problems besets charities mostly dependent on donations from foundations, corporations, federated funders, and individuals. Institutional funders have long studied the financial statements of nonprofits during the grant review process. At times, some foundations have aggressively demanded management reforms in the organizations that they fund. This oversight is limited in impact and scope, however, because the vast majority of giving is done by individuals, not by the more visible institutional givers. According to research, individual contributors typically support organizations that they have had contact with in the past or that work in their local communities. Donors are particularly attracted to universities they have attended and to their community hospitals. Contributions are a way for individuals to act on their values and commitments, and to help causes that are important to them. Such contributions rarely reflect careful consideration of a charity's financial statements.