Thursday, August 7, 2008

CEO Compensation - Donor Frustration

For 4 years now we have been putting out our CEO compensation study . Reporters are asking us, "What's new with this year's study? Are there any surprises?" My answer to them is as follows:

"The results of the study are not that different than the year before, however there is something new that is enlightening. 9 months ago we added a new feature to our site, the ability for donors to make comments about charities they are considering donating to. Without question, the most common donor comment we are seeing goes something like this:

I can't believe how much money the CEO of this charity is making! I have been donating to them for years. However, I will NEVER do so again!"

We agree that, in some cases, salaries are way out of line. For example, the CEO of Johns Hopkins University is making over $1.5 million. That is NOT what we would consider to be reasonable for public charities!

However, the fact that the average CEO salary in the US is around $149,000 does not seem unreasonable to us. As we note in this year's study:

"To the skeptics, we ask that you keep in mind that the charities included in this study are multi-million dollar operations. Leading one of them requires an individual that possesses both an understanding of the issues that are unique to the charity's mission as well as business and management expertise similar to that required of for-profit CEOs. Attracting and retaining that type of talent requires a certain level of compensation."
What kind of expertise are we talking about here? The skills needed include financial management, fundraising, public relations, human resources, program operations, strategic planning, board relations and administration, among many other talents.

Nonetheless, many of the donors who make comments on our site do not agree. I believe that the reason in part relates to a very straightforward logic - I am donating to a CHARITY, therefore the leadership should be receiving only a small amount of compensation. In other words, it is assumed by some, that leaders of charities must sacrifice and have a "charity" level income or even take a "vow of poverty" to take the job. In theory, this would be great, but in reality it does not work that way. Furthermore, I believe that most CEOs of charities ARE making a very real sacrifice. We note in our study that CEOs of similar sized for profit operations make an average of $11 million with their stock options, etc.

So what do we think is best practice? Every charity, of the size we evaluate, should have a Board Compensation Committee that reviews the CEO salary on some periodic basis and benchmarks both the initial salary and ongoing raises according to norms within that particular category and cause of charity. Our study is one of the tools that the Board can use in this process. The CEO also has a responsibility to make sure that the Board is aware of the full financial cost of any decision they make. For example, if they give a 5% salary increase to the CEO and the agency also provides contributions to a pension plan or other deferred compensation, they need to know the cost of that as well.

The new IRS 990 has a number of questions about CEO compensation and whether an organization has a Compensation Committee. We will be adding this information to our web site down the road for returns in the future (starting some time in 2009). In the meanwhile, you as a donor are encouraged to contact the charity you are considering donating to and asking them if they have a committee in place and how they go about making these salary decisions.

That reminds me of another point that may further frustrate the donors mentioned above. Be aware that our information only captures certain categories of what the CEO gets; there are other benefits they may receive that are above and beyond what is reported here. For example, a CEO often receives contributions to a benefit plan or deferred compensation that could end up, over the years, totaling millions of dollars. This information is not included in the salary number on the 990 (unless the person is at or near retirement) and therefore it is in large measure not reflected in our study.* So, for some donors, the frustration they have with highly compensated CEOs may only be the tip of the iceberg. Donor beware!

*You can find the information regarding these benefiits in another area of the 990, part V column D, but that is not considered CURRENT compensation by the IRS.

3 comments:

Anonymous said...

Just want to call out this part of the article, once more.

"To the skeptics, we ask that you keep in mind that the charities included in this study are multi-million dollar operations. Leading one of them requires an individual that possesses both an understanding of the issues that are unique to the charity's mission as well as business and management expertise similar to that required of for-profit CEOs. Attracting and retaining that type of talent requires a certain level of compensation."
What kind of expertise are we talking about here? The skills needed include financial management, fundraising, public relations, human resources, program operations, strategic planning, board relations and administration, among many other talents.

Anonymous said...

Non-profit CEOs need to be paid comensurate salaries. I know of a charity that is being investigated by the state atorney general. They don't have paid employees and it shows. No one knows where the money is going, no money is being brought in, and they have no one who can even write a decent grant proposal. There is a good possiblity the government will take all their assets and the charity will no longer exist. They reason that they can't afford to pay a CEO, but unless they bring in someone who knows what they are doing, they will be out of business soon. Running a large charity is no different than running a large company - you need talented people.

Ken Berger said...

Anonymous,

We agree that nonprofit CEO's should be paid a competitive salary that is based on a compensation study of similarly sized and type of organization.