Charity CEOs should lead in taking pay cuts

[Editor’s note: A longer version of this article was published in The Chronicle of Philanthropy.]

Pablo Eisenberg
Pablo Eisenberg

Pablo Eisenberg

While executives at some nonprofits have taken cuts in their salaries and benefits – which exploded during healthy economic times – compensation at the vast number of charities continue in place even in these days of financial distress.

The lack of action to curb exorbitant compensation levels raises serious questions about the mission and management of charities, the values and qualities of their leadership, and the role of their boards in determining and overseeing compensation systems.

It has become a popular myth in the nonprofit world that only highly-paid executives are qualified to run nonprofits and that the only way to keep them on the job is to pay them well.

That has never really been the case at nonprofits, where service to the common good, not high pay, is part of the reward.

But it is even less true now, when large numbers of highly qualified people have lost jobs to the recession.

Moreover, the recent recruitment of CEO candidates from the business world is adding to the inflationary surge in compensation in the often-mistaken belief that business executives are better managers than people who have spent their careers at nonprofit organizations.

It should trouble lawmakers, donors, and everyone in the nonprofit world that:

* Fourteen leaders of public universities received more than $700,000 in total compensation in 2007-08, and at least 12 presidents of private colleges and universities earned more than $1 million.

* One-third of college presidents sat on at least one corporate board, with the typical payment $50,000 in fees plus a similar amount in stock options.

* Average annual pay of managers of nonprofit hospitals was $490,000, and 20 of the largest hospitals paid their chief executives an average of $1.4 million.

* Median pay of foundation leaders is $538,450.

* Many leaders of other types of nonprofits are paid $400,000 or more. The growth of CEO compensation at large organizations sets the tone for the entire nonprofit world.

Many midsize and small groups have come under pressure to follow suit and inflate the pay of their leaders.

As the nation continues to face a severe financial test, it’s time for nonprofit groups to take action – and for Congress and the Internal Revenue Service to take steps to remind nonprofit leaders that their role is to serve the public interest, not their own pocketbooks.

Among them:

* Limit nonprofit salaries. The president of the United States, who holds one of the toughest and most important jobs in the world, receives $400,000 a year.

* Organizations that want to give their CEO’s larger salaries could do so but would have to pay a 100 percent tax on the amount of compensation that exceeds the limit.

* Redefine federal regulations on excessive compensation. The IRS should clearly spell out what it means to pay a nonprofit leader too much.

* Nonprofit leaders and their consultants should compare only nonprofit salaries in judging whether they are paid market rates and no longer should be allowed to consider salaries for comparable corporate jobs.

* Prohibit nonprofit leaders from serving on corporate boards — service that is time-consuming and can deflect the CEO’s attention, create serious conflicts of interest and add to the inflationary spiral of nonprofit compensation.

* If a nonprofit group felt strongly that its chief executive needed to sit on a board, it could allow him or her to serve on one company board without pay.

* Reduce the disparity between the salary and benefits awarded to top executives and those awarded to the second-highest-paid staff member, as well as to other staff members.

* Urge boards to do a better job of overseeing compensation.

At a time when nonprofits have been asked to do more with less, chief executives of the biggest organizations must demonstrate that they, too, are capable of doing a lot more with a lot less money in their paychecks. To show their commitment to the common good, each of the leaders of the 200 largest nonprofit groups should volunteer to reduce their pay by 10 percent to 20 percent.

It is urgent that nonprofits take steps to shift away from the corporate culture that has insinuated itself into the life of the largest organizations. Stemming the growth of compensation packages is a major way to accomplish this goal.

At stake is the confidence of donors and taxpayers, who are themselves sacrificing their own financial needs as the recession continues.

Pablo Eisenberg is a senior fellow at the Georgetown Public Policy Institute.

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