The Buck Stops Here
Sandra K. Pfau
Reprinted from Executive Update, April 1995When the United Way/William Aramony story broke a few years ago, the National Charities Information Bureau reportedly received numerous letters from the public opining that no nonprofit executive should earn more than $100,000 a year. And while a Treasury Department proposal to impose an excise tax on excessive nonprofit compensation died with last year's Democratic Congress, a new bill was introduced this year in the House that proposes to cap salaries of nonprofit officers and directors at the level of US Cabinet members.
Given the increasing publicity over CEO salaries and Congress's forays into new regulation of nonprofit pay, association executives should be prepared to explain and defend their six-plus-figure salaries. It may also be time to do some self-assessment regarding how much is too much compensation in the nonprofit community.
The cornerstone issues
Brian O'Connell, former president of Independent Sector, has described four aspects of the nonprofit compensation issue:
Some salaries are egregiously high.
Some salaries appear to be high, but not enough time has been spent helping the public understand what it takes to attract and retain qualified individuals to lead large and complex organizations.
There is an incorrect but common notion that salaries are overhead.
The reality is that most salaries are so low that they threaten the ability of organizations to develop and maintain essential services.
IRS regulations look at a variety of factors to determine the reasonableness of compensation, whether for- or nonprofit: What is ordinarily paid for like services, by like enterprises, under like circumstances?
In the corporate sector, the IRS has a powerful weapon against out-of-the-ozone compensation: If a for-profit business is found to have paid excessive executive wages, the IRS can simply disallow part of the business deduction for the salaries and tax the business on the resulting increase in profits. Currently, no similar sanction exists for nonprofits. The IRS's only choice is to revoke the organization's tax exemption.
And self-policing seems ineffective. "The sector needs to speak out forcefully when there is evidence of inappropriate behavior," says Mark Rosenman, vice president, social responsibility, The Union Institute. But he notes that nonprofit leaders seem reluctant to do so against even the most outrageous abuse.
Educating a skeptical public
But avoiding discussion on nonprofit compensation makes it more difficult to educate an organization's members and the public about why higher salaries are necessary, and dispel the notion that salaries are mere overhead. According to Henry Ernstthal, executive director of the Master of Association Management program at George Washington University, the public "just doesn't understand the salary marketplace." The only way to educate them: "Keep repeating the message."
As O'Connell and others point out, the reality is that most in the nonprofit sector earn far less than their for-profit counterparts. One national survey indicates that the majority of nonprofit chief executives earn less than $75,000 a year, while other research shows that nonprofit staff earn only 70 percent to 80 percent of their for-profit peers.
Mary Cutler, a student in Ernstthal's master's program and foundation associate for the American Psychological Association, admits that she would like to make as much money as her for-profit counterparts, "but I don't anticipate that I will." She believes that some of her student colleagues do plan to earn significant salaries, while others are more concerned with the psychic rewards of their jobs.
"Personally, she says, "I hope in the nonprofit field that I can make a greater contribution to society."
Ernstthal wonders about the validity of penalizing "people because they have good in their hearts." Nonprofits, he says, "ought to be treated like for-profits because they are competing for the same personnel. It's already tough in the nonprofit marketplace. There is relatively little incentive pay, no stock options or some of the other benefits available to for-profit employers. You're already a half-step behind."
If less, how much less?
Not everyone agrees that associations should match their corporate brethren when it comes to compensation. "There shouldn't be equivalence between nonprofit and for-profit salaries," says Rosenman. But, he adds, the nonprofit sector should develop a consensus and "be clear what the normative expectations are."
A spokesperson for the National Center for Nonprofit Boards agrees: "The whole sector needs to discuss the theory behind nonprofit salaries. Do we believe that people [in nonprofits] should make less than those working for for-profits? If so, how much less?
Keeping the board aware
Ultimately, setting and approving compensation is the responsibility of the organization's governing board. But it frequently falls to the chief staff executive to ensure that the matter gets the board attention it requires. "The chief executive should be making sure that it is one of the things on their plate," says the NCNB spokesperson.
The NCNB suggests that the chief executive remind the board that he or she needs to be evaluated and perhaps give the board a number of options on how that may be done. Most important, however, is that executive salary determinations are understood and supportable by the entire board.