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.

9 comments :

works in progress said...

I agree wholeheartedly with the pushback on donor frustration at CEO compensation. Nonprofits should require and demand the same level of quality in their leadership as corporations (some would argue more) and in order to attract that level of talent and experience, need to offer reasonable compensation. This obviously should not, could not, and does not equate to a private sector salary, but nor should it be a pittance.

The idealistic view may be that those who work for nonprofits should seek their rewards in the social impact that they are created, and I certainly believe that there are extremely capable leaders who are willing to make that sacrifice - and they should be admired for their humanity. But to demand such sacrifice shrinks the potential talent pool that you might be drawing from. I wonder for instance how many donors have tried to recruit for senior leadership positions within a nonprofit - it's not as easy as it might seem. The cold truth is that there are monetary incentives, even in nonprofit. While the social mission of an organization is critical in attracting the right person, you still get what you pay for.

A larger point though (hopefully to the greater satisfaction of donors) is that the issue of CEO compensation as presented here is starkly absent of any mention of CEO performance. CEO should be compensated reasonably but should also be held accountable for the performance of their organization. Specific milestones, goals, and results need to be tracked, all of which should relate to the organization’s strategy, social mission, and measured impact, and this should tie to compensation. At the end of the day, I would prefer to pay a CEO $250,000 a year and see a well-functioning, innovative, and socially impactful organization than pay a CEO $60,000 a year and roll the dice.

Ken Berger said...

I completely agree with your point that CEO compensation must be linked to outcome based performance evaluations.

Ken Berger said...

Btw, we recommend the donor consider CEO performance, and state as much in bullet point 3 in the summation of the CEO compensation study.

John said...

The 2008 Compensation Study that you have posted is interesting and some ways very misleading.

It is interesting because it discussing large non-profit organizations who are categorized under section 501(c)(3) of the internal revenue code. To site the IRS information “Organizations described in section 501(c)(3) are commonly referred to as charitable organizations.” Being a charitable organization does not necessary mean they are a public charity. “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!”

Your description as noted above of John Hopkins University as a public charity clearly does not fit into any model or concept of a public charity that I might have. Consequently, you cloud the debate on compensation and the nature of the non-profit sector when you lump all organizations into one classification “public charities”.

Lost in the headlines of the study is the fact that you only evaluate a select segment (about 0.44%) of the sectors one million plus qualifying organizations. While you acknowledge this reality in your opening sentence, the perspective of the sector is that CEO’s and employees in general are overpaid. Your study sans your blog comment does little to dispel that image.

You might do the sector and the debate a greater favor by showing how difficult it is to talk generically about organizations that are classified under the same section of the IRS code. While meeting the same general requirements they are so vastly different that comparing a national organization with the local non-profit one might interact with on a regular basis is extremely difficult if not impossible. Nevertheless, because you call them all charities or worse public charities rather than ‘charitable organizations’ as classified by the code you contribute to the image problem.

The examples you site highlight the difficulty of comparing organizations but you leave that to the readers’ discernment.

Why not use the platform of this study to raise as points of discussion the complexity of the sector. To point how difficult it is to draw simple conclusions about an incredibly diverse segment of the economy. To highlight how compensation, regardless of the industry or sector, needs to be competitive and capable of recruiting talent consistent with skills needed to allow the organization to meet its objectives and grow.

mtharp100 said...

All this justification is fine, but I for one will not contribute to a charity where the CEO is making more than 150K. The same sort of arguments could be applied to charities which spend a lot on fundraising, which expenditure is probably -more- justifiable, and I would have the same reaction.
I strongly doubt that the CEO of the charity I was just considering, who is making over $300K, is worth twice what the CEO making 150K is worth. In any case -I- am not willing to contribute to his salary. If he wants to make that much -let- him go to the private sector. Charities should choose their leaders based on their sharing some sense of common mission with the charity. I would argue that someone who would demand a 300K salary does not. A leader who is making a reasonable salary is going to inspire a lot more dedication from his staff than one who is making $300K, a number far above what the workers on the ground are making. Maybe if enough people refuse to contribute to these overblown CEO's charities, they'll wake up!

works in progress said...

I understand mtharp100's feelings and they resonate with me - if I'm going to contribute hard-earned money to a nonprofit, then I don't want to feel like it's just going into the CEO's pocket, especially if he's already making a lot more than me!

However, I think that the nonprofit field as a whole is in need of a shift in its perspective. The very term "charity" feels inadequate to me because it implies the traditional approach to solving problems - giving handouts and providing relief.

I believe that the field is moving toward a much more effective attitude that looks at solving persistent problems through prevention, innovative solutions, and applications of technology. Moreover, traditional charity operations have performed very poorly at measuring the longer-term impact of their activities. Nonprofits (a better term I think) need to be able to define the problem they're addressing, the approach they will use, and set realistic goals that they will measure themselves against. At the end of the day, nonprofits need to take a more rigorous business-like approach.

I don't think this means that nonprofits need to lose their core mission and that should remain as a source of passion, enthusiasm, and recruitment, but I think 50 years of charity has shown that more is needed. Businesses have shown that they can deliver results and pay for performance is the very essence of an accountable and forward-looking mindset.

Is a $300K CEO twice as valuable as a $150K CEO? I would say yes if that CEO is running an organization that is twice as large, twice as complicated, and consistently meets its stated goals. If you can find a nonprofit with a much lower cost structure that accomplishes the same social impact, then of course support the more efficient nonprofit, but I would argue that CEO compensation is one piece of a complex picture that must include an assessment of what the objectively measured social impact is compared to other similar organizations.

Now if only all nonprofits rigorously measured their social impact in a standardized way...that would be game-changing!

But I think to argue that CEO's at nonprofits can make no more than $300K, no matter how difficult the job or how good the performance simply ensures that you're going to have a much smaller pool of talented leaders to select from.

Ken Berger said...

In response to John's comment, the most recent data we have indicates that there are approximately 1.5 million non-profits in the US today and of those, 850,000 are public charities. With rare exception, we only evaluate public charities (as defined by the IRS) that get at least one-third of their support from individual donors like you and I. Of those 850,000 public charities, approximately 1% (8,500 or so) receive 83% of all the revenues that come into charities each year. It is that tier of the industry we focus on. The reasons we evaluate 5,326 charities rather than the full 8,500+ include a variety of factors such as the fact that churches do not file the IRS 990 and most of the remaining large charities get almost all of their funding from government and fees.

Nonetheless I believe your point is well taken that the industry is so vast and complex that a reader can be mislead if they solely rely on our study. We always recommend that donors (and Board compensation committees) get information that is specifically tailored to the unique characteristics of a particular charity.

Having said that, we do believe our Compensation study does provide valuable information as a starting point. We do intend to break the information down further next year to try and provide some additional detail for donors.

David said...

Great issue--what might be informative would be to chart some comparison based on employees and program outcomes to the corporate world. I suspect the obscene salaries of the for profit world might put the discussion in perspective. Another standard would be the ratio between the highest paid and the lowest paid. Some type of outcomes standard would be wonderful but from my very small operation creating real outcome measures when you are not making widgets or bombs or something physical become much more difficult and has a higher level of subjective interpretation.
Laborers are worth their hire. Paying people adequately is the right thing to do.

Ken Berger said...

David,

Good suggestion. I hope we can do more of that next time. We just put our toe in the water this year with a brief reference to the S&P.