Sometimes It’s Better Not to be Ranked #1

The Chronicle of Philanthropy lead off its annual executive compensation story with the headline that “Nearly three in 10 of the leaders of the nation’s biggest charities and foundations have taken pay cuts in the past year as the recession causes donations to drop and batters endowments”. 

USA Today interpreted the annual survey results differently, with yesterday’s headline: “Non-profit execs make millions: Big organizations have highly paid leaders,” coupled with the usual USA Today chart, this one listing the leaders of the pack, compensation-wise.  The accompanying article questioned why nonprofit compensation is so high.

How much is too much is a fair question, and one readers of this blog will recall that Attorney General Ann Milgram is asking about Stevens Institute’s President.  The ubiquitous Senator Grassley thinks non-profit salaries are too high, and is using health care reform as an opportunity for reforming more than the health sector – one of the 500+ amendments to the Baucus healthcare reform bill comes from Grassley, who wants to eliminate the presumption of reasonableness afforded federally tax exempt organization salaries as long as boards obtain inter alia a comparability study (which unsurprisingly, most do).         

According to a recent IRS hospital study, “Although high compensation amounts were found in many cases, generally they were substantiated based on appropriate comparability data”.  The IRS is currently focusing on salaries at colleges and universities.   Somewhat unclear is whether the comparability study may include salaries from the business sector – the IRS has waffled so far, but then-New York Attorney General Spitzer was pretty clear in his mind that it was improper for Richard Grasso’s friends on the compensation committee to have relied on for-profit numbers when it came to setting Grasso’s $187 million compensation package as head of the then-nonprofit NYSE.

Some are outraged by non-profits’ salaries, which are, after all, subsidized by donors and the tax-payer, while others think that politicians should let nonprofit boards run their own show.  The argument is that nonprofits have to compete with the business-world for the best talent.

 Is there any law on the subject?  Yes, but it’s rarely enforced.  State nonprofit corporate law contains a non-distribution constraint–that is, nonprofits can’t pay out dividends or excessively pay its employees or those with whom they do business – the money is supposed to be used to further the entity’s mission.  On the tax side, federal law prohibits private inurement and excess benefit, which essentially seeks to accomplish the same goals.  So, on the one hand, critics of excessive compensation do have a legal leg to stand on. On the other, all anyone seems to do about the issue is complain – neither the IRS nor state AG’s have boards particularly concerned about their compensation decisions.  In fact, all boards have to do is follow the right procedure, and their CEO salaries are presumptively reasonable.  So, if all non-profits essentially use the same small group of compensation consultants, and set salaries coincidentally high, then it’s a self-reinforcing system and nobody gets in trouble.

I have little hope that the real questions will be seriously considered, which include what the role of the nonprofit is in our society, and what we expect of nonprofits in exchange for their not having to pay taxes, and for their donors getting tax deductions.  The IRS has begun collecting information on the revised 990 about hospital “community benefit”, but the real question is whether any real change will come out of the whole thing, and whether it will go further than health care.  Nudge would suggest that merely by asking the right questions behavior will change!  I’m more in the Grassley camp of being a noodge….

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