We're asking the wrong questions when it comes to nonprofit executive wages - Generocity Philly

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Jan. 22, 2018 12:55 pm

We’re asking the wrong questions when it comes to nonprofit executive wages

Paying good leaders is important for many reasons. But so is paying your staffers enough so they don't need public assistance.

"Accidental encounter" by Frits Ahlefeldt.

(Image by Flickr user Frits Ahlefeldt Founder Hiking.org, used under a Creative Commons license)

Here’s what happens when nonprofit tax forms are released every year: The public sees how much nonprofit CEOs make, there’s an uproar about a select few executives, then, within a matter of days, the outrage fizzles out, only to resume in a year’s time.

In Philadelphia, you can always bet on the same executives being placed under the magnifying glass — think WHYY CEO Bill Marrazzo and Penn president Dr. Amy Gutmann.

On the surface, the outrage makes a lot of sense. First, unlike for-profit CEOs, salary information for nonprofit executives is easily accessible. And, also unlike for-profits, nonprofits are legally bound by a social mission, so the perceived-to-be-high wages just feel … dirty.

Perhaps, in the case of many human service nonprofits, that rage stems from knowing that people working full-time on the ground floor of these organizations make somewhere between $10 and $11 an hour (that’s an average) and are on public assistance.

In many other cases, like Marrazzo’s, public disapproval often stems from donors and supporters who feel duped thinking their money isn’t funding a nonprofit’s mission, but padding the pockets of a nonprofit’s head honcho.

Yet, for all the reasons why nonprofits aren’t businesses (or maybe shouldn’t be businesses), most nonprofit professionals will tell you time and time again that they are, and that they have to be. If that’s the case, they argue, why shouldn’t nonprofit executives earn competitive salaries on par with their for-profit executive counterparts?

Maybe the more important question is, why shouldn’t entry- and junior-level nonprofit workers be paid wages that are on par with their for-profit colleagues?

After all, nonprofit is just a tax status.

The business case

“Why are we having two systems for judging the goodness and appropriateness of the behavior of nonprofits and for-profits?” asked Laura Otten, director of The Nonprofit Center at LaSalle University.

Consider how one-tenth of American jobs are in the nonprofit sector. It’s time, Otten said, to move beyond the notion that the nonprofit workforce, chiefly their executives, shouldn’t make the kind of money their counterparts in the private sector do.

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Nonprofit CEOs make upward of 25 percent less than their for-profit counterparts, according to PayScale. The majority, according to a Meyer Foundation survey, feel they’re underpaid for the work they do. And 64 percent have “financial concerns” about committing to the nonprofit sector.

This poses a talent retention problem in the nonprofit sector, which has largely been tasked with providing vital services to the country’s most underprivileged and disempowered.

All of which further compounds and complicates reactions among nonprofit executives when 990s are released every year.

"Leadership in general is a critical skill, and it's expensive."
Jay Hall, ExecSearches.com

The annual publication of those nonprofit tax forms, in which all executive salaries and operating budgets are made public, instills a sense of anxiety in nonprofit executives that many have taken to calling “salary angst” — the feeling in which top brass like Marrazzo and former GLAAD CEO Joan Garry find themselves “having to justify being well compensated” regardless of whether or not they’re an “effective leader, manager, strategist, public voice, and movement leader,” according to the latter.

Leadership doesn’t come cheap, regardless of organizational tax status.

“Leadership in general is a critical skill, and it’s expensive,” said Jay Hall, managing director at ExecSearches.com, a jobs board for nonprofit professionals. “Leaders don’t just fall off trees. They develop over time and over their career. Finding the right fit is competitive.”

And it can be rewarding.

Under Marrazzo, for example, WHYY’s net assets have grown virtually every year since 2007, and according to WHYY spokesman Art Ellis, the percentage of the organization’s budget that gets invested in production has increased from 52 percent in 2003 to over 71 percent as of last July. Gutmann, similarly, is an indisputable fundraising machine for Penn.

How are nonprofits supposed to grow and sustain if they can’t offer competitive salaries that help retain good talent? It’s a question that also applies to nonprofit employees, especially those who work in human services.

How much is too much?

There’s a vaguely defined legal limit to how much nonprofit executives, particularly presidents and CEOs, can make, though the limit isn’t exactly quantifiable.

Instead, the IRS has a three-step process for making sure nonprofit boards set “reasonable” compensation for executives. It’s largely based on the salaries of executives at nonprofits with comparable missions and budgets.

According to Inglis‘ VP of Human Resources Cheryl Whitfield, the health services nonprofit partners with “external resources to benchmark salaries” against executive roles at over 40 similar organizations; Whitfield said this is done for all roles at Inglis.

The glaring problem here is that, beyond encouraging boards to aspire to executive wage standards set by their peers, the IRS doesn’t exactly define “reasonable,” and you’d be hard-pressed to find a nonprofit executive who wants them to — let alone one who wants to discuss how much someone in their position should make.

“I believe that all not-for-profits should be having high-level conversations with their boards and stakeholders, and consulting outside sources to make appropriate decisions around compensation that work for each organization,” said Inglis President and CEO Dyann Roth, who received a pay bump when she left her post at Resources for Human Development (RHD) for her current position last year. (Her predecessor at Inglis made over half a million dollars in 2015.)

"There is no universal solution for all. Each not-for-profit organization must come to those answers for themselves."
Dyann Roth, Inglis

“There is no universal solution for all,” Roth added. “Each not-for-profit organization must come to those answers for themselves.”

The average salary of nonprofit CEOs, according to a 2016 Charity Navigator compensation study, is $123,362. Charity Navigator president and CEO Michael Thatcher says this number is “very reasonable.”

As long as there’s no overt reason for the taxman to come knocking, nonprofit boards are left to set salary rates within the also-vague limitations of what might be considered ethical.

Above all, executives are tasked with making their organizations more money. And that job itself requires adequate compensation, if done properly.

Charity Navigator’s data shows that CEO compensation varies depending on the size of the nonprofit’s operating budget and its mission. CEOs of larger nonprofits make more money. Research organizations, for example, pay their CEOs roughly 50 percent more than human services organizations.

Otten said a good gauge for asking whether a CEO makes “too much” is if they’re making over 10 percent of the organization’s overall operating budget. This concept, however, excludes nonprofits that are working with under $750,000.

In other words, Otten said an organization should be paying a “qualified executive director whom they wish to keep” more than 10 percent of, say, a $300,000 operating budget.

Discussing how much CEOs and other executives at human services organizations should be paid can quickly become a chicken and the egg conundrum: Which comes first, paying a competitive salary to the executives who will grow your organization, or paying a living wage to employees who are on the ground carrying out the organization’s mission?

In Otten’s words: “Why are we wasting our breath and worry and concern about how much executives are getting paid instead of worrying about the issues of equity for the payment of everybody else?”

Wage disparity: CEOs vs. employees

There’s this concept of “psychic income” — sacrificing monetary gains to pursue a career doing something you love — that’s often used to justify the gap between nonprofit wages and for-profit wages. But ask any social worker how much they love their job, then ask their landlords and alma maters if they accept psychic money, and the concept quickly becomes an empty rationalization.

If nonprofit CEOs make over 25 percent less than their for-profit counterparts, does that ratio carry over to their junior and entry level staff?

Hall, the ExecSearches.com managing director, says yes, kind of. At every level, from entry to CEO, he said, nonprofit talent is losing a “good bit” of what they would be earning in an equivalent position in the for-profit world.

"Why are we wasting our breath and worry and concern about how much executives are getting paid instead of worrying about the issues of equity for the payment of everybody else?"
Laura Otten, Nonprofit Center

But the lower a nonprofit’s operating budget gets, the closer your entry level staff’s wages get to the federal poverty line — or worse.

“If you have an executive director making $100,000 and entry level staff making $25,000 … start thinking about the ethical and moral implications,” said Otten. “How can we expect our staff to help people, particularly in the social services sector, when they’re barely making more money than they are?”

Home health care, an industry that boasts the fastest rate of job growth in the country, offers compensation that, for 55 percent of home health aides, sits 200 percent below the federal poverty line (but hey, at least it’s an automation-proof field).

Direct service providers — the folks who are on the ground working with some of society’s most underprivileged people — make an average of $10.62 an hour. Many entry and junior level workers at human services organizations receive public benefits themselves.

According to a 2007 Medicaid study, 42 percent of all direct service workers lived in households that relied on some form of public assistance, and not much has changed on that front since then. According to current RHD CEO Marco Giordano, that’s largely because government funding for direct service professional wages hasn’t properly increased in a decade. (For what it’s worth, the direct service provider crisis is often a topic of conversation and top of mind for RHD personnel, Giordano said.)

But what about executive wages? Giordano said at RHD, the compensation of the CEO cannot be greater than 14 times the lowest-paid employee.

"Our foremost challenge is figuring out how to better compensate staff who are doing incredibly important and essential work supporting people every day."
Marco Giordano, RHD

“We believe that’s reflective of our mission and our corporate values,” said Giordano. “Acquiring and retaining leadership is vital for every human services organization, and we’re very cognizant of that at every level, but our foremost challenge is figuring out how to better compensate staff who are doing incredibly important and essential work supporting people every day.”

Roth, Giordano’s predecessor, made a base salary of $163,888 in 2016— at a massive organization with 6,000 employees running 160 programs across 15 states.

Giordano’s executive colleagues at local homelessness relief organizations Project H.O.M.E., Bethesda Project and Broad Street Ministry all made under Charity Navigator’s average nonprofit CEO salary of $123,362 in 2016. And it’s important to note that RHD’s operating budget is about five times that of Bethesda Project’s, which itself is about double Broad Street Ministry’s.

In short, nonprofit executives should be paid according to the expertise and leadership skills, and the scope of their work. But not all nonprofits are created equally, and leaders should consider how their compensation matches with the mission of their organization.

Boards and CEOs should also consider how executive compensation stacks up against the rest of an organization’s employees. Leadership is valuable, but so is the work your staff is carrying out — and to do that work well (and not seek employment elsewhere), they should be compensated enough to sustain an adequate quality of life.

If you tout your nonprofit as a business, yet some of your full-time employees are on public assistance, you might be doing business wrong.

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This story was edited by Generocity Editor Julie Zeglen.

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