Charitable Pay: A Growing Disparity

The gap between CEOs' salaries and the wages of other employees at nonprofit organizations is increasing significantly

By Harvy Lipman

The pay of chief executives at nonprofit organizations is growing twice as fast as the wages of other workers at such groups, according to a new Chronicle analysis of compensation at more than 3,770 organizations.

The median increase in pay for chief executive officers rose by 16 percent from 1998 to 2003, after adjusting for inflation, while wages of other workers rose 8 percent. By 2003, nonprofit leaders were paid an average of nearly five times what other employees received.

That differential is nowhere near the spread in the business world, where CEOs make more than 400 times the typical worker's salary, on average. But the pay rates for corporate executives still have a big influence: Nonprofit trustees say they have been raising pay of charity executives to keep leaders from fleeing to more-lucrative corporate jobs. What's more, nonprofit groups often compete with businesses to recruit people with the skills needed to run large, complex organizations -- and that has led to an escalation in the pay offered to attract new chief executives.

The result has been a growing gap between the compensation of top executives and what other workers are paid, a development that worries many people in the nonprofit world. Some nonprofit officials fear that morale is suffering, while others say they worry that unless employees start getting increases at similar rates to chief executives, nonprofit groups are going to suffer a major worker shortage.

Working as a Team

Scott Klinger, a co-director of United for a Fair Economy, a nonprofit group in Boston that monitors the pay of executives in the corporate world, says he worries that the disparity in pay between leaders and workers "erodes a sense that we're all in this together, and the sense of being in it together is more important for a nonprofit, mission-driven organization than a for-profit company."

Christine Letts, a scholar of nonprofit management and associate dean of Harvard University's John F. Kennedy School of Government, notes that inflation-adjusted salaries for employees of businesses, governments, and nonprofit groups rose faster than that of nonprofit workers alone. Such wages grew 13 percent from 1998 to 2003, five percentage points ahead of nonprofit workers, according to the federal Bureau of Labor Statistics.

The sluggish wage growth, she says, is the key reason "everybody's having trouble hiring good people. It's hard hiring really good people at the salaries we're paying."

Ms. Letts says she worries that many organizations are holding down wages of workers largely to demonstrate to donors how efficient they are in controlling their overhead.

"We're holding up organizations that don't give raises as models because we can show their overhead being so low," Ms. Letts says. "There are very few people out there saying we should pay these people better living wages because we want the best people."

Diana Aviv, president of Independent Sector, a nonprofit organization that represents charities and foundations, says she too thinks the solution is to increase the pay of workers, not to focus on the growth of pay to chief executives. (Ms. Aviv was paid $152,007 in 2003 -- the most recent year for which the group's tax return is available -- about twice the average pay of other workers at Independent Sector.)

"The big challenge is not how big the salaries of the top executives are, but how low the salaries are for the workers," she says.

Size of Organization

The extent of disparities in salary growth between executives and other workers varies by type of organization. The Chronicle examined organizations that paid a minimum of $1-million in total wages and earned revenue of $1-million to $3.3-billion annually.

The gap grew fastest among the largest organizations. Among those with annual revenue of less than $10-million, executive compensation increased less than one and a half times as fast as other workers' pay. At organizations with revenue above $20-million, CEO pay grew at more than twice the rate of average workers' salaries.

Among the other key findings:

The gap between executive and worker pay is growing larger. In 1998, chief executives earned 4.4 times as much as the average nonprofit worker, while in 2003 they earned 4.8 times as much. If the trends in executive and worker pay continue, by 2018, chief executives will be making six times what other employees are paid.

The biggest gaps were found at organizations that serve young people, followed by environmental and animal-protection groups. The pay of executives at youth charities increased by 17 percent after inflation, while compensation for workers decreased by 8 percent. At environmental groups, the pay of chief executives grew about three times as fast as the pay of other employees.

Big youth groups say the reasons for the disparities are varied: For many affiliates of the Boy Scouts, tough financial times led to layoffs of many full-time workers, who were in some cases replaced by part-time workers, while at Boys & Girls Clubs a rapid expansion led to the addition of many part-time employees. In both cases, the growth of part-time jobs drove down the average wages of workers.

Some types of organizations rewarded their employees with bigger percentage increases than the chief executives received.

Wages of workers at nonprofit nursing homes and home health-care organizations grew by 11 percent, adjusted for inflation, compared with the 4-percent increases awarded to leaders of the groups, while employees of public-broadcasting and religious-broadcasting organizations got raises of 14 percent compared with the chief executives, whose compensation rose by 7 percent.

A national shortage of nurses created competition for employees that helped push up salaries at the health-care facilities, while many of the public-broadcasting employees -- whose employers must compete with private television and radio stations -- are represented by labor unions.

The widening gap in wages paid in the nonprofit world comes at a time when compensation of charity and foundation executives has come under increasing scrutiny by government policy makers. The Internal Revenue Service is examining organizations that it suspects may be paying their executives excessively. The Senate Finance Committee has also put the spotlight on executive compensation as it considers new legislation designed to tighten the management of charities, foundations, and boards.

Lawmakers may look on the escalation of executive compensation as evidence that some nonprofit groups are acting more like for-profit businesses, providing added impetus for new regulations, says Paul C. Light, a professor of public service at the Robert F. Wagner Graduate School of Public Service at New York University. "If nonprofits start to resemble any other organization, except one has a tax-exempt letter from the IRS in its files, then you start to say, why shouldn't we regulate executive compensation?" he says. "If these gaps get too big, then you say this is just another variation of a for-profit entity."

Trustees' Role

In many cases, the gap between workers and chief executives grows when board members start comparing the pay of the leaders of their organization with that of other charities and private corporations. Federal law encourages charities to do just that; it says charities won't get in trouble for paying their chief executives too much if they can show that other officials with comparable jobs are paid similar sums. While that law was intended to prevent nonprofit groups from paying overly high salaries, it has had the opposite effect, say many officials in the nonprofit world.

"The unintended consequence is that it has forced up CEO pay," says Deborah Hechinger, president of BoardSource, a nonprofit group that works to improve the effectiveness of nonprofit boards of directors. When organizations look at pay of their competitors, they generally want to match or top the highest-paid officials, Ms. Hechinger says. The process "continues to drive the median up," feeding an upward salary spiral, she says.

A review of compensation of chief executives of similar-size organizations prompted the board of the Greater Chicago Food Depository to increase the salary of Michael Mulqueen, the group's executive director, by 23 percent in 2003.

The result for Mr. Mulqueen, who now makes $250,000, was to create a far larger differential between the amount of his pay and that of workers. While his pay grew by 38 percent from 1998 to 2003, the pay of the employees at the food bank rose just 6 percent, to about $44,000 on average.

Mr. Mulqueen says he has long recognized that inequalities could cause problems, so the food bank has made an effort to adjust salaries regularly to make sure employees are paid similarly to the amount they would make if they worked in a comparable job at a business.

He says he also tries to keep up morale by offering bonuses to top performers, and putting the equivalent of 7 percent of every worker's salary into a retirement plan annually.

"The whole culture here is that we hold our employees accountable, but we really take good care of them," he says.

Focus on Results

Some leaders of big institutions say the reason their pay has outpaced that of their employees is that they have achieved the results sought by their boards.

Peter C. Marzio, director of the Museum of Fine Arts, Houston, won increases in pay of 41 percent from 1998 to 2003 while wages paid to employees rose by 12 percent. Mr. Marzio's compensation peaked at $2.2-million in 2001, which included a bonus of $1.7-million, awarded him by the museum trustees after he managed a capital campaign that raised $237-million over five years. He received smaller bonuses over several years. Mr. Marzio says he was rewarded not just for the success of the campaign, but also because the institution raised that money without hiring additional employees.

The board of the museum "is very, very results oriented," Mr. Marzio says. "If we didn't succeed in raising the money, not only would I not have gotten a raise, I wouldn't have a job."

No longer receiving bonuses, Mr. Marzio's salary has come down to $365,000. He notes that top managers at the museum also received large pay raises from 1998 to 2003 to compensate them for the extra work they put in. Gwendolyn H. Goffe, an associate director of the museum, for instance, received an increase of 30 percent. Several other of the museum's highest paid staff members received raises between 20 percent and 25 percent. "My job would be so much easier if we could pay them a lot more," Mr. Marzio says. "But our pay increases have always stayed way above the inflation rate."

Another charity where the chief executive was rewarded for the growth of the organization is the Kips Bay Boys & Girls Club, in Bronx, N.Y. Daniel Quintero, the executive director, was paid $290,113 in 2003 (the most recent figures available), nearly two-and-a-half times his annual salary in 1998. At the same time the average pay for workers grew by 21 percent in those five years.

Mr. Quintero wouldn't talk about his pay, but Arthur Shapiro, a board member for the charity, says that Mr. Quintero deserved the increases because under his leadership the club has tripled its budget (spending $5.3-million in 2003), doubled its membership, opened five new locations, opened a center in a homeless shelter, and built a dental clinic. Other employees, Mr. Shapiro says, receive cost-of-living increases and merit raises that he says "are commensurate with and even exceed industry standards."

Shunning Raises

While the top officials at most groups studied got pay increases that well outpaced those of workers, chief executives at several hundred organizations bucked that trend -- sometimes taking no pay increases or actually reducing their compensation.

William F. Baker, president of the Educational Broadcasting Corporation, which operates WNET, the public-television station in New York, was paid $226,438 last year, the same amount he got as a starting salary a dozen years ago after he left his job as president of Westinghouse Television.

Mr. Baker, who declined to be interviewed about his compensation, has repeatedly rejected efforts by the nonprofit group's board to give him a raise.

Stella Giammasi, the station's vice president for communications, says Mr. Baker "has always believed in doing service by taking a comparatively modest compensation." In addition, she says, he believes that since he is very visible in the New York market as a fund raiser for public television, always on air asking for money, that he should in effect 'put his money where his mouth is.'"

While Mr. Baker's pay has not changed since 1998, average wages for other workers at WNET rose 22 percent from 1998 to 2003, after taking inflation into account; last year, the station increased pay for each employee by 3 percent.

In Philadelphia, William Dwyer III, head of the Cradle of Liberty Council of the Boy Scouts of America, took no pay raises for four years in a row, starting in 2000.

Mr. Dwyer says he felt it was inappropriate to take a raise at a time when the organization was laying off workers and facing other financial problems. The money crunch for his group -- and many other Boy Scout affiliates -- came after the U.S. Supreme Court ruled in 2000 that the Boy Scouts had a constitutional right to bar gay people from being Scout troop leaders. The ruling prompted many charitable groups and government agencies to stop providing financial support to Scout groups.

"We had lost money from the United Way and the Pew foundations. The United Way cut us $500,000," he recalls. "I was letting people go, giving their jobs off to part-timers, and I couldn't very well take a raise while I was doing that."

Mr. Dwyer says his colleagues appreciated his gesture: "Our staff looked at that and said, 'He's doing what he can. We all need to pitch in here.'"

As a result of the staff's efforts, he says, the council has recovered financially, and is enjoying what Mr. Dwyer says is a very good year financially in 2005. He has received pay raises the past two years, bringing his salary up to $200,000, or $14,000 more than he made in 2003.

Pay Isn't Everything

While many nonprofit boards and executives argue that they cannot recruit the best qualified candidates for leadership positions without offering top salaries, others say that sometimes an organization's reputation for excellence is more important than the ability to pay top dollar. The Washington Home, a hospice-care facility in the District of Columbia, was facing serious financial difficulties last year when it set out to recruit a new CEO.

The hospice's top executives had gone two years without a salary increase, says Ilene Reiter, vice president of human resources, because the organization was running a budget shortfall, and the home's president, Lynn O'Connor, resigned in 2004. Those conditions, however, did not prevent the home from being able to recruit a highly qualified replacement from private business, Ms. Reiter says.

"We have quite a good reputation in the hospice industry, so I had quite a few people come to me inquiring about the position," says Ms. Reiter, who headed the search for a new CEO. In September, the hospice hired David Rehm, former senior vice president at VistaCare, one of the largest for-profit hospice companies in the country. He took the job even though his compensation deal ties his pay closely to the hospice's finances, so he will not do well unless the group's financial situation improves.

Nonprofit officials say, however, that in most cases charities have to compete financially with private business for executives, and many charities may not be able to find talented leaders as long as pay is rising fast in the corporate world. The nonprofit world, says Mr. Klinger of United for a Fair Economy, should be far more active in efforts to publicize and control the escalation of executive pay in the business world, because otherwise it will never be able to control its own salaries.

Nonprofit leaders may feel constrained from doing so, he fears, because they benefit personally from the rising executive salaries, and because many of them have corporate executives on their boards. But if they fail to deal with the issue, he says, nonprofit groups eventually will find themselves priced out of the market for talented executives.

"The nonprofit sector rests in the economic world underneath the for-profit sector," Mr. Klinger says. "They should be concerned about what the for-profit people are making and try to work to put some brakes on that."

Harvy Lipman is director of special projects at The Chronicle of Philanthropy

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