Charities grapple with CEO compensation

The Animal Rescue League of Western Pennsylvania's chief executive and many other leaders of nonprofit organizations know the size of their paychecks hinges on how well they perform.

League Executive Director Dan Rossi adopted policies to make sure his pay hinges on formal job evaluations, goals and benchmarking.

“I wanted to ensure things weren't done by the seat of the pants, without professional procedures in place,” said Rossi, who made $97,680 in 2012 and spurred the policy change by using practices he learned during 18 years of working for United Cerebral Palsy.

Five years ago, the animal charity told the Internal Revenue Service that it used no such procedure.

The nonprofit, whose budget is about $4.1 million, is among at least 14 Pittsburgh-based charities to implement a standard method of determining CEO pay since 2008. That's when the IRS redesigned tax forms so nonprofits had to disclose whether they did so, in an attempt to get every tax-exempt charity in line with the best practice.

Indeed, the number of charities using ideal models for setting executive compensation is on the rise, just as funders demand greater accountability and proof of return on investment. Fewer than 200 of nearly 4,000 charities examined by Charity Navigator in 2014 had no documented policy, down from 244 that had none in the previous year.

Yet some charities still “seem to set salaries based on the whims of leadership, rather than on getting an expert to do a review and based on market conditions,” said Ken Berger, CEO and president of Charity Navigator.

“You have boards that are friends of the CEO, or they're extremely wealthy and they assume salaries are going to be set a certain way, so as not to have full appreciation for the fact that every taxpayer in America to some degree subsidizes every charity because of tax deductions,” Berger said. “They're supposed to be focused on providing public benefit, not lining the pockets of the leadership.”

Not about the money

The 2012 median pay for Pennsylvania nonprofits ranged from $100,607 for small ones, or those with less than $3.5 million in expenses, up to $287,796 for large ones with more than $13.5 million in expenses, a Tribune-Review analysis found. Size played the most significant factor in compensation rates.

In Pittsburgh, small nonprofits increased CEO pay at a rate of 0.1 percent per year between 2008 and 2012; executive pay at large Pittsburgh nonprofits rose 5.8 percent, on average, annually during the period.

“There are some assets in this town whose salaries are too high,” said Rick Pierchalski, who founded Medallion Wealth Management and evaluated local nonprofits as a former board member of the Allegheny Regional Asset District. He says the true test should be whether a qualified candidate is willing to do the job for less.

“If you're going to work in the nonprofit sector, then it's not about making a fortune; it's about doing something for the public good, and you have to set your salary sights accordingly.”

To be sure, nonprofit CEO salaries pale in comparison with those in the private sector, whose 200 highest-paid CEOs made an average of $20.7 million in 2013, an Equilar/New York Times study found.

Twelve of 3,929 charities that Charity Navigator examined paid top executives $1 million or more in 2012, compared with nine that did so in 2011 and 14 in 2008. The watchdog's review excluded nonprofits that did not file complete reports on time, as well as universities and hospitals — such as Pittsburgh's nonprofit health care giants UPMC and Highmark, which pay their CEOs between $4 million and $7 million.

Charity Navigator found that most compensation packages seemed “reasonable,” and that some executives, particularly at small and midsized organizations, may be underpaid.

Performance-based pay

The gold standard for setting nonprofit CEO pay calls for evaluating four main factors: the size of the nonprofit's budget, where the nonprofit is located, the organization's cause, and the individual's experience or expertise.

“I think quality begets quality,” said Mitch Swain, who made $115,884 in 2012 as CEO of the Greater Pittsburgh Arts Council, which sets pay using data from the Bayer Center for Nonprofit Management at Robert Morris University. “I count on my board to compensate me in a fair manner, and they expect me to compensate and put together a healthy program for my employees.”

The issue reflects competing views within the sector and among the public over whether nonprofits must run more like businesses — paying more to attract candidates and achieve bigger impacts — or operate as lean as possible to ensure the maximum amount of money goes directly to program services.

“It's great in theory to be streamlined and bare-bones; however, if you want to be impactful, you also have to invest in your infrastructure costs and you have to have talented leaders,” said Alicia Chatkin, who has spent 15 years working in Pennsylvania nonprofit management.

RiverQuest, a nonprofit that teaches students about science by using Pittsburgh's rivers, recently downsized its program from three to two executives, trimming costs from roughly $300,000 to $150,000.

“However, you've got to have, practically, the key positions,” said RiverQuest President Jim Roddey, who has served on more than 40 nonprofit boards. “You've got to have people with talent, and you've got to have people that can raise money.”

Boards must be vigilant about whether the executive is worth his or her pay, Chatkin said: “If you aren't reaching your outcomes, that's a problem.”

In 2012, Rossi, with the Animal Rescue League, boasted the organization had adopted out or returned to owners 6,866 animals, spayed and neutered 1,219 more cats and dogs than in the previous year, and bolstered the monthly volunteer rate by 45 percent.

The board set his 2013 pay at $103,000, a 5.4 percent raise.

Tips for donors

• Find out if a charity has documented procedures for setting executive pay by reviewing its 990 tax forms, available after making a free account at GuideStar.org.

• Be skeptical of charities reporting zero CEO compensation, and look for hidden perks cited as “business expenses.”

• Be cautious if charities have given their CEOs loans.

• Compare compensation and level of staffing to organizations similar in size, scope and service areas. CharityNavigator.org provides median CEO salaries for 30 large cities and ratings for nearly 8,000 nonprofits nationwide.

• Consider the charity's performance in relation to the CEO's pay; watchdogs say it's better to support a high-performing nonprofit that pays competitive compensation over an underpaid CEO whose organization fails to demonstrate its impact.

Charity pay trends

• Charities focused on education, arts, culture, health and public benefits pay their CEOs the most, while those dedicated to religion, animals, human services, international causes and the environment pay the least.

• In Pennsylvania, nonprofits with documented CEO pay policies on average trimmed their CEO pay by 12 percent between 2008 and 2012. However, at large organizations in the state, average CEO pay rose by 22 percent during the same period, a Tribune-Review analysis found.

• Twelve of 3,929 charities examined by Charity Navigator paid their top executives $1 million or more in 2012, compared with nine that did so in 2011 and 14 in 2008. Sixty-seven charities paid between $500,000 and $1 million in 2012, down from 78 that did so in 2011 and 106 in 2008.

• Female representation in nonprofit CEO positions declines as an organization's budget size increases. In 2012, a majority of nonprofits with budgets less than $1 million had women running them, while just 17 percent of organizations with budgets exceeding $50 million had female CEOs.

Source: Tribune Live