Spokane Journal of Business

Nonprofit executive pay might fall

Big sums paid to top talent under more scrutiny now due to recession concerns

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Anxiety over the recession and big payouts on Wall Street are spilling over into the charity sector, putting pay for top talent under pressure—and under the microscope—for the first time in years.

While nonprofit executive salaries aren't falling, in upcoming years they aren't expected to rise as fast as before, and may even start to fall, experts say. In addition, more scrutiny lies ahead as a new tax form for nonprofits comes into use this year. As well, donors want to spend their dollars wisely and are more inclined to support organizations that don't pay huge salaries.

In the Seattle area, there are 24 nonprofits that paid their top executives at least $500,000 a year in total compensation in 2007, according to the latest data from Guidestar USA Inc., a Virginia-based provider of tax data for the nonprofit sector.

Statewide, 150 employees at nonprofits earned $300,000 or more that year, Guidestar says.

In May, a compensation survey published by the United Way of King County showed that local executive pay continued its steady rise in 2008, despite the recession, pushing median pay for top executives above $90,000.

But while efforts to reduce or keep a lid on salaries could help nonprofits save money and save face, observers say there's a downside: In the long run, lagging pay could end up costing organizations the top talent that top pay buys.

"What we have seen is a stabilization of executive compensation," says Linda Lampkin, director of research at Redmond-based Economic Research Institute, which provides market salary data to the Internal Revenue Service for enforcement purposes. "I think what we are going to see is that salaries are fairly stable and not the growth we have seen in the last five years."

But Lampkin warns that if groups give in to public outcry and cut executive pay, they can expect to reduce the size of the talent pool from which they can recruit.

"If you constantly cut salaries, you are going to lose that talent," Lampkin says.

According to a Guidestar survey conducted for the Puget Sound Business Journal, many of the highest salaries are paid by hospitals and universities for positions that put leaders in demanding roles and where competition among employers is high.

But executives in other nonprofit sectors—as well as specially talented or skilled employees at organizations in the arts, social services, grant-making, religion, credit unions, private clubs, and associations—often earn well over $100,000.

The growing public awareness of salary levels, coupled with the recession, is prompting a revision of tax policies for nonprofits, picking up on earlier efforts, including 2004 U.S. Senate Finance Committee hearings on executive pay.

"In the last 10 years (scrutiny over executive pay) certainly has changed," says Ned Turner, a 39-year veteran of Swedish Medical Center's board of trustees and chairman of its executive compensation committee.

To be sure, most organizations set salaries using market-based data that are debated by compensation committees. And because of the extremely broad array of work, mission, financial factors, and market-specific challenges in the industry, there is no single way to fairly gauge compensation across the different sectors.

"Once you have seen one nonprofit, you have seen one nonprofit," says Lampkin, at ERI.

Although the IRS has no clear standard for what constitutes appropriate charity compensation, experts say following the herd is a wise move.

"It's all about comparables," Lampkin says. That means like pay for leaders of like organizations who perform like duties. Experts say compensation typically climbs when an organization must search nationwide, and also if it must compete against the private sector, which often is the case in health care.

"Whatever the salary levels selected, there has to be a thorough process for going into it," Lampkin says.

The IRS is also setting its sights on the sector with a revised Form 990, the primary filing for tax-exempt organizations. Beginning with fiscal year 2008 tax forms—many of which will start being released to the public later this fall—charities must identify more employees with six-figure salaries and also affirm that they set their executive compensation levels using a standard policy. Some small groups initially will be exempt from the new form, instead filing an "EZ" version.

Executive compensation can take many forms, including annual salary, severance provisions, and other benefits. But one of the most common is deferred compensation, which increases an annual base salary by giving an additional payment that is deferred until the employee departs. It typically is smaller than, but still in line with the spirit of, corporate bonuses given to private-sector executives.

For example, in 2006, Swedish Medical Center was looking to hire a new executive director to replace its outgoing CEO, Richard Peterson, who had earned a base salary of more than $1.9 million that year. The hospital system settled on Rodney Hochman from Virginia, who started in April of 2007.

But Peterson, who left only a quarter of the way through the year, drew a salary of $1.7 million that year—nearly equal to his annual base pay. Peterson, who died in 2008, received the pay under a deferred-compensation agreement with Swedish that paid him about one-third of his base salary each year but held it until he met certain criteria.

"Once you hire someone like that you want to keep them, and deferred compensation is one way to do that. It is a retention bonus, I guess you could say," says Turner, the longtime board member.

Revenue is a major determinant in how much executives are paid. Typically, the greater an organization's total revenue, the higher its executive's pay ceiling. Leaders who can increase revenue sometimes receive higher salaries, based on the organization's greater ability to pay, says New Jersey-based Compensation Research Inc.

But groups also can't be out of line with pay levels at peer organizations, against whom they compete for talent.

In addition, the new IRS Form 990 requires that charities affirm that compensation packages were approved by independent board members, drafted using comparable data, and that decisions were documented.

Some fear that the salary-setting process, which can include hiring consultants to study the salary market, adds too much cost and provides too little benefit. "Absolutely there is a concern about cost. I am sure most organizations are spending a lot more on compliance this year," says LaVerne Woods, partner at Davis Wright Tremaine LLP and chair of the law firm's tax-exempt organizations practice group.

As tough economic times persist, some experts say a new model worth considering is one that is laden with performance bonuses.

In recent years there has been a strong push to better measure the results of a nonprofit's work. The shift has largely been powered by donors who want their money to have the greatest impact possible.

Lampkin, from the Economic Research Institute, says pegging salaries to performance is an effective way for groups to get what they pay for. However, beyond financial metrics, it is difficult to gauge whether progress is being made and whether that is due to the work of the executive director, she says.

The sector so far hasn't responded to the recession by cutting executive salaries—either under orders or voluntarily.

"I have not heard personally of any executives taking pay cuts," says Renee Bourque, a principal with Clinton, Wash.-based Brightstar Grant Consultants Inc., a service that advises nonprofit groups, grant makers, and individual donors.

But growth in salaries is expected to slow due to the economy, says Heather Eddy, chief operating officer of The Alford Group Executive Search, a subsidiary of Seattle-based nonprofit consultant The Alford Group.

Of course, there's been at least one high-profile exception. Last November, Washington State University President Elson Floyd took a $100,000 cut in his $725,000 base salary. University of Washington President Mark Emmert—one of the highest paid university presidents in the nation—turned down pay raises both last year and this year, although he recently signed a five-year contract extension that makes possible additional incentives.



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