Sarah Z. Sleeper
San Diego Metropolitan
It is a sensitive subject. Ask for a CEO’s salary and the answer is likely to be a cold stare.
But in an era of financial scandals, calls for fiscal transparency are on the rise. Not only corporate CEOs, but also executives of tax-exempt nonprofits are finding themselves under scrutiny to prove their financial houses are in order.
Several San Diego nonprofits have been accused in recent years of mismanagement of funds or overpayment of executives. San Diegans may remember when the American Red Cross, San Diego/Imperial Counties Chapter president two years ago left her $300,000-a-year job.
More recently, Julie Meier Wright of the San Diego Regional Economic Development Corp., Reint Reinders of the San Diego Convention & Visitors Bureau and Roger Talamantez, formerly of the San Diego Data Processing Corp. have been subjects of media scrutiny.
San Diegans, like much of the country, want assurances that the charities, advocacy and nonprofit business groups they support are fiscally sound and that their CEOs are paid fairly.
But who is to say when executive pay is too much? The issue is getting national attention. In late May, the Wall Street Journal reported the IRS was taking a harder look at nonprofit executive salaries
Should a nonprofit executive draw a lower salary than a for-profit executive in a similar job? Why? Why not? And who decides how much a nonprofit executive deserves to be paid? Aren’t nonprofit organizations obligated to provide financial data to the public since some of their money comes from donations and taxes?
“I think it benefits both the community and the organization to practice full disclosure. There’s really nothing to hide and no way to hide it,“ says Tom Courtney, teacher of nonprofit financial management at the University of California at Berkeley. Nonprofits are required by law to make public their IRS Form 990s, summaries of financial data, when requested.
Most nonprofit CEOs are not rich, says Michael O’Neill, a professor of nonprofit management at the University of San Francisco and author of the book “Nonprofit Nation: A New Look at the Third America.” The majority of nonprofit workers go into their lines of work because they feel committed to a particular cause, he says. Although some are paid high salaries, many are underpaid, especially in comparison to their for-profit peers.
“Hardly any of us get what we’re worth. We make the choice to go into this knowing that this is what we want to do,” says Bruce Bleakley, executive vice president and chief operating officer of the San Diego Aerospace Museum.
Some San Diego nonprofit executives, such as Bleakley, were forthcoming when asked for financial data. Others were not. “The salary question is a legitimate question because these organizations are exempt from paying corporate income tax,” says O’Neill.
Analysts say some nonprofits hide financial data even though disclosure is in the best interest of the organization and the public. “Nonprofit CEO compensation is, of course, an issue of public interest,” says Chris Vest, a spokesman for the Washington, D.C.-based American Society of Association Executives. “Stockholders in a nonprofit, whether its members, donors or volunteers, need to measure CEO compensation against the return.”
When analyzing nonprofit CEO salaries, many factors should be taken into account: the size of the organization; its budget, revenues and expenses; the industry within which it operates; its overall mission; the cost of living in its operating area; the experience of the executive; salary norms for executives in similar positions in other cities; salary norms at for-profit companies of similar size and scope.
The Devil In The Details
O’Neill breaks nonprofits into nine subsectors: religion, social service, health care, education and research, advocacy, arts and culture, international, funders and mutual benefit organizations. (See chart on Page 65.) The IRS breaks the nonprofit sector into 27 different tax-exempt groups.
A look at numbers gives a limited snapshot. (And here’s a caveat. Even researchers don’t agree.) GuideStar, a unit of Virginia-based Philanthropic Research, is a national database of more than 850,000 U.S. charitable organizations. It pegs the 2001 median salary for CEOs at $108,981 for nonprofits with budgets between $5 million and $10 million. Its “GuideStar Nonprofit Compensation Report” is considered the gold standard because it uses Form 990s to collect data, rather than voluntary surveys.
ASAE, a group made up mostly of business executives, found that the average nonprofit CEO in San Diego earned a base salary of $122,720 in 2002 and total compensation of $127,840. By comparison, the Washington, D.C. numbers were $201,710 and $227,458. In New York City, the numbers were $193,907 and $214,482 and for Los Angeles they were $187,017 and $213,300.
Yet another group, the Center for Nonprofit Management in Los Angeles, surveyed nonprofits in Southern California and offers salary data in context with budget information, staff size, educational level and gender, among other data. Its report, “2003 Compensation and Benefits Survey for the Southern and Central California Nonprofit Community,” found that nonprofit CEOs in the San Diego area who have bachelor’s degrees earned an average salary of $85,926.
Those with master’s degrees earned an average of $104,139. Men earned an average of $111,273. Women earned an average of $88,591. The overall average compensation for a nonprofit CEO in Los Angeles was $100,544, says the report. In San Diego it was $96,339. But if the nonprofit’s budget is over $15 million, the average goes up to $168,992.
Historically, nonprofit CEOs make less than CEOs at for-profits with similar budgets and staff sizes, says ASAE’s Vest. As a point of reference, the American National Red Cross’s revenue for fiscal year 2002 was $4 billion. Its interim president Harold Decker had several roles in addition to CEO, such as general counsel, in the period from July 1, 2001, to June 30, 2002, and received compensation of more than $450,000.
By comparison, Qualcomm’s revenue for 2003 also was about $4 billion. CEO Irwin Jacobs received $8.3 million in cash and stock compensation, according to the New York Times. The Times also reported that for-profit CEOs, running large public companies (often with revenue in the billions of dollars) received median compensation of $7.1 million in 2003.
Truth In Numbers
“Both government and nonprofit salaries at the top level are much lower than business salaries at the top level,” O’Neill says. And just like it’s cracking down on for-profit companies, the IRS in 2003 announced plans to increase scrutiny of nonprofit executive compensation. Penalties for excessive compensation packages can include a 25 percent tax on overpayments.
Nonprofits and their boards of directors may be called on by the IRS to prove they did thorough compensation research to establish fair market value. Along with the IRS, the state attorney general is charged with being a watchdog over nonprofits. Form 990s can be accessed through the IRS, directly from the nonprofit, from the attorney general and from GuideStar.org.
“With the exception of private foundations, virtually all nonprofits get some government assistance,” O’Neill says. Many get donations, making allocation of those funds of critical interest to an informed public. The amount of city, state or federal funding of nonprofits varies greatly from industry to industry. Social services organizations get about 60 percent of their revenue from the government. Health care gets about 45 percent. Research and education get 15 to 20 percent, O’Neill says. Arts and culture groups get 10 percent or so and religious groups get about 1 percent.
The United States General Accounting Office (GAO) produced a report, “Tax-Exempt Organizations: Improvements Possible in Public, IRS, and State Oversight of Charities,” in 2002. It found that nonprofits reported on Form 990s that they spent an average of 12 percent of expenses on management, 87 percent on program services, and 1 percent on fund-raising, which indicates a “high level of spending efficiency.” Though experts agree Form 990s can be inaccurate and out of date, the figures give a bit of a benchmark by which to judge efficiency at a given organization.
Why are Form 990s sometimes inaccurate? For one thing, many nonprofits don’t have a chief financial officer or auditor or even paid staff. That means the forms often are completed hastily. And some nonprofits have reasons to prop up 990 figures. “The incentive is to do everything they possibly can to jack up the program and services percentage (in the expenses column). I’m not saying there are a bunch of liars and cheats out there, but on the whole it’s sloppy and inconsistent,” O’Neill says.
Spotlighting San Diego
So, how about San Diego? Are nonprofit CEO salaries here in keeping with norms? “Is it really the lifestyles of the rich and famous?” asks Lou Cumming, a bank executive officer, who says he suspects some here are overcompensated. In San Diego “nobody has wanted to peel the layers of the onion back and find out exactly what’s going on,” he says. As a former president of the San Diego Symphony Association, he says he’s one of many who are interested in more facts about the sector.
In 2002, the San Diego Symphony had $9.6 million in expenses, including 13 percent for management and 80 percent for programs and services. Its revenue for 2002 was $9.6 million, reports GuideStar. “The only way you can ultimately judge is to compare the things that we do here with comparable organizations in other cities,” says one nonprofit CEO active in San Diego civic affairs.
For 2002, the Kansas City Symphony’s revenue was $8.7 million. Its expenses were $8.9 million, including 11 percent for management and 85 percent for programs and services. Its executive director’s compensation was $195,643. So, based on revenue, Kansas City’s symphony is slightly smaller and the executive director’s pay is slightly less than in San Diego. Based on the benchmarks noted by the GAO, both the San Diego Symphony and the Kansas City Symphony are in the efficient range.
The San Diego Opera Association’s general director Ian Campbell’s compensation was $297,271 in 2002. The group’s revenue was $11.4 million. Compare it to the Dallas Opera, with revenue of $11.2 million in 2002. Its general director made $228,400.
Faye Wilson, a board member of the San Diego Opera, points out that Campbell’s job encompasses three roles, each of which is usually paid separately. In addition to being executive director, Campbell is artistic director and chief administrative officer. In Dallas the artistic director made $85,500 and the director of administration and finance made $90,000.
“If you added up each of the three jobs, he should be making a lot more,” Wilson says. The San Diego Opera’s board of directors does salary surveys to establish industry norms and uses data from Opera America, a trade group.
“One of the key board responsibilities is fiduciary responsibility to the organization and to the community,” O’Neill says. For instance, he says, boards should use salary surveys as a tool to set CEO compensation.
Cumming agrees. “It’s incumbent upon a board to say what is a fair wage,” he says.
The YMCA of San Diego County’s CEO Richard Collato was compensated $420,000 in 2003. While high in relation to other nonprofit salaries in San Diego, the YMCA provided information, including detailed salary surveys, to put the data in context. First, the YMCA of San Diego County is the second largest YMCA in the nation, with 13 branches, 3,400 employees and more than $100 million in revenue.
The “YMCA’s 2003 Survey of Executive Compensation,” completed by researcher Sullivan, Cotter and Associates, puts the compensation range for chief executives of general industry organizations with revenue of $50 million to $125 million at $350,000 to $428,500. Collato’s compensation is in line with that. It is also in line with what the survey data shows for nonprofits with revenue of $50 million or more. That compensation range is $364,200 to $448,100.
Further, YMCA literature points out that Collato has been in his position for 23 years, a long time by any measure of executive tenure. He has helped the group achieve 10 percent to 18 percent annual growth for the last 15 years. “The compensation philosophy is one of pay for performance,” reads an official YMCA document, and is set by an eight-member board of directors.
One interesting fact about Collato’s compensation package is that in each of the last two fiscal years, he received 100 percent of his salary as bonus. O’Neill says that is far from standard procedure for nonprofits, many of which offer no bonuses at all and some of which consider bonuses to be unethical in the nonprofit world. The NonProfit Times reported in February 2003 that just 13 percent of nonprofits offer top executives performance-related bonuses.
But Pattie Griffin, vice president of marketing and communications for the YMCA, disagrees. “The larger and more progressive nonprofits have adopted this proven and accepted business practice,” she says, something Sullivan, Cotter and Associates confirms.
The San Diego Convention & Visitors Bureau took heat late last year when The San Diego Union-Tribune published its CEO’s compensation. The group’s chairman, Joseph Terzi, sent a letter to Mayor Dick Murphy, which included clarification about a golf outing. That event was not a “perk” for CEO Reint Reinders, as the newspaper labeled it. It was instead a major, national ASAE event, sponsored by the San Diego bureau and 10 bureaus from other cities. The purpose was to bring convention business to San Diego, something Terzi says the bureau achieved, to the tune of $60 million in future business.
One San Diego nonprofit CEO questioned one bit of data about Reinders’ compensation; an interest-free loan he received in July 2003. “I assume he does a good job,” he says, but, “I don’t see any justification for Mr. Reinders getting a $50,000 interest-free loan.”
Salvatore Giametta, vice president of community relations for the bureau, points to a Feb. 4, 2004, Associated Press article. It reported that dozens of nonprofit groups give executives interest-free loans, sometimes more than $250,000. The opera’s Wilson agrees, saying that a forgivable mortgage loan is not unusual for a nonprofit head in a high-cost-of-living area.
In Reinders’ case, the loan was written into his contract and paid back in full in December 2003. As a result of the media scrutiny, “Reint requested that item be eliminated from his contract,” says Giametta.
Giametta also provides an International Association of Convention & Visitors Bureaus 2002 salary survey for reference. It puts the median for total CEO compensation at $233,051 for groups with a budget of $7.5 million or more. San Diego’s bureau has a budget of $14.9 million and Reinders’ compensation for 2003 was $306,000. “My salary falls right in line with the top 25 percent in the CVB business,” Reinders said.
For further comparison Reinders notes that general managers in large hotels with jobs similar to his may earn a salary of just $100,000, but may receive a 60 percent bonus, thousands of stock options and other benefits. “To get the most competent people and get great results, you have to pay, for lack of a better term, the going rate,” he says.
The public doesn’t always see it that way and sometimes doesn’t have all the facts. “Somehow, the nonprofit sector is seen as a place where people shouldn’t make what they deserve,” says Sara Roscoe Wilson, executive director of Nonprofit Management Solutions, a San Diego consulting firm. “It should astound people what our nonprofit sector organizations are able to accomplish and the people they are able to serve based on their budgets,” she says.
That point was echoed over and over in 20 or so interviews with nonprofit executives, spokespeople and researchers. CEOs of some nonprofits, such as business-related groups, make hundreds of thousands of dollars. The majority of nonprofits, however, have small budgets, limited income and largely volunteer staffs.
There are many thousands of tiny nonprofit organizations, compared to a relatively small number with revenue of $25,000 or more that must file 990s, says O’Neill. Consider the fact that the majority of religious nonprofits have 75 members or fewer and that the median CEO executive pay in that group is $24,000, he says.
Like business-related nonprofits, health care nonprofit CEOs tend to have high salaries relative to the nonprofit sector as a whole. Nonprofit health care accounts for more than 40 percent of all nonprofit employees, or 11 million jobs, O’Neill says. Salaries in this sector are generally in line with their for-profit peers.
Two San Diego nonprofit health care systems, Scripps Health and Sharp HealthCare Foundation, compensated their CEOs in 2002 with $858,031 and $536,633, respectively.
“San Diego has some of the most sophisticated, complicated systems in the country,” says Jim Nelson, managing director of the Minneapolis-based health care practice for Clark Consulting, which researches nonprofit executive compensation plans.
Scripps, for instance, generates about $1.4 billion in net revenue. For health care systems with median net revenue of $1.5 billion, Clark’s 2002 survey data shows that the median CEO compensation ranged between $960,000 and $988,000. As a comparison, The Cleveland Clinic Foundation runs a health care system similar to Scripps with $1.7 billion in revenue. According to the 990, its CEO was compensated with $1.7 million in 2002. Bonuses are common in this industry too, says Nelson.
The American Red Cross, San Diego/Imperial Counties Chapter is another group that took public criticism for its financial management, including allegations that its former CEO was overcompensated at around $300,000 in 2000. Although the charity reports its financial data nationally and is not required to share local data, officials here willingly shared key financial facts. Veronica “Ronne” Froman came on board as CEO in April 2003 and has a 2004 salary of $175,000 with no potential for bonuses.
The revenue of the chapter was $10.2 million in 2003, says spokesman Bob Morris. Compare that to Orlando, Fla.-based Action Products International, a publicly traded company that the Wall Street Journal says expects to have revenue of $10 million this year. Its CEO, Ronald Kaplan, will be compensated $136,000 in 2004 and he has $1.6 million in stock options. Unlike the nonprofit sector, stock options often put even seemingly low-paid for-profit executives into the realm of the rich.
That goes to a key point about much nonprofit work; people do it because they have a passion for the mission of the group. “In general, it’s not about making money,” says O’Neill. “The main reason these organizations exist is to provide some public service, whether it’s artistic or health care or whatever,” he says.
And what about allegations that the former head of the Red Cross was paid too much? The group made changes with Froman, says board member Phil Blair. “We were very cautious. We felt that the compensation package for the previous CEO had grown over the years to a level that we could not substantiate,” he says. “We did surveys. We had input from organization search firms. She is the right person at the right time.”
Just about everyone agrees that having the right staff is critical to any nonprofit’s success. Often that means pay is competitive. “We, as a nonprofit, still need to attract, retain and motivate our employees, including senior management,” says Fred Baranowski, president of the United Way of San Diego County.
“I think people still believe that the nonprofit sector should be paid substantially less because we are doing work for the betterment of the community,” he says. “I can make a case that a skilled fund-raising executive in a nonprofit is well worth his salary and more.”
Baranowski says that sometimes people in the public overreact to financial facts when taken out of context. “Often people don’t understand that there is a need to use some of the donated money for operating the organization,” he says.
Public education about the operating necessities and financial practices of nonprofits should be part of nonprofits’ missions, says Stacy Palmer, editor of the Chronicle of Philanthropy. “One of the real challenges nonprofits have is that their image is everything,” she says. “There are a lot of people who think of nonprofits as being these little things. Nonprofits need to find a better way to talk about how they came to salary decisions,” she says.
As for the United Way in San Diego, it generated $25 million in revenue in 2003, says Baranowski. Of $26.8 million in expenses, it put just 3 percent toward management expenses, much better than the GAO’s benchmark. Its percentage of expenses for programs and services was 89 percent, again beating the GAO’s mark.
The San Diego Regional Chamber of Commerce’s CEO Jessie Knight was compensated $420,000 in 2002. The chamber’s gross revenue was about $5 million. As a comparison, the Las Vegas (Nevada) Chamber of Commerce had 2002 revenue of about $6 million and its CEO was compensated $174,285 that year.
Compare that to another nonprofit, the American Institute for Property and Liability Underwriters, in Malvern, Penn. Its 2002 revenue was $4.7 million and its CEO made $286,000.
William Scarfia, chief financial officer of the San Diego Chamber, says Knight is well worth his pay. “This organization has had a significant turnaround since he has been at the helm,” he says.
In March 1999 when Knight arrived, the organization owed $350,000 and had nothing in the bank. Today it has more than $1 million in the bank and no debt, he says. Since it’s a mutual benefit organization, it gets nothing from state or city funds, he adds.
Despite many requests the San Diego Regional Economic Development Corp. President Julie Meier Wright was unavailable for comment for this article. Her compensation figures were taken from Form 990s. The San Diego Union-Tribune reported on Jan. 20, 2004, that her 2004 base salary was reduced from $257,000 to $225,000, but no one at the group would verify that figure.
Others, including Consumers’ Action Network, offered both data and context. UCAN’s Charles Langley, a gasoline analyst, says many nonprofit executives do what they do because they are committed to a cause. UCAN executive director Michael Shames, like many in the nonprofit sector, is “grotesquely underpaid,” he says.
The truth is San Diego’s nonprofit executive salaries are all over the map. So are local nonprofit leaders overpaid, underpaid or appropriately paid?
That question only can be answered on a case-by-case basis, with careful analysis of facts, figures and specific context. It is research any interested citizen can and should do before investing time and treasure with a favorite cause.
U.S. Nonprofit Subsectors
The U.S. nonprofit world can be broken into nine major subsectors, each with unique characteristics. CEO compensation varies greatly from subsector to subsector. Religious and advocacy groups, for instance, tend to be on the low end, while health care groups are near the top. The IRS requires nonprofits to compile independent research data to ensure CEO compensation is within a fair market range.
1. Religious Organizations-One of the largest subsectors, although many religious nonprofits have 75 members or fewer.
2. Social Service Organizations-Human service agencies, soup kitchens, suicide prevention centers and so on. These groups get broad government and community support.
3. Health Care Organizations-These groups make up about 50 percent of all revenue and employment in the nonprofit sector.
4. Education and Research Organizations-Private schools, colleges, universities and research institutes make up an influential nonprofit sector.
5. Advocacy Organizations-Environmental groups, women‘s groups and others have strong influence on public policy.
6. Arts and Culture Organizations -With little government support, arts groups tend to have many low-paid workers but broad influence on culture.
7. International Groups Organizations-Emergency and economic relief groups, peace and human rights organizations work both in the U.S. and in other countries.
8. Funders-These are institutional grantmakers, including foundations and corporate philanthropies.
9. Mutual Benefit Organizations-These are the “noncharitable” nonprofits that focus on the needs of members but also benefit their communities in many ways.
Source: “Nonprofit Nation: A New Look at the Third America,” by Michael O‘Neill, 2002, John Wiley & Sons