.02 % of Nonprofits

Posted by Laura Otten, Ph.D., Director on January 12th, 2018 in Thoughts & Commentary

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If I thought an equal rights amendment for nonprofit employees would have a better chance of passing than the original ERA , I’d be proposing it asap. In less than 15 minutes I was sent two articles that, in essence, slammed nonprofits for paying their employees, but especially their executive directors, “too much.”

One, a commentary on CNBC, lauded the newly passed tax bill for limiting the “excessive” pay of nonprofit executives; the other, an article from the Burlington (Vermont) Free Press, described a new bill presented to the state legislature that would forbid any nonprofit that received more than $1 million in taxpayer money from paying an employee more than what the governor is paid (currently around $166,000).  So much for hoping that 2018 might be the year when we get past the idea that nonprofit employees don’t deserve equal pay for equal work.  Running a multimillion dollar hospital or educational institution or public radio station is every bit as complex as running a multimillion dollar for-profit anything, requiring the exact same set of skills and then some, such as working in partnerships with a board of directors and knowing how to fundraise from both individuals and corporations (the latter akin to raising venture capital dollars).

From the start, with the headline “How tax reform will end the nonprofit pay scam,” the CNBC commentary reveals too many of the falsehoods that so many hold to be truths.  What exactly is this pay scam?  No one would dare refer to the CEO of Goldman Sachs, who made almost $54 million in 2016 (with a base salary of $600,000, the rest of his compensation came from bonuses, stock and other options), or the head of Bank of America, who made $20 million in 2016 (with $18.5 million in stock and a base salary of $1.5 million), as participating in a pay scam.

Jake Novak, the author of this commentary, rightly notes that nonprofits do actually make profits, but then makes the outlandish statement that “[t]he money these organizations make every year above expenses is usually paid out to employees, often with very large salaries to a few executives at the top.”  If he had spoken to as few as 10% of the 1.6 million nonprofits he would never have printed such a false statement.  The reality is that too little of the money made goes into salaries of employees, executive director or otherwise, but rather goes into strengthening programs, expanding services, and, sometimes, even upgrading technology and other infrastructure needs.  But, sadly, as we know from reams of anecdotal evidence and board members who don’t understand that nonprofit employees should be paid competitive wages, too little of the profit nonprofits do make is spent bringing nonprofit salaries to where they can be competitive with the for-profit sector.

Being ill-informed doesn’t prevent Novak, and too many like him, from complaining about “excessive payments” to nonprofit employees.  He cites presidents of private colleges and universities pulling off their own scams because they make over $1 million in annual compensation, and the presidents of state school systems that made more than $1 million?  But he also singles out Alan Miller and his excessive salary— $51.3 million—claiming Miller is the CEO of United Health Services, which he places in Pennsylvania.   Alan Miller, however, is the founder, CEO and Chairman of the Board of Universal Heath Systems, a publically traded, Fortune 500 for-profit health management company.  United Health Services is a nonprofit, regional health care organization in Binghamton, New York, with a CEO named Matthew Salanger, who, according to the organization’s 2015 form 990, made just under $1.3 million.

But where is the scam?  These heads of organizations are running multi-million dollar businesses, many of which are multi-site operations or even international, with overseas campuses.  They are responsible, just as are CEOs of for-profit companies, for ensuring the efficient, effective and, yes, profitable running of these businesses, and remaining profitable is increasingly a much bigger challenge, requiring much more creativity and work, for nonprofit hospitals and institutions of higher education than it is for CEOs of for-profit companies. If we reward CEOs of for-profit companies for keeping their companies successful and reaping returns for their investors and not call it a scam, why does the exact same behavior that is rewarded in the exact same manner be called a scam when it happens in the nonprofit sector?

Vermont State Senator Christopher Pearson, who is proposing the legislation noted above, apparently shares Novak’s concern that nonprofit employees should not benefit from the same capitalistic dreams that those working in the for-profit sector have.  He doesn’t suggest that those who earn more than the governor are scamming anyone, but rather wants to encourage board members to “think differently” about compensation.

It would, however, appear that he, and Novak, want the exact opposite; they want the old way of thinking about nonprofit employee compensation:  wages based on the fact that an employee works for a nonprofit, rather than based on the job an employee is being asked to do and how well s/he does it, regardless of where that work is taking place. We must move beyond the old notions, just as absurd now as when they were first conjured, that those who work for nonprofits should not be paid livable wages and aren’t interested in financial compensation because their compensation is knowing they are helping others.  We must understand that paying competitive (with the for-profit sector) wages is doing exactly what everyone wants nonprofits to do with its money and profits—invest it into the fulfillment of mission promises.  If the for-profit sector is allowed to act on one of its sacred beliefs that money buys talent, why shouldn’t the nonprofit sector?

Perhaps, though, the saddest part in this story is its irony, as it thwarts attention going where it should.  Beginning several years ago with New York’s cap on salaries of CEOs of nonprofits receiving state funds and coming current with the new tax bill’s 21% excise tax on salaries in excess of $1 million, so much time and attention has been spent on a tiny phenomenon.  According to a Wall Street Journal study last year, 2700 of those employed in nonprofits in 2014 earned more than $1 million—or, put otherwise, a mere .02% of nonprofit employees that year.  Attention on the .02% diverts attention to the problem so many of the other 99.98% face:  insufficient compensation.  This is the issue that every nonprofit board should address in 2018.



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