Executive Compensation in the Nonprofit Sector
New Findings and Policy ImplicationsPublication Date: December 11, 2001 Permanent Link: http://www.urban.org/url.cfm?ID=310372 Share:       Brief #11 from the series "Charting Civil Society," by the Center on Nonprofits and Philanthropy.
The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders. The strong economy and tight labor market of recent years have spurred hefty increases in executive compensation in corporate and nonprofit America. Yet, the growth of salaries and benefits for nonprofit officers has been significantly more controversial than increasing executive compensation in the corporate sector. Even government regulators have taken notice, as evidenced by the temporary regulations recently passed by the Internal Revenue Service (IRS). Related to public concern that large executive salaries are incompatible with charitable activity, these regulations allow the IRS to assess excise taxes against executives of nonprofits that provide disproportionately high—or excessive—compensation to their employees. However, in an economy that offers an increasing array of opportunities for executives, some scholars and nonprofit leaders suggest that charities must offer to top executives wages and benefits that are comparable with those in the for-profit sector. Despite the contentious nature of this issue, the debate regarding excessive wages and benefits in the nonprofit sector has proceeded without much empirical evidence. Instead, the discussion has relied largely on limited survey data from small samples of organizations. Indeed, studies such as the Chronicle of Philanthropy's salary survey,1 which focuses on just 0.2 percent of the largest nonprofits, provide only a narrow examination of a few exceptional organizations. To expand our knowledge of nonprofit executive compensation, this brief draws on data2 from the National Center for Charitable Statistics (NCCS)3 to examine nearly 55,000 nonprofits that reported the ages and benefits of their chief officers on Forms 990 in 1998.4 The brief relates the executive compensation of these nonprofits to their size, activities, and reliance on different types of revenue. The relationships between top executive salaries and the nonprofits' program service revenues and management, general, and fundraising expenses are also examined. Six Major FindingsWith a median annual salary of $42,000 in 1998, chief executives of nonprofit organizations receive relatively low wages. Nonprofit executives perform a host of tasks that often include budgeting, staffing, and fundraising. Despite the consistent challenges of running organizations, nonprofit chief executives earn relatively small salaries compared with other occupations. In fact, their 1998 median annual salary lagged behind the typical 1998 wage earned by computer programmers ($47,550), construction managers ($47,610), and dental hygienists ($45,890).5 Moreover, with a minimum salary of $99,200, administrators and managers in the Senior Executive Service of the federal government earned more than twice the typical pay of nonprofit chief executives in 1998. Executive salaries in the nonprofit sector are highest at hospitals and higher education institutions. Wage rates vary significantly across the nonprofit sector. Indeed, salaries for top officers at nonprofit hospitals and colleges and universities significantly exceed the wages of chief executives in other nonprofit fields. In select cases, chief executives at nonprofit hospitals and higher education institutions are paid more than $1.5 million, while the highest salaries in most nonprofit industries, including arts and culture, international and foreign affairs, and the environment, were below $500,000 in 1998. Moreover, the typical chief executive received $169,000 at nonprofit hospitals and roughly $114,000 at colleges and universities, while the median salary at health-related nonprofits, such as community-based clinics that provide medical or mental health care, was $53,000 (table 1). With a typical salary of approximately $24,000, chief executives of faith-related nonprofits were the lowest paid in the nonprofit sector.
Bigger nonprofits generally pay higher chief executive salaries than smaller groups. Not surprisingly, top officers at large nonprofits typically receive higher compensation than chief executives at smaller organizations. Using an organization's total revenue as a proxy for its size, the Spearman correlation between salary and size for all nonprofits is 75 percent, indicating that organizations with larger revenues tend to pay higher salaries to their top executives (table 2). This finding is particularly evident among arts organizations, which seem to strongly link executive pay to firm size. It is not surprising that bigger nonprofits pay higher salaries to their top officers because, similar to for-profit firms, large nonprofit groups are often complex entities with multiple funding streams, products, and many layers of staff. Moreover, organizations with complicated administrative structures often compete with other groups for experienced executives, causing wage rates to rise.
Hospitals and higher education nonprofits are the most likely groups to supplement executive wages with employee benefit plans or deferred compensation. Among the roughly 54,000 groups reporting compensation to chief executives in 1998, approximately 38 percent made payments to employee benefit plans or deferred compensation. Thus, more than one-third of the chief executive officers at nonprofit organizations received monies to supplement their base pay. However, the extent that alternative compensation is used in the nonprofit sector depends significantly on the type of organization. Indeed, about three-quarters of hospitals and higher education institutions contributed to employee benefit plans or deferred compensation for their top executives, while only one-quarter of the arts, culture, and humanities, and religion-related organizations did so (table 3). Although the degree of additional payments varies across the nonprofit sector, the level of payment is fairly constant. On average, these benefits equaled roughly 8 percent of the base compensation of the executives who received them. Moreover, these contributions served as the biggest supplement for executives earning $100,000 or less in wages, particularly in the higher education, international, and religion-related fields.
Expense accounts and other allowances serve as important supplements for base pay, particularly among faith-related organizations. In addition to making cash contributions to retirement funds or deferring compensation for top executives, nonprofits act like other firms by supplying some chief officers with expense accounts or other allowances to purchase housing, food, and clothing. This compensation strategy is less popular among nonprofits, however, than contributing to employee benefit plans or deferring wages. Indeed, only about 6,000 of the nearly 55,000 groups (or 10.9 percent) covered employee expenses or provided allowances. Nonprofit hospitals are the most likely organizations to pay these expenses for their chief executives. Nearly 28 percent of nonprofit hospitals that reported executive compensation levels provided expense accounts or other allowances to their top officers (table 4). In addition to nonprofit hospitals, more than one-quarter of the faith-related organizations provided these benefits to their organizational leaders in 1998. Because wage levels are relatively low at religion-related nonprofits, expense accounts and other allowances for these groups are the biggest supplements of base pay in the nonprofit sector. Not only do a relatively high number of top executives of faith-related groups receive wage supplements, but these payments also account for a relatively substantial percentage of their total compensation. While the typical expense account or allowance added roughly 6 percent to a top nonprofit executive's compensation package, it improved the total compensation of religious leaders by a whopping 53 percent (table 4).
The value of allowances for chief executives is even more pronounced in smaller religion-related nonprofits. Among faith groups with revenues of $250,000 or less, the median benefit for expense accounts or other allowances added nearly 60 percent to the leader's base salary. This makes sense considering that heads of religious groups often receive room and board in addition to their salaries. Other types of organizations with relatively large allowances include higher education institutions, which often provide housing, and international organizations, which may pay international travel and lodging expenses. Nonprofit executive compensation varies significantly within sub-sectors, making problematic the targeting of types of organizations for IRS sanctions. Simply stated, hospitals, higher education institutions and, to a lesser extent, other types of health-related nonprofits compensate their chief executives more heavily than do other types of nonprofits. These organizations could therefore be the prime targets of regulatory efforts to reduce excessive compensation in the nonprofit sector. While this brief provides evidence of relatively high wages and benefits in the nonprofit hospital and higher education industries, the analysis also reveals that pay levels vary significantly within all nonprofit industries, depending on an organization's size, activities, and reliance on different streams of revenue. The substantial variation within nonprofit subsectors is described below:
DiscussionOur findings illustrate that nonprofit executive pay structures are complicated and somewhat difficult to categorize. Nevertheless, some important patterns emerge that help to explain variations in nonprofit executive compensation. Hospitals and higher education groups pay the highest wages. Religion-related nonprofits pay the lowest base salaries, but tend to compensate their organizational leaders with fairly generous housing and other allowances. Organizational size is also very influential in determining compensation packages. Larger nonprofits generally pay their chief executives significantly more than smaller nonprofit organizations pay. Pay in the nonprofit sector is also related to the reliance of groups on different revenue sources. For arts, education (excluding higher education), and human service nonprofits with revenues of less than $500,000, greater dependence on direct public support is linked to higher salaries. For some larger organizations, however—such as higher education institutions, environmental groups, and religious nonprofits—dependence on direct public contributions actually relates to lower executive salaries, suggesting perhaps that some nonprofits depress compensation levels to avoid agitating their donors. One notable exception to this rule is the human service category. Among these human service nonprofits, higher executive compensation is tied to the organization's dependence on direct public support, regardless of organizational size. This finding may hint to the growing competition between nonprofits and for-profits for skilled executives, particularly as the corporate sector becomes more prominent in social service delivery. More "commercialized" nonprofits pay higher salaries to their executives, although the relationship between program service revenue, which serves as a proxy for commercial activity, and executive compensation varies with organizational size and activity. Once again, smaller nonprofits tend to behave differently than larger groups. Higher executive salaries in small arts and human service nonprofits are linked to less reliance on program service revenue, which include fees paid by clients. Among large education (excluding higher education), human services, and public societal benefit organizations, however, higher executive compensation relates to greater receipts of program service or commercial revenue. On the other hand, for hospitals with revenues of over $10 million, dependence on program service revenue is related to lower salaries. The variability in nonprofit executive wages and benefits suggests that generalizations concerning compensation patterns are difficult and unadvisable. Indeed, the differences among executive salaries within subsectors of nonprofits has important implications for policy officials and IRS regulators. As lawmakers and the IRS impose sanctions on executives and groups that pay excessive compensation, they should be mindful that salary determinations are defined largely by the characteristics and circumstances of individual nonprofits. Endnotes1. The annual surveys by the Chronicle of Philanthropy serve as the most notable sources of information on nonprofit executive salaries. The Chronicle surveys 400 U.S. nonprofits that raised the most money in private donations during the preceding year (Billitteri et al. 1999). Although widely discussed, the surveys focus heavily on nonprofit hospitals and universities as well as foundations. As a result, the reports do not include information on small nonprofits, and therefore may overstate the compensation of nonprofit executives. ReferenceBillitteri, T. J., D. E. Blum, H. Lipman, D. Marchetti, J. Moore, M. Sommerfeld, G. Williams, and M. Voelz. 1999. "Top Leaders See Fatter Paychecks." The Chronicle of Philanthropy (September 23): 1. About the AuthorsEric Twombly is a research associate at the Center on Nonprofits and Philanthropy (CNP) at the Urban Institute. His research focuses on the role of nonprofit institutions in providing social services and building community capacity. Marie Gantz was a research associate at CNP until leaving the Urban Institute in June 2001 to pursue her doctoral studies at the University of Kentucky. The Urban Institute's Center on Nonprofits and Philanthropy (CNP) was established in September 1996 to explore the role and contributions of nonprofit organizations in democratic societies. The work of CNP will be communicated through the dissemination of timely, nonpartisan research to policymakers, practitioners, researchers, the media, and the general public. The National Center for Charitable Statistics (NCCS) became a part of the Urban Institute in July 1996 and is the statistical arm of the CNP. The mission of NCCS is to build compatible national, state, and regional databases and to develop uniform standards for reporting on the activities of charitable organizations. NCCS databases are available on CD-ROM, diskette, 9-track tape, or via File Transfer Protocol (FTP) in a variety of database formats. For information, call 202-828-1801 or visit our Web site. Related Publications
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