Let’s talk about nonprofit salaries.
The greatest expenditure by most nonprofits is for staff salaries, which makes sense: a nonprofit typically doesn’t produce goods, as a manufacturer does, but services, and those services are usually provided by paid staff members.
It stands to reason that you need to pay people fairly: the quality of services is only as good as the staff members who provide them, so you want to keep good employees, and keep them happy and productive. If there’s a medical clinic serving poor children, its doctors and nurses need to be paid professional salaries, even if their pay will no doubt be less than what they would receive in private practice. You need to pay teachers, social workers, and clarinetists if you want functioning schools, social service agencies, and orchestras.
These employees are the folks who actually deliver the services. And, despite the best intentions of the organization, nonprofit staff are usually underpaid for what they do. But what about salaries for nonprofit CEOs?
I have written earlier about the simplistic (and harmful) way certain on-line rating agencies evaluate nonprofits based on fairly arbitrary ratios, such as how much they spend on fundraising relative to their total budget. I will suggest that a more telling ratio – and one that would explain a lot about the culture of the organization – is how much the CEO gets paid relative to the average salary paid in his or her organization. A second ratio worth considering is how much the CEO gets paid relative to the lowest-paid staff member in the organization. If the ratio of the first measure is more than 2:1 and if the ratio of the second measure more than 4:1, then the board may be guilty of the same affliction that has plagued the corporate world: veneration and overcompensation of the CEO.
Certainly CEOs have a tough job. They need to oversee how the organization spends its money (the budget), how the organization gets its money (the earned income and donations), where the organization is going (the strategic vision), how the organization goes about its work (the culture), and how the organization is perceived (the public image). Pleasing clients, funders, staff, board, and the public all at the same time is a juggling act, and not everyone can do it. Good CEOs need and should be paid well for their services.
But there are limits.
A few years ago, St. Paul’s School, the exclusive boarding school not far from where I live in Concord, New Hampshire, stirred up a public relations nightmare when news arose that their rector (the head of school) was receiving a $500,000 salary. That was about twice the salary of the heads of similar institutions. What was particularly galling was that the rector had received significant salary increases even when the school was cutting benefits for its teachers and eliminating positions among its support staff. (That rector has long since departed, driven out, in part, by this and other awkward revelations.)
I blame the school’s board of trustees, most of whom were so wealthy that they could hardly see the difference between a salary of $250,000 and $500,000. The board members also were somewhat blinded by their relationship with the rector: they had hired, worked with, and gotten to like him, and he was, after all, their primary interface with the institution. They assumed that he was far more important to the school’s success than he actually was. To the credit of the school, the salary of rectors since then have been much more reasonable — and I hope the Board has a more mature perspective on the role of the CEO within the institution.
Even at less-wealthy nonprofits, with less out-of-touch boards, the CEO’s salary can rise to inappropriate levels. This can happen because, as with St. Paul’s, the board may overvalue the contributions of the CEO—easy to do when the CEO controls most of the information going to the board. But it can also creep up on an organization because of uncreative approaches to annual salary adjustments. One of the most common – and, if unchecked, most unhelpful – formulas is to give across-the-board percentage raises to all staff. And the reason that’s a problem is because a fixed percentage of a large number is a lot bigger than a fixed percentage of a small number. So under that scenario, the well-paid get richer much more quickly than the folks at the bottom.
Let’s say a CEO is making $100,000 a year. And let’s say the lowest-paid staff member is making $30,000 a year. In other words, the CEO is making $70,000 more than the lowest-paid staff member. If they both get annual 5% increases for five years, then by the end of that time the CEO will be making $89,340 dollars more than the lowest-paid staff member ($127,628 vs. $38,288). Without intending to, the across-the-board percentage increase has significantly widened the gap between the top and the bottom of the salary structure.
A good way of avoiding that widening income gap is to give everyone the same dollar amount pay increase. That keeps the income gap from widening, and it actually lowers the ratio of how much the CEO earns compared with the person on the bottom. For example, if the CEO (again, starting at $100,000) and the person at the bottom (starting at $30,000) each gets an extra $3,000 a year for five years, at the end the CEO would be at $115,000 and the lowest-paid person would be at $45,000. There’s still a $70,000 gap – but the income ratio between them has narrowed from 3.3:1 to 2.5:1.
I worked at a very good nonprofit that approached compensation in a variety of ways: sometimes an across-the-board percentage increase, sometimes an across-the-board dollar increase, sometimes bonuses, and frequently adjustments for staff who took on new or more challenging responsibilities. It was an enlightened blend, and the CEO’s salary was never more than three times the bottom salary. There were tensions, as within any organization, but I don’t remember them ever being based in any way on financial resentment.
People often say that no one goes into the nonprofit world for the money – but salaries do matter. Nonprofit staff have to make mortgage payments and send their kids to child care and buy groceries just like everyone else. They don’t get a nonprofit discount when they buy a new car. And my personal observation has been that organizations where the salaries are more closely bunched together are happier and more cohesive than those where the CEO makes six or ten times more than the person at the bottom. There are enough reasons, real and imagined, for resenting the boss. Boards should be careful not to add to the list, “The CEO gets paid way too much, and I get paid way too little.”
Keep your eye out for the next post: “Getting Paid — Part II”
Copyright Alan Cantor 2012. All rights reserved.
I especially like the point that a Board is highly influenced by the CEO as their primary interface, so they need to be extra diligent in evaluating that person if they want thier organization to be healthy. I have worked at and served on the Board of an agency that did a 360 evaluation (before we called it that!) of the CEO each year. This gives the Board perspective and lets the staff know their opinion matters, and gives the CEO much needed feedback from the front lines.
You are so on the money about the need for a thorough 360-degree evaluation of the CEO.
I don’t think a nonprofit Board has a more important job than hiring, supporting, monitoring, evaluating, and — if necessary — firing the CEO. But some Boards are hesitant to dig around and ask people (outside of the Board itself) how the CEO is doing. To do that well, they need information from all quarters — not simply from the CEO. I remember being on a nonprofit Board with a long-time CEO. I asked if the senior staff had been interviewed as part of the CEO’s evaluation. The Board chair at the time — a very decent guy, but very much a product of the corporate world — said that that would be VERY inappropriate, and that it would undermine the number one person. I was astonished.
If the most important thing a CEO does is hire and motivate a staff, shouldn’t we ask what that staff thinks of him or her?
Great article! Perspective, unfortunately, is one thing that is lacking amongst many of today’s CEOs. In large companies, even as budgets are supposedly tightening, money seems to be funneled upward to the top tier w/less scrutiny but, on the flip side, every penny that trickles down, seems to be micro-managed and justified.
Great article Al! I’ve printed and e-mailed to my Board. One of the many jobs of the CEO is to educate the Board – not just about the day-to-day operations, the community, the finances, development, etc., but also about the culture of the organization – which, to me, this is a component of. Thanks for helping me educate everyone on my Board!