Who here is old enough to remember the William Aramony scandal?
In 1991, Aramony, the head of what was then called United Way of America, was found to be having a series of affairs, culminating with a long-term liaison with a girl who was 17 years old (Aramony was 59) when they met. Moreover, Aramony traveled with her in style (four-star hotels, the Concorde to Europe, nights in a specially-purchased luxury condo in New York City), all on United Way’s dime. And this was on top of what was discovered to be a lavish $390,000 annual salary.
Aramony became the poster child for abusing the trust people place in charity. The scandal damaged the independent local United Ways, which were tarred by association, even though they had only a tangential connection to Aramony and his shenanigans. In fact, the scandal impugned the reputation of the entire nonprofit sector. And the United Way of America’s board of governors was roundly seen as equal parts negligent and clueless, and so extremely wealthy that they didn’t realize that paying the CEO of any charity that kind of money was utterly inappropriate. While Aramony’s travel style and sexual peccadillos clearly attracted attention, people were stunned enough by his salary alone that they raised their eyebrows and voices.
Flash forward a couple of decades. Aramony’s 1991 salary of $390,000, if adjusted for inflation, would equate to $667,000 in 2012. So it’s worth noting that the current CEO of United Way Worldwide, Brian Gallagher, earned a cool $1.2 million in 2012 – nearly twice the inflation-adjusted income of Bill Aramony. And it’s also worth noticing that Gallagher’s salary draws zero notice because it’s more or less in line with other executives at major nonprofits. In fact, compared with nonprofit hospital executives, many of whom earn several million dollars a year, it seems downright modest. (If you want to get really revved up about some of the salaries paid to nonprofit CEOs – not to mention university football and basketball coaches – you owe it to yourself to read Ken Stern’s With Charity for All. And I credit Stern with making this point about the growth in salaries since the Aramony scandal.)
From Occupy Wall Street to the latest State of the Union, in the past few years income inequality (and its first cousin, wealth inequality) have become a frequent topic in public discourse. Many people are upset because of the social and economic injustice: a growing number of workers and families are struggling to make ends meet while a tiny percentage of folks at the top are raking in millions. Some people are concerned because of the strain a weakened middle class and working class can place on the economy: if the masses can’t afford to buy products and services, they warn, economic activity will grind to a halt. And, of course, there are some people who think that income inequality is simply the market doing what the market does, and that to wring our hands and try to redistribute the wealth is counterproductive and socialistic.
Whatever your viewpoint, the inequalities that characterize the larger for-profit world have become an increasingly prominent fact of life in the nonprofit sector. At the hospital where the CEO is earning $2.5 million, it’s highly doubtful that the orderlies, nurses, technicians, and cafeteria workers are getting rich. In fact, they are likely to be facing staff reductions, salary freezes, and roll-backs of benefits – the kind of “tough measures” for which the CEO is rewarded.
Here’s one frustrating aspect about the absurdly high CEO salaries: for the most part they have come about not because nonprofit compensation committees are shooting from the hip, but because they are following to the letter the best practices encouraged by the IRS and state charity regulators.
You probably know the line from NPR’s “A Prairie Home Companion”: In Lake Woebegone “all the women are strong, all the men are good looking, and all the children are above average.” That notion has given rise to the Lake Woebegone Effect in executive salaries. How it works is that a Board’s compensation committee will commission a study of CEO salaries at similar institutions – a course of action encouraged by the IRS. That study provides the committee with a salary range and average compensation. And then, because they will deem their particular CEO to be above average, the Board will pay their person at the top or even a bit above the range. When the next nonprofit undertakes a similar study, the average salary has consequently gone up – and then that group pays its CEO at the top or above the range. And so the salaries ratchet up, rapidly, inevitably, logically, and deplorably.
Some people ask me if nonprofit salaries are too high. Others ask me if nonprofit salaries are too low. I tell all of them: yes. The widespread veneration of the CEO, which has increasingly poisoned the for-profit corporate world, has infiltrated nonprofits. CEOs at many successful organizations are getting way too much credit, and way too much money. And the people in the trenches – the social workers, teachers, nurses, cooks, security guards, bookkeepers, and IT guys – are getting way too little.
And, there’s a second form of inequality in the sector: the yawning gap between small community-based nonprofits and the big elite institutions. But that important story awaits another post on another day.
Copyright Alan Cantor 2014. All rights reserved.