Nice Work If You Can Get It

[This post was later published, with some small adjustments, as an op-ed for Inside Philanthropy on May 3, 2016.]

Presidents of large private foundations get paid too much.

I don’t say that out of envy. (Not entirely, anyway.) I say that because by objective standards CEOs of private foundation receive disproportionately large salaries given the relative simplicity of their jobs.

There are two factors that make running a foundation fairly easy. The first is that the CEO of a private foundation doesn’t have to struggle with the single largest operational challenge of running a nonprofit: making sure that income and expenses are in balance.

Think about any operating nonprofit – a food pantry, mental health center, community theater, or Boys and Girls Club. Let’s say the organization is considering expanding its hours, opening a new clinic, extending its season, or starting a new program. All of these efforts would cost money, and the CEO is responsible for deciding if the organization can afford the expansion. Will there be adequate grant dollars, contributions, ticket sales, tuition payments, or government reimbursements to make the plan work, in year one and long term? It’s a difficult question to answer, with many variables, and the consequences of a miscalculation are serious. This is an issue that turns CEOs’ hair gray.

Private foundation presidents don’t have to deal with this problem, because they already have their money. The traditional private foundation model is simple, if unexciting: living off the earnings of a big endowment. (A disclaimer: some foundations work to spend down their principal within a certain number of years. This scenario describes the majority that do not.)

Let’s say a foundation has a billion dollars in its endowment, invested in stocks, bonds, and other securities. By federal law, the foundation needs to allocate five percent of the assets each year for charitable purposes – in this case, roughly $50 million. Most of that money is sent out in grants, but a portion can be used to reimburse the foundation for its own grantmaking activities – that is, paying for its program staff members’ salaries, benefits, travel, and other grant-related overhead. Assuming that on average the market returns more than five percent annually, the foundation can use some of the excess return to pay for the rest of its operations, while plowing any additional yield into the principal – and starting the process all over again.

Yes, it’s true that when the stock market hits the skids there is less money available for grantmaking and for operations, but bad markets do not threaten the viability of the foundation. In tough times the foundation simply trims a staff position or two and distributes a smaller amount in grant dollars, but otherwise it goes on more or less as it did before.

The second reason running a private foundation is an easy job is that there are virtually no consequences for running the organization poorly.

Imagine an operating nonprofit that didn’t answer the phone or respond to letters and emails. Or think of an operating nonprofit that spent its money in an utterly haphazard way. Those organizations would be out of business in a heartbeat. But I know private foundations that act this way (I’ll bet you do, too), and they’re still in business the next year and the year after that. There are no real consequences for treating their customers – that is, the nonprofits seeking grants – poorly, nor is there accountability for wasting money on grants to badly-run organizations or for projects that have negligible impact. Essentially, so long as private foundations spend their five percent a year for charitable purposes and their leaders are not caught embezzling money, they will remain in business. That, my friends, is a very low bar.

Not only do private foundations, even the poorly-run ones, continue to operate, but they find themselves the perpetual object of public adulation. Why? Because they are the source of grant dollars, and, given the power imbalance in the nonprofit world, it is in the interest of charitable organizations to heap praise upon the foundations. Savvy nonprofit executives don’t bite the hand that feeds them, and foundation executives are only too happy to accept accolades at face value.

Running a large private foundation is undoubtedly prestigious and important, but, as I explain, it’s also pretty easy and low-risk. So why do foundation CEOs get paid so much? Because they do.

I’m not being flippant. I’m simply explaining how the process works. The high salaries are self-perpetuating and self-accelerating.

Here’s how it works. In determining the salary of their CEOs, most boards of private foundations follow the guidelines provided by the federal government. First, the foundation sets up an executive compensation committee to examine what to pay its CEO. That committee needs to make a recommendation of what a fair salary is for the position. As part of determining that number, the compensation committee surveys similar organizations to see what the going rate is.

So let’s imagine, again, that we’re talking about a billion-dollar private foundation, and let’s say it’s based in the Midwest. The compensation committee surveys the other billion-dollar foundations based in the Midwest, of which there aren’t very many, to develop a salary range for the CEO position. The committee ascertains the range, and then, because the committee members and the board like their CEO, they decide to pay him or her at the top of the range, or even a little bit higher. They are not alone in doing this, because in subsequent months the compensation committees for the other foundations will be similarly susceptible to what some HR specialists call Lake Wobegon Effect, “where all CEOs are above average.” So if the range of salaries initially is $700,000 to $800,000, most of the foundations will decide to pay their CEOs $800,000 to $850,000. Consequently the salary range and the average compensation get ratcheted up the next year. And the next.

All of this is perfectly legal. It’s even considered “best practice.” But the process makes no objective sense. Running a private foundation is a prestigious, interesting, powerful, and, yes, relatively easy job. People would do it for far less than the absurdly high salaries the big foundations pay. I certainly would. Though something tells me that I won’t be given that opportunity.

Copyright 2016 Alan Cantor. All rights reserved.