As evidenced by the recent media coverage of the salaries paid to CEOs of four nonprofits that contract with the government to deliver U.S. foreign aid, nonprofit executive compensation continues to be an area of keen interest for the media and for key members of Congress. Each of the four executives earned over $500,000 in 2007 according to the organization’s tax filings (Form 990). Both Sen. Chuck Grassley and Sen. Patrick Leahy made comments that the pay is excessive:
“It seems to me that these are salaries that are outrageous, particularly if they’re government contractors,” said Sen. Chuck Grassley of Iowa, the ranking Republican on the Finance Committee, which has jurisdiction over nonprofit compensation.
“It conflicts with most people’s notion of what a nonprofit organization is about when they’re paying themselves salaries that are several times higher than what a U.S. Cabinet secretary would earn,” said Sen. Patrick Leahy, D-Vt., who chairs the subcommittee that funds foreign aid.
While it is true that these salaries are in excess of what a U.S. Cabinet secretary earns, that is not the standard. The standard is reasonable compensation in the amount that would ordinarily be paid for similar services by similar enterprises, whether taxable or tax-exempt, under similar circumstances. Based on this standard, it’s not clear whether these executives are earning excessive compensation.
Running a large and diverse nonprofit organization with a multi-million dollar budget and operations spread out across the globe does not require less skill because the organization is a nonprofit. Nonprofits compete with for-profits for executive talent, yet the Senators’ comments imply that executives who choose to run non-profit organizations should forgoe a significant portion of their earning potential for the privilege.
In my experience, most nonprofits do pay reasonable salaries according to the reasonable compensation standard. Where many are coming up short is in adequately documenting the process in a manner that will substantiate and explain the compensation decision if questioned. More on that later.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, PC. To contact Ellis, call 602-456-0071 or email us at firstname.lastname@example.org.