The Nonprofit Ethicist | How Much is Too Much CEO Pay

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Dear Nonprofit Ethicist,

Can a board pay the founder-CEO of a 501(c)(3) above other paid staff when there is a shortfall in revenue? If so, how?

–Running on Empty


Dear Running on Empty,

By “above,” do you mean “more” or “in advance of”? If you mean, should an organization’s board pay a CEO before it pays other employees, the answer is “Absolutely not.” You should check with a lawyer, but it sure sounds like a good candidate for an illegal practice. Regardless, it’s a foolish and ungracious move destined to drive away employees and volunteers. It’s not the action of a leader.

There are several answers to the question of paying a CEO more than other employees. The only law on the subject of executive compensation is the IRS’s Intermediate Sanctions rules, which say nothing about compensation differences within an organization. But your last sentence suggests that you are more concerned about the other issues.

From a human-resources perspective, it is good policy to compensate higher-ranking executives more than those who report to them. Face it: lower-ranking employees will lose whatever respect they may have left for an inadequate CEO when they make as much as he does. (There is an exception to this rule, however: when a CEO voluntarily cuts his own salary, he should follow this gesture with organization-wide salary reductions in the spirit of shared sacrifice.)

Trimming executive compensation will not solve this organization’s problem. When external forces batter an organization, it should look for efficiencies by doing a top-to-bottom review of what it does, why, and how. If a CEO isn’t up to the new monumental demands of leadership in tough times, the board should replace him. Firing a CEO is never easy, but it is especially difficult when a CEO is also an organization’s founder. If your CEO recruited everyone on the board, as founders usually do, it may be impossible. While in good times a close working relationship between a board and a CEO often works well, in bad times it can cause real problems.

Woods Bowman is a professor of public service management at DePaul University.

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  • Marcia Hale

    😮 This is an age old argument. CEO’s ALWAYS make more than the rest of the organization. However, SHOULD they? Depends. Is that CEO raising enough money to more than cover their own salary? Are they raising enough money to keep the NPO afloat? Are they an effective leader? Does the staff feel supported, or is this CEO only serving the board and their desires? From an ethical standpoint it would be nice if the world were fair, and we all made the same amount. However, it is not. From my years in non profit (and never as a CEO)I have seen too many CEO’s with inflated salaries serving the board far more than the organization. Many of these CEO’s will not fight for their staff and dutifully cut back on staff, staff salaries, or benefits because the board directs the CEO to do it. The Boards of many organizations seem not to understand that it takes more than one person to front an organization. If the staff/volunteers are not respected and compensated it won’t be long before the NPO starts to have problems. For some non profits the gap between what the CEO and other senior staff make in comparison to the actual people in the field who make the mission happen, is absolutely appalling. Coming from a museum background, I am consistently amazed at the salary discrepancies between senior staff and those delivering the programs that bring the museum alive. It no longer surprises me that when budgets shrink the first place the board cuts is staff. The very people who make the mission happen. Why is that? I’ve never understood. Before non profit I was a producer/talent in radio broadcasting. It completely amazed me that the sales people were paid vastly more (not just in commissions)than the talent who gave them the product to sell. I just don’t get it. Without a product (and in non profits, that’s the people who make the services happen), there is no outcome. Yet, those who toil tirelessly are seldom rewarded financially. Not to say that ALL CEO’s do not earn their money, I’m just saying that salary scales between the senior staff and everybody else bears looking at. If it takes money to attract the best people to run a company, doesn’t it stand to reason that it should take money to KEEP the best people who are making the mission happen? It isn’t a one person show. Yet, those of us “on the ground” are the ones scrambling to keep our heads above water. Perhaps if Boards were made up of middle class citizens we would have first of all, more transparency, I believe more equity in salaries, and I believe a stronger focus to mission. But then who would ask for money? It’s the wealthy well connected who can make the “ask” and get the cash”…sad, but true. Still, there are an awful lot of overpaid senior staff and CEO’s out there who are a bit out of touch with what is actually going on for everyone else supporting the mission.