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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