Massachusetts AG Coakley Examines High Nonprofit Salaries

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December 19, 2013; Boston Globe

The Boston Globe’s story on Attorney General Martha Coakley’s review of nonprofit compensation says it all: “Nonprofit groups in Massachusetts are paying their chief executives huge amounts of money and giving them lavish perks unavailable to most workers.”

Coakley’s report examined 25 large corporations, typically hospitals, insurers, and colleges, and discovered a pattern of high salaries plus bonuses, deferred compensation, auto allowances, financial planning, life insurance, and, according to the Globe, “other benefits that are more commonly associated with corporate leaders.” Total compensation for some of these nonprofit execs reached as high as $8.8 million between 2009 and 2011.

Coakley’s report contended, “It is not always clear that large compensation benefits packages are actually necessary to attract and retain talent.” That conclusion runs head-on into a theme popping up in nonprofit journals recently that nonprofit executives should be paid like their for-profit counterparts, or at least that their organizations’ nonprofit status shouldn’t mean that they have to accept less than what they think is necessary or what they might deserve.

While not specifying or recommending salary caps, the AG report, according to the Globe, suggested that “nonprofit compensation committees to consider their charitable mission, how the executive pay compares to other workers’ salaries, and take into account the amount of public support the nonprofit receives from its tax-exempt status.” The report also suggested that nonprofit boards reconsider their promises to executives for large severance payments.

But Coakley came to this study after the largest nonprofit health plan in Massachusetts, Blue Cross and Blue Shield, gave two former CEOs large lump sum payouts on their retirement, $16.4 million for William C. Van Faasen in 2006 and $11 million, including a $4.2 million severance payment, for Cleve Killingsworth in 2010.

From the AG’s report, these are the 2011 total compensation numbers for the heads of some of the 25 nonprofits in the study:

Fallon Community Health Plan (Hughes)


Harvard Pilgrim Health Care (Schulz)


Tufts Associated HMO (Roosevelt)


Baystate Health (Tolosky)


Beth Israel Deaconess Medical Center (Tabb)


Boston Medical Center (Walsh)


Brigham’s and Women’s/Faulkner Hospital (Nabel)


Children’s Hospital Corporation (Mandell)


Dana-Farber Cancer Institute (Benz)


Lahey Health System (Grant)


Lawrence General Hospital (Anderson)


Massachusetts General Hospital (Slavin)


Partners Healthcare System (Gottlieb)


Sturdy Memorial Hospital (Shyavitz)


UMass Memorial Health Care (O’Brien)


Boston University (R. Brown)


Brandeis University (Lawrence)


Harvard University (Faust)


Massachusetts Institute of Technology (Hockfield)


Northeastern University (Aoun)


Suffolk University (B. Brown)


Tufts University (Bacow)


While there are positions for and against high salaries for nonprofit executives, Coakley’s report is going to get a lot of attention, if only because she stands a good change of being elected the next governor of the state. Here are some questions for consideration:

  • The largest nonprofits with the highest paid executives tend to be the eds and meds, particularly the meds, including nonprofit insurers. Is it a fair characterization of the nonprofit sector to think of nonprofit CEOs as overpaid when the “evidence,” such as it is, is typically heavy on huge salaries from hospitals and insurers?
  • Since so much of the activity of nonprofit hospitals and insurers is often questionable in terms of its “nonprofitness,” might it be appropriate to consider a different 501(c) status for the meds and, consequently, a different regime of accountability review?
  • The advocates of higher compensation for nonprofit executives (and fundraisers) often pay scant attention to the abysmal compensation of non-executive nonprofit workers. Isn’t it important for the advocates of higher executive pay to give attention to the AG’s recommendation that there should be “analysis of the relative magnitude of the CEO’s total compensation package in relation to that of the non-executive workforce?”
  • What seems to be a potentially major contributor to the gap between executive and non-executive compensation is the practice of “supplemental executive retirement program or ‘SERP’ to supplement retirement benefits available to non-executive employees,” with the implication that these practices put nonprofits at risk and in a way hide true levels of year-to-year compensation. Is this practice something that, regardless of one’s position on compensation, merits greater oversight and regulation?

Twenty-three of the 25 nonprofits in the study used outside compensation consultants to help them set executive salaries. The AG’s report said, “we found little evidence that the process restrained CEO compensation or its growth” and the implication was also that these compensation consultants may not have been all that attentive to the gap between executive and non-executive salaries. Has the process of hiring compensation consultants who presumably know that they are being asked to justify high salaries become next to useless as a mechanism for restraining executive salaries, especially given that nonprofits can look at for-profits for comparables?

This isn’t the first time that Coakley has examined the supposed practice of excessively high compensation in the nonprofit sector, including issues such as paying the trustees of nonprofit insurers. This repeated attention to a practice dominated by a small number of very large nonprofits suggests that her report won’t be the last time someone in public office questions the salaries being paid to nonprofit insurers and nonprofit hospitals.—Rick Cohen

  • Patrick Bell

    It would be good to know the budgets of the respective organizations in order to provide some context. There are large hospital and insurance nonprofits with multi-billion dollars in revenues. These companies require the same sort of management as their for-profit cousins. If you grant that premise, then the only real questions become: Should we allow nonprofits to be that big? Do they need their non-profit status to make their business model work? Is there something different between Kaiser and Aetna that justifies that status?

    The issue of the disparity between the salaries in the c-suites and the salaries of the worker bees is also cited as problematic, but is there an equivalent spread between for-profits and comparable non-profits? And if there is, what does that mean? Is it the non-profits’ job to address the issue on a broader scale? Is that something that either society expects or that the authors of public policy – especially tax policy – should impose newly on non-profits? I don’t recall that being either implicit or explicit in the attitude toward the sector. It seems to me that while many decry the great disparity, the nonprofits are being singled out because somehow they”should” be better at treating their non-executive employees more fairly. And because the elected officials can exert more influence over the nonprofits, using 501(c) status as a club of sorts that cannot be wielded against for-profits.

  • Michael Wyland

    As Rick Cohen notes, this is a complex issue.

    Under IRC Section 4958, the IRS currently allows 501(c)(3) and 501(c)(4) organizations to set executive compensation using comparability studies that include both for-profit and nonprofit comparable organizations. Nonprofit organizations, of course, are more limited that their for-profit counterparts in what types of compensation they may offer, primarily because nonprofits may not offer asset-based compensation (e.g., stock options) because no one may “own” a nonprofit.

    The state needs a nexus for superseding federal law and regulation in this area, and one presumes it comes in the form of regulating the use of state monies by nonprofits in a state. Will states like Massachusetts make state funds so unattractive to some nonprofits that they might consider refusing state support, or even consider abandoning nonprofit status? Medicaid payments don’t cover hospital costs, and hospital margins are shrinking. State-based scholarship support may come at too high a price for a university, and especially an elite university. One must remember that, while nonprofit status carries with it the opportunity for grants and charitable gifts, for-profit status carries with it the opportunity for attracting investors and offering equity for sale.

    Compensation studies like those endorsed by the IRS in Section 4958 often carry with them pressure to compensate people “above the midpoint,” leading to an acceleration of compensation levels as the midpoint rises and many seek to keep above it. We can’t all be “above average” unless compensation levels are set high and with flexibility for market-inspired increases.

    There is a natural tension in a nonprofit’s mission between market-based compensation levels and so-called “living wage” and “earnings multiples” considerations. Is it good stewardship for a nonprofit to pay above-market wages and salaries to anyone, regardless of title or position? Further, as regulation threatens to intervene in market-based employee compensation, will this inspire nonprofits to engage in more contractual relationships, outsourcing to third parties functions that were once performed by staff?

    Actions have consequences and regulation changes behavior. The difficulty is that regulatory action often changes behavior in unintended ways.

  • Barbara Moore

    Wouldn’t it be nice if those of us who are not “eds” or “meds” and dramatically underpaid, didn’t get lumped in with them. As a human service organization, I wish the public didn’t see all of us the same just because the AG of Massachusetts says we are all the same.