“One Million Dollars” by MMarchin

March 6, 2017; Wall Street Journal

About 2,700 employees of 501(c)(3) nonprofits received annual compensation of more than $1 million in 2014, according to a study of IRS Form 990 returns performed by the Wall Street Journal. This is about one-third more than received $1 million or more in 2011.

As might be expected, the “eds and meds” led the list. Five nonprofits paid $10 million or more to their CEOs; four out of five were healthcare systems. The fifth was the Harvard Management Company, which manages the Harvard University endowment and has been the subject of persistent leadership turmoil. Overall, three-quarters of the high-paying nonprofits were in the healthcare sector, with private colleges and universities making up another ten percent.

However, some of the most generous organizations weren’t the largest. In one case, Hal and JoLynn Lindsey, the couple running the Hal Lindsey Online Ministries, received $4 million, almost half their nonprofit’s total revenue. In another, the CEO of the Savannah College of Art and Design made $9.6 million in 2014. In both cases, the organizations said the pay received in 2014 included “catch up” payments of retirement or other deferred benefits.

Nonprofit executive compensation is a thorny question on several levels, invoking popular views of charitable endeavor as involving individual self-sacrifice, concerns about nonprofits’ budgeted overhead versus support for programs and services, and the appropriate uses of other people’s money (donor contributions, direct government support, and tax support through the deductibility of charitable gifts) in the name of charity. Perceptions vary widely of what tax exemption means legally and ethically, and which organizations should receive tax exemption. High nonprofit executive salaries can be a lightning rod for many philosophical and public policy debates about nonprofits in society.

The reporting is remarkably comprehensive, addressing the increasing professionalization of nonprofit executive leadership and the need for large nonprofits to compete for talent with the for-profit sector. Increasingly, nonprofit executive compensation looks like for-profit CEO contracts, with much of the compensation being incentive-based, tied to achievement of performance objectives. In fact, only about one-quarter of 2014 nonprofit compensation packages over $1 million included base pay over $1 million.

More than two-thirds of the nonprofits paying individuals more than $1 million rely on external compensation consultants to assist in setting base pay and total compensation. This practice, popular with for-profit corporations since the 1980s, is implicitly endorsed by the IRS for use in nonprofits because IRS regulations (technically, Section 4958, known as “intermediate sanctions”) require 501(c)(3) and 501(c)(4) nonprofits to be able to demonstrate executive compensation is “reasonable,” meaning that total compensation is in line with similar nonprofit—and for-profit—organizations. Further, the IRS requires that reasonableness must be determined using a board-led process; the board can’t just take the word of the executive or finance and HR staff or a staff-led process. The easiest way for the board to provide evidence of reasonableness is to point to a consultant’s compensation survey. However, nonprofits are learning what for-profits have known: Compensation surveys drive up executive compensation. No one wants to pay—or be paid—below the 50th percentile of compensation for similar organizations and similar work.

The WSJ’s reporting includes a short companion article noting the IRS decision last year to release Form 990 return information in computerized format for organizations that filed their returns electronically. Currently encompassing returns filed since 2011, the computerized records will make it easier for the media, federal and state regulators (including the IRS itself), and others to perform the types of comparative analysis on 990s that the WSJ did for its compensation report. This makes it even more important, as recorded in a recent free NPQ webinar, that charities and other nonprofits pay attention to the accuracy and completeness of their 990 returns.—Michael Wyland