Nonprofit Executive Compensation: How Much is Too Much?

TwitterPinterestLinkedIn

The Climate of Executive Compensation

In recent years, a great deal of scrutiny has been placed on corporate executives who enjoy lavish salaries and benefits packages, even in times of great economic turmoil.  For instance, in a 2009 article for The New York Times, Mark Hulbert references the work of two Harvard Law School professors — Lucian A. Bebchuk and Holger Spamann — as he writes: “… [C]ompensation for bank C.E.O.’s is asymmetrical … they often stand to make much more money when their banks succeed than they could lose if their banks fail.” 1,2 In light of this statement, it seems hardly surprising to note that executives from large investment banking firms such as Goldman Sachs, Merril Lynch & Co. and Citigroup Inc. reported multi-million dollar salaries during the sub-prime mortgage crisis that began in 2007, even as many Americans were losing their homes and facing other economic hardships.  As an example, the former C.E.O. of Citigroup, Chuck Prince, received a $10.4 million cash bonus for 2007.3

But, excessive executive compensation is not limited to for-profit organizations like the large banks and banking firms that were chiefly responsible for the housing market collapse.  Surprisingly, there is strong evidence to suggest that C.E.O.’s for non-profit entities have been “getting in on the action,” as well.  In Organizational Ethics – a Practical Approach (2nd Edition – c. 2012), author Craig E. Johnson, PhD, details several eyebrow raising examples of non-profit executive payouts that would seem to be in conflict with the spirit of public service and charity that is presumably  a condition of achieving non-profit (and tax exempt) organizational status:

“Corporations aren’t the only organizations accused of paying their executives too much and providing them with outlandish perks.  Lawrence Small, the former chief executive of the Smithsonian Institution in Washington, D.C., saw his pay jump from $536,000 to $915,000 between 2000 and 2007.  He traveled by private, chartered plane and took nearly 10 weeks of vacation a year.  His deputy was absent from the Smithsonian one quarter of her workdays while serving on other boards, which earned her about $10 million in outside income.  Combined compensation for executives at the National Veterans Business Development Corporation amounted to more than 22% of the money Congress appropriated to the organization to help veterans.  The group’s leaders also spent over $5,000 for two meals at a steakhouse.  Senators criticized the Boys & Girls Clubs for paying its president nearly $1 million a year while spending over $4 million on travel expenses for 350 staff members.” 4

It has been argued that the cavalier largesse which many non-profit organizations seem willing to bestow upon their executives is designed to attract the very best administrators that money can buy.  As the chairman of the Museum of Modern Art in New York has been quoted as saying:

“If you are lucky enough to have the best executive in the field, you should compensate the person accordingly … because if you want your organization to be well run, you’ve got to find the person who can accomplish it.” 5

(The museum paid $2.7 million in salary, housing and “other” benefits to its director in 2008.)

Unfortunately, catering to the needs of the best executives seems to take precedence over organizations’ founding missions for some non-profits.  For instance, if you looked deeper into one of the examples detailed by Johnson — the case of the Boys & Girls Club — you would find that the president was still receiving a $1 million salary, even as a number of branches were being forced to close down. Re: 4 As such, is it ethically justifiable for the many non-profit organizations that engage in such overly abundant executive compensation practices to continue to do so?

By employing the technique of ethical pluralism recommended by Johnson, we should be able to arrive at an answer to this inquiry.  To begin, five popular organizational ethics philosophies are systematically consulted in order to weigh the effect of an action (in this case, the heightened compensation afforded non-profit executives) on the continuing viability of the organization in question.  These are: Utilitarianism; Kant’s Categorical Imperative; Rawls’ Justice as Fairness; Confucianism; The Ethic of Care.

 Utilitarianism

In general, this philosophy centers around doing the greatest amount of good for the greatest number of people.  A utilitarian analysis of whether or not non-profit executives should enjoy excessive compensation for their services would include quantifiable statistics about just how much “good” these executives are capable of doing for all of the members of an organization.  The results of this analysis would, in turn, be weighed against the negative impact on the organization from expending a great deal of capital on one or a few individuals.

Consider the case of the National Veteran’s Business Development Corporation listed above.  Recall that executives from this non-profit organization consumed nearly a quarter of taxpayer money earmarked by Congress to help veterans.  Any argument (however unlikely) that could have been made, which would suggest that these individuals were able to somehow perform more skillfully than other, less talented administrators in their efforts to help our nation’s former men and women in uniform seems ludicrous when you take into account the flamboyant way in which they were throwing money around (e.g., $5,000 for two meals in a fine steakhouse).

Kant’s Categorical Imperative

Kant would have taken a hard line on non-profit executive salaries.  His philosophy maintains that there is a universal right and a universal wrong.  No action that could be construed as harmful to a small number of individuals is justifiable for any reason, even for the good of an entire organization.  As such, it would be considered unethical for a non-profit to place emphasis on paying top-level officials by sacrificing capital that could otherwise have been spread around more equitably.  In short, even if an executive’s high salary required one less fortunate person to endure unjust loss (e.g., a pay-cut or termination of employment), the pure Kantian would forbid it.

There is also the small matter of what a non-profit organization is actually supposed to doIn the strictest sense, a non-profit (or “not-for-profit”) is “… an organization that uses surplus revenues to achieve its goals rather than distributing them as profit or dividends.” 6 Especially in cases where profits are diverted from public service and other charitable functions in order to pamper high level executives with lavish compensation packages, there can be no possible justification under Kant’s Categorical Imperative.

Rawls’ Justice as Fairness

Here, things might at first appear to be ambiguous.  After all, Rawls believed that a person should be compensated according to his or her abilities and relative contribution to society.  And if that is the case, shouldn’t high level non-profit executives be compensated more, since their duties presumably exceed those of lower-level employees (and mere mortals, in general)?

In order to validate that line of reasoning, you would have to be able to demonstrate that the talents and contributions of the executive(s) in question were sufficiently beneficial to the organization(s) to justify an (comparatively) astronomical pay scale.  But when you consider another of Johnson’s examples — the case of former chief executive officer Lawrence Small — this argument seems absurd.  For example, is it really worthwhile to entertain the notion that a man who enjoyed ten weeks of vacation per year could have made a more significant contribution to the Smithsonian than a lower level employee who was forced to work year long?

Furthermore, in addition to Rawls’ belief that more productive members of society enjoy more in the way of compensation, he also believed that society’s least advantaged members should receive proportionally more in the way of opportunities and resources.  But what does this say about the aforementioned Boys & Girls Clubs executive who received $1 million dollars as branches of the organization were actually closing down?  According to Rawls, that money should have been used to prevent the closings in order to protect the interests of disadvantaged boys and girls.

Confucianism

This ancient Chinese school of thought focuses on humaneness, and respectful relationships in the workplace.  Hierarchies are built on trust — i.e., those at the lower rungs of the organizational ladder are required to trust that those at the top have their best interests at heart.  Managers and administrators operate with relative autonomy without having to answer to underlings, who in turn do as they are told.

But the trust that was placed with the executives in the examples discussed thus far was betrayed.  Specifically, trust that the leaders of the organizations in question would make use of the resources available to them in a way that was most beneficial to all concerned.  Instead, the executives essentially “took the money and ran.” (Confucius is probably turning over in his grave.)

The Ethic of Care

Much of Western philosophy is based on the concept of altruism — a testament to the widespread influence of Christianity on Europe and America.  The Ethic of Care is an approach to organizational philosophy that calls for altruism and self-sacrifice for the good of the organization.  For instance, as an adherent of this philosophy, an executive of a non-profit would be expected to volunteer to collect less salary if the interests of the organization were threatened.

If organizational altruism may be defined simply as the willingness to do what is in the best interests of the organization before doing what is best for yourself, then we can see that the executives in each of the examples discussed so far did the exact opposite:

The president of the Boys & Girls club took money that could presumably have been used to prevent branches from closing, executives from the National Veterans Business Development Corporation could have eaten less expensive steak, and the C.E.O. of the Smithsonian could have sacrificed some vacation time in order to put in more work at the museum.

Conclusions

By employing the technique of ethical pluralism, while drawing from five popular organizational philosophies — Utilitarianism, Kant’s Categorical Imperative, Rawls’ Justice as Fairness, Confucianism and The Ethic of Care — we have seen that excessive compensation for executives often results in organizational inefficiency, untoward hardship for the disadvantaged, and an overall abuse of the trust placed in leaders of non-profit organizations.  In the case of the National Veterans Business Development Corporation, resources were consumed to cater to the whims of executives rather than assist veterans.  Also, Lawrence Small, formerly of the Smithsonian, was paid a lavish salary despite unreasonably long vacation stints.  Furthermore, Boys & Girls Clubs actually closed while the parent organization’s president inexplicably received $1 million.

All three of these examples demonstrate how handsomely compensated, presumably unethical executives can ultimately subvert their non-profit organizations’ principles of public service and charity (i.e., assuming that an ethical executive would be prepared to sacrifice a higher salary for the good of the organization).  If these were isolated instances, a reasonable case might still be made for the merits of paying high salaries to highly-talented, ethical executives who bring their skills to a non-profit, for the good of the organization.  But these are hardly the only examples:

Johnson also alludes to the annual salary enjoyed by the C.E.O. for Philadelphia’s public radio station WHYY ($450,000).  What possible justification could this person offer for harvesting such a hefty amount of donations and government funding — the primary source of revenue for public radio stations — as income?  Quite simply, there are none. Re: 4

Then, too, there is the considerable profiteerism exhibited by executives for many non-profit hospitals.  Such individuals enjoy multi-million dollar salaries and benefits packages while the rest of the nation is forced to contend with the ever-increasing cost of healthcare.  Poignantly, hospital administrators often receive salaries that are exponentially higher than the doctors they employ, those who are actively working to alleviate suffering and save lives. 7 Ask yourself which among these two functions — administrator or physician — is more crucial to society, and should therefore carry with it more financial reward?

Clearly, the people who run non-profits are just as susceptible to the trappings of greed as the brokers and business executives running the large investment banking firms alluded to in the opening paragraph.  This is hardly surprising, though, considering the huge sums flowing into and out of many not-for-profit organizations.  Money has ever been a corrupting influence.

As such, it seems logical to conclude that legislation should be drafted which guards against the kinds of abuses that have been discussed here.  For example, a specific clause could be included in a non-profit’s charter which states that compensation for any person employed by the organization be calculated after all the needs of the organization have been met.  In other words, executive salaries would be determined after all of the non-profit’s obligations had been satisfied.

Moreover, minimum and maximum salaries could be set to prevent executives from appropriating unwarranted surpluses at the expense of organizational health and/or expansion.  Also, executive salary caps would make non-profits less attractive to those administrators who are more interested in money than in advancing the cause of this or that organization.  Finally, parties interested in securing employment at a not for profit organization could be required to undergo personality and psycho-social profiling tests, in order to determine their altruistic tendencies. (i.e., Only those who have been deemed highly empathetic would even be considered for employment.)

All too often, non-profits are run like businesses in our country; non-profit executives, like their for-profit counterparts, are paid handsomely for their services, even at the expense of parent organizations.  But this is illogical, as market forces that dictate business and finance decisions are impersonal, oftentimes ruthlessly so.  Recall that a well-known axiom among Americans reinforces this fact: “It’s not personal.  It’s business.”  Therefore, can there be any reasonable basis for modeling non-profit entities — organizations that by their very definition are meant to get “personal” by helping others — after businesses?

Certainly not, and I don’t believe there is any reasonable argument that can be made for supporting not-for-profit organizations that pay their executives absurdly high salaries.

References

1. Hulbert, Mark. Did banker’s pay add to this mess? (Internet). NYC, NY: The New York Times; 2009 Sep 26 [cited 2014 Jul 7]. Available from: http://www.nytimes.com/2009/09/27/business/27stra.html?_r=0

2. Bebchuk, L. & Spamann, H. Regulating banker’s pay (Internet). Cambridge, MA: Harvard Law School; 2009 Oct 1 [cited 2014 Jul 7]. Available from: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1410072

3. Katz, Ian. CEO pay help fuel subprime crisis, AFL-CIO says (update 2) (Internet). NYC, NY: Bloomberg; 2008 Apr 14 [cited 2014 Jul 14]. Available from: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=abIvC8rXaMVo

4. Johnson, Craig E. Organization Ethics, A Practical Approach (2nd Edition), pgs. 12-14. Sage Publications, Inc., 2012. ISBN 978-1-4129-8796-7. Available from:   http://www.sagepub.com/books/Book234909?siteId=sage-us&prodTypes=any&q=organizational+ethics&fs=1

5. Progrebin, R. Smithsonian ex-chief criticized in report (Internet). NYC, NY: The New York Times; 2007 Jun 21 [cited 2014 Jul 7]. Available from: http://www.nytimes.com/2007/06/21/arts/design/21smit.html

6. The Nonprofit Handbook: Everything You Need to Know to Start and Run Your Nonprofit Organization (Paperback), Gary M. Grobman, White Hat Communications, 2008.

7. Brill, Steven. Bitter pill: why medical bills are killing us [Internet]. Time Magazine; 2013 Feb 20 [cited 2013 Apr 14]. Made available by the University of Texas at Arlington: http://www.uta.edu/faculty/story/2311/Misc/2013,2,26,MedicalCostsDemandAndGreed.pdf

TwitterPinterestLinkedIn

Leave a Reply

Your email address will not be published. Required fields are marked *