Nonprofit Compensation

With the A.I.G. scandal so widespread, it is not surprising to find the Wall Street Journal article below:







MARCH 27, 2009

Pay at Nonprofits Gets a Closer Look

The furor over big bonuses at American International Group Inc. and other Wall Street firms is prompting nonprofit organizations to brace for more scrutiny of their executive pay practices.

Though they haven't received taxpayer bailouts, charities benefit from billions of dollars in subsidies through their tax-exempt status, which could expose nonprofit leaders to the same level of scrutiny that executives at subsidized financial firms are facing.

Nonprofits of all stripes were feeling greater heat over pay even before the AIG bonus furor. At the University of New Mexico, faculty are in an uproar over pay for the school's president and other top executives. For the first time in 20 years, the Internal Revenue Service recently imposed stricter disclosure requirements on executive pay. The IRS also has scrutinized pay for nonprofit hospital executives, while the Chronicle of Higher Education has put the spotlight on big payouts for professors, administrators and athletic coaches.

"The train of greater focus on nonprofit executive compensation has left the station, and charity boards better get on, or they're going to suffer greatly for noncompliance," says Michael Peregrine, a partner at McDermott Will & Emery LLP, who advises nonprofits. Nonprofits should start reviewing their pay policies in light of the current political environment, he says. "It just cannot be business as usual."

In higher education, the University of New Mexico's faculty delivered a no confidence vote last month against its president, David Schmidly, amid consternation over executive pay and other issues. Mr. Schmidly took home $587,000 in total compensation in fiscal 2008. A recent university report showed budgeted salaries -- excluding other perks -- for senior executives increased 71% to more than $9.8 million between 2002 and 2008. (Mr. Schmidly took the reins in 2007.)

The increased pay for these university leaders has created "a similar sense of disparity" that others have voiced about paydays for Wall Street executives, says Douglas Fields, the university's incoming faculty senate president.

Mr. Schmidly, who recently instituted indefinite pay freezes for himself and other top executives, expressed disappointment in the faculty decision, but in a statement after the vote vowed to "reach out and gain the support" of the university community. He declined to comment further through a spokeswoman.

In a survey by the Chronicle of Higher Education examining large compensation packages at universities, David N. Silvers, a Columbia University dermatology professor, was the top-earning academic, bringing in $4.3 million. In a statement, Columbia declined to discuss Dr. Silvers' pay but said he is "renowned in the field and has significant responsibilities in directing a highly specialized lab" at the university's medical center.

Universities point out that their officials help generate millions of dollars in revenue. And even the best-paid nonprofit leaders don't come close to making the tens of millions of dollars reaped by some on Wall Street. At the largest nonprofits, or those with budgets exceeding $50 million, top executives earned $476,383 on average in 2006, according to the most recent figures compiled by GuideStar, an electronic database that gathers information on nonprofits. Some argue that nonprofit leaders are underpaid, which may lead to the same "brain-drain" phenomenon that Wall Street executives have warned about in light of new pay restrictions.

"I've run into a lot of people who are great leaders of great nonprofit organizations who end up having to leave to go into business to make some money, because they have kids they're going to need to send to college," says Steve Case, the America Online co-founder who now chairs his own foundation.

Still, the IRS has signaled more aggressive oversight of charities as various compensation scandals crop up among nonprofits. The agency overhauled the annual tax form nonprofits must file. Now, nonprofits are required to disclose compensation perks under certain circumstances, such as when an employee makes more than $150,000. Among the compulsory disclosures are benefits that have featured prominently in recent compensation scandals. They include first-class air travel, expense accounts, housing allowances and the use of bodyguards, chauffeurs and lawyers.

The IRS also has homed in on hospital pay. In a report, which surveyed 489 institutions, the agency found pay for the top official averaged $490,000 a year. Among a select 20 hospitals that paid relatively higher amounts, the compensation figure averaged $1.4 million. The IRS declined to name the hospitals.

The IRS can currently impose penalty taxes, called "intermediate sanctions," on an executive receiving excessive compensation from a charity. But the agency also has established a procedure, called the "rebuttable presumption of reasonableness," that allows charities to avoid the penalty. To do so, the nonprofit must demonstrate its board approved the pay and used comparable compensation data from similar organizations to determine it, among other things.

Critics say the standard is loose and puts the burden on the IRS to show compensation is excessive. Sen. Charles Grassley of Iowa, the ranking Republican on the Senate Finance Committee who has pushed for stricter regulation of nonprofits, is considering legislation that would put more pressure on charities to prove their compensation is reasonable, an aide said.

Others say the policy has already spurred charities to more prudent governance. "We have encouraged our clients to use it religiously" to ensure compliance with IRS rules, says Victoria Bjorklund, a partner at Simpson Thacher & Bartlett LLP who represents charities.

Still, squabbles over nonprofit executive pay continue to emerge. In the fall, a controversy swirled around a $1.2 million pay package for the United Way of Central Carolinas Inc.'s chief executive, Gloria Pace King. Board members resigned and Ms. King was ousted as a result.

Ms. King couldn't be reached for comment. She recently told the Charlotte Post that she thought her performance justified her compensation.