Charity Salary Myths
- published in the December 2008
issue of the Charity Rating Guide & Watchdog Report
High salaries should not signal a red light to not
give just as low salaries should not signal a green light to give.
Charity salary levels ought to be based on the skill, experience
and education necessary to forward the work of the organization.
Charities compete with businesses and the government for employees
and must therefore offer reasonable wages in order to attract, hire
and retain competent people. Many charity employees are willing
to sacrifice the higher pay in the private sector for the psychological
rewards of working for a good cause. But underpaying employees could
sabotage a charitys programs if the only people willing to
accept such low wages are unqualified to do the job. Underpaying
lower level employees may be more damaging to an organization than
paying top level executives too much. Charities that pay so little
that they cant retain their staff waste a lot of money by
repeatedly recruiting and training new crops of employees, and losing
valuable institutional knowledge in the process.
Knowing that many donors are highly focused on salaries,
the decision makers at some poorly performing charities take advantage
of this narrow view by keeping staff salaries low, and instead paying
millions of dollars to outside professional fundraising companies
or expensive consultants. In this way a charity can report certain
overhead costs in a lump sum on its tax form rather than tying these
expenditures to a specific employee as they would if the same fundraising
or management functions were performed by its staff. Donors that
are overly impressed with low salaries ought to be aware that F
rated charities tend to pay far lower salaries than A rated ones.
Excessive compensation should certainly be avoided.
But if a charity official runs a vitally important organization
with thousands of employees and a budget of hundreds of millions
of dollars, it may be worth it to pay the official hundreds of thousands
of dollars. Even smaller charities may run programs that require
skilled professionals such as medical doctors, engineers,
lawyers or accountants and they therefore need to pay large
salaries that may appear high to donors in absolute terms and as
a percentage of an organizations budget.
Higher Salary May Save Money
Paying a higher salary to a talented fund-raising
employee with pre-existing donor contacts could pay for itself.
For example, a charity would be better off paying twice as much
($150,000 vs. $75,000) for an in-person fundraising employee, if
the higher paid employee could bring in six times as much as the
lower paid one ($600,000 vs. $100,000). The higher paid fundraiser
would have a 300% return and the lower paid only a 25% return. This
is good for donors because a much smaller share of contributions
would need to be spent on paying a fundraiser.
A good question to ask a charity that might appear
to pay an excessive salary is whether or not it could hire a qualified
worker for less, and show you a list of what people in similar positions
are paid at other organizations. According to IRS rules, charities
are supposed to consider the pay levels at similar sized and located
organizations, either nonprofit or for-profit, when setting pay
scales. When comparing nonprofit and government pay, dont
forget to take into account the generous health, retirement and
vacation packages offered to government workers that are not often
available to nonprofit personnel.
Salaries Are Not Always Overhead
A common misconception about charities is that money
spent on employee compensation and benefits is not a program service
expense and is not fulfilling a groups mission. This is absurd
since most paid charity workers spend the majority of their time
operating programs that directly fulfill their organizations
This misconception is often perpetuated in the media,
as in the following comment from a nonprofit consultant in an August
2008 article in The Atlanta Journal-Constitution:
Donors dont want to contribute to salariesthey
want to contribute to the fulfillment of the [nonprofits]
This consultant is not speaking on behalf of informed donors who
understand that charities fulfill their missions primarily through
workers that deserve to be paid a reasonable salary. How can nonprofit
service organizations care for the sick, educate children or dispense
aid in the aftermath of a disaster without employing nurses, teachers
or relief workers? Volunteers may not require a salary but they
usually require guidance, training and oversight by paid nonprofit
Another false belief about charity finances is that
expenses are always overhead rather than program expenses. The following
are two examples that dispel this myth: 1) Grant making organizations
would not be fulfilling their mission if they just threw money randomly
at individuals or groups. An essential part of a grant making program
is the paid employees who conduct research, and recruit and screen
potential recipients. 2) The compensation of a nursing supervisor
is a program expense because she manages the nurses who provide
medical care, which makes her an essential part of the program.
Youre spending 50 percent of my money
not toward programs and thats what Im giving you money
for. In the above-cited article, this was the consultants
response to the Atlanta Police Foundation for spending about
half of its 2007 budget on employees compensation and benefits.
The consultant is wrong again. He is implying that
all of the money spent on compensation is not going toward
programs. Charities typically allocate their compensation expenses
based on how employees utilize their time among program service,
management and general, and fundraising functions. This charity,
according to its 2007 tax form, is counting 58% of the funds spent
on compensation as program services and overall is spending 72%
of its budget on programs.
Reported Pay May Not Reflect Total Compensation
Some charities may pay all or a portion of employee
compensation through an outside management or consulting company.
The value of an executives compensation paid through an outside
company may not be separately disclosed on a charitys tax
form. Deafness Research Foundation paid a total of $352,034
to two management companies, according to its fiscal 2007 tax form.
The only compensation tied to an individual on this charitys
tax form is $35,873 for its chief operating officer.
Furthermore, dont assume that if a management
company has the same name as a charity executive, it represents
all the money being paid to him. For example, Mr. Doe may be paid
through John Doe & Associates as well as through Acme Consulting.
The Asia Foundation, which promotes United
States-Asian relations, has a clever way of boosting its President
Douglas Bereuters payout without revealing it on the Foundations
tax filing until years later. The Foundations fiscal 2006
tax form reports that Mr. Bereuter receives $229,787 in compensation
and benefit plans. The form also identifies a $250,000 loan at 12%
interest for housing assistance made to the president in 2004 with
repayment terms or installments of escalating amounts from 2007
through 2010. What the form doesnt tell you is that Each
installment [on the loan] shall be forgiven if, on its due date,
the President has not resigned or been terminated for cause from
the Foundation, according to a note in its audit of the same
year. The note also says that the Foundations management expects
the Note will be forgiven
According to the Foundations
CFO, John Croizat, the forgiven loan would not be counted as compensation
on the charitys tax form until it is forgiven. So even though
Bereuter received the $250,000 in 2004, the Foundation will not
report it as compensation to him on its tax form until fiscal years
2007 to 2010 ($25,000 in 07; $50,000 in 08; $75,000
in 09; $100,000 in 10).
A cautionary tale of a charity that paid its chief
too much played out this summer in North Carolina. The Charlotte
Observer reported that the United Way of Central Carolinas
(UWCC) paid Gloria Pace King, its President, $1.2 million, including
$822,000 in retirement contributions, in 2007. The paper reported
that for months the charity defended Kings compensation until
public outrage forced UWCC to oust its President and later caused
its Chairman, Graham Denton, to resign.
Ever wonder if certain nonprofit executives fly first-class,
receive housing allowances, country club memberships and are provided
with personal chefs or chauffeurs? Next year charities will be required
to disclose these perks, if the latest draft of the proposed fiscal
2008 tax form receives IRS approval.
Charities have a tough balancing act when it comes
to setting employee salaries and benefits. On the one hand they
have to worry about offending donors by paying salaries that may
be viewed as excessive, and on the other hand they need to pay enough
to attract the talented and dedicated people that will allow charities
to accomplish their important missions.