Nonprofit CEO Pay Over $1 Million: Right, Wrong, or Reasonable?

by Linda M. Lampkin, Senior Nonprofit Compensation Specialist 16. January 2013 16:00

A recent article in the San Francisco Chronicle revisits the discussion of appropriate salary levels for nonprofit CEOs.  Citing data from the Chronicle of Philanthropy’s annual compensation report, the article examines two perspectives of annual salaries over $1M: “That’s Too Much for a Nonprofit CEO” and “It’s Time to Change Our Thinking.”

The public often appears outraged by high salaries for nonprofit executives, and legislators in some states (e.g., New York, New Jersey, Florida, and Massachusetts) have supported the sentiment by proposing a cap on salaries at nonprofit organizations that receive public funding. While no such restrictions are currently in force, they may be forthcoming.  It seems that there is an expectation among some people that nonprofit employees should be willing to sacrifice personal compensation to achieve organizational goals.

Others argue that, when higher salaries attract top talent, the result is better for the organization — as is often the theory associated with for-profit companies. A highly effective — and highly paid—executive may bring improved management and efficient systems that will increase organizational revenues far in excess of the investment in executive salary.   

Ethics and theory aside, comprehensive research shows that most nonprofits provide reasonable CEO salaries and that highly paid executives are the exception rather than the rule (see ERI White Paper Charity Executive Pay). 

So, is it wrong to pay a nonprofit CEO $1M or more a year?  If potential donors believe that their gifts are going to pay salaries that are too high, then revenues to the organization may drop.  On the other hand, what organizations should and have to pay their executives is influenced by the size and type of organization, as well as the need to attract executive talent.  The more appropriate question might be this: Is it unreasonable to pay a nonprofit CEO $1M or more a year?

The challenge for nonprofits is that the IRS doesn’t say precisely what is deemed unreasonable compensation, but it does require that comparable salaries for executives with similar responsibilities in similar organizations be used to determine appropriate pay.  ERI’s Nonprofit Comparables Assessor shows comparable salaries for a given organization’s CEO, based on the type of organization, size, and geography, using ERI’s database of Form 990 compensation data.  A look at the free demonstration version may help assess if those $1M plus salaries are, in fact, reasonable.