Changes in Pay for Charity Executives, 2009 to 2012

by Linda M. Lampkin, Senior Nonprofit Compensation Specialist 9. September 2015 14:15

 

In 2009, charities were beginning to recover from a national recession that impacted revenues throughout the nonprofit sector.  By 2012, many had become more financially stable, maintaining or increasing services and revenues.  During the same years, the interest in identifying highly paid nonprofit executives also continued.  Rather than deal with individual instances of “unreasonable compensation,” ERI Economic Research Institute used its database of IRS Forms990 to review CEO compensation for all reporting charities in the two years.  (Our first research paper using 2009 data is available here). 

In the field of executive compensation, the two key factors generally recognized as the most influential in determining compensation levels for a given job title are size and industry; in the for-profit sector, these translate to level of company revenues and the industrial code associated with the product or service (usually a NAICS or SIC code). In the nonprofit world, the comparable factors are revenues, as reported on the Form 990, and subsector, as indicated by a National Taxonomy of Exempt Entities (NTEE) code from the nonprofit classification system created by nonprofit experts and practitioners and maintained by the National Center for Charitable Statistics at the Urban Institute. 

ERI creates a database of Form 990 information, including revenues and direct cash and total compensation, for use in the Nonprofit Comparables Assessor (CA), an application that calculates average competitive compensation levels for the executive jobs reported on the form, allowing the user to choose characteristics such as revenue size, type of organization, and geographic location to find the closest comparable organizations.  The compensation database is created with data from Forms 990 leased from ERI’s digitizing process and from GuideStar.  CA customers include many regulators (the IRS with multiple licenses and state charity officials) and many large nonprofits, as well as the lawyers, accountants, and consultants who serve the nonprofit sector.

ERI chose all returns filed for 2012 with compensation observations for the CEO position.  The total number of charitable organizations reporting compensation on their Forms 990 increased only slightly, from 96,130 in 2009 to 97,056 in 2012, an increase of only about 1%.  But this masks the fact that, during this time period, the IRS revoked tax-exempt status for a huge number of inactive organizations that had not filed Forms 990 in three years, and that change primarily impacted smaller organizations.  The number of the smaller organizations reporting compensation actually decreased dramatically from 2009 to 2012, while the larger ones increased between 12% and 20%.

Changes in CEO Compensation from 2009 to 2012 by Size of Charity

The table below shows the mean, median, and standard deviation (SD) of direct cash compensation payments for CEO salary observations by size of charity, as measured by annual revenue ranges. 

Table 1.  Charity CEO Salaries by Revenue Range, 2012

The data on mean and median salaries reported above, as in 2009, do not provide support for claims of widespread unreasonable compensation in the sector.  However, the larger the organization, the more need there may be for further review of individual organizations.  For example, there are large difference between the mean and median and the huge SD for the $10m+ category, indicating that salaries vary widely in this group.

To see how compensation levels compared in 2009 and 2012 for those organizations in which the CEO remained the same over the three-year period, the names of CEOs were checked for matches in 2009 and 2012.  The average compensation levels for same CEOs for different sizes of organizations are shown in Table 2.  The table revealed a striking difference in the rates of increase by size of organization – the bigger the charity, the higher the rate of increase. 

Table 2.  Comparison of Average Salaries of Same CEOs by Revenue Range, 2009 and 2012

Changes in CEO Compensation from 2009 to 2012 by Type of Charity

A look at the average salaries by type of charity also shows huge variations in average salaries. Table 3 shows the average CEO compensation by selected NTEE groupings often used by nonprofit researchers.  In general, the mean and median salaries for CEOs tend to be modest, but the categories of Hospitals and Universities are clearly higher than most others.

Table 3.  Average Charity CEO Salaries by Type of Charity in Selected NTEE Groups, 2012

Table 4 shows what happened to CEO salaries for those CEOs whose names were listed in both 2009 and 2012 filings.  Although hospitals and universities record higher than typical increases for charitable organizations, the group of organizations classified as Public/Societal Benefit also gave larger increases than other types of charities.

Table 4.  Comparison of Average Charity Salaries for Same CEOs, by Type of Charity, 2009 and 2012

The Incidence of High CEO Salaries  

The IRS says nonprofits must pay employees “reasonable compensation,” and penalties for paying more include taxes on the employees who receive the “excess” compensation and even the organization managers who approve the payments. In extreme cases, the organization could even lose its tax-exempt status.  While compensation must be reasonable, the IRS gives few specific guidelines. The stated criterion is that total compensation must be compared with what would be paid for like services by like enterprises under like circumstances. This analysis must be done for each nonprofit executive.  (See details in page 84 of the Form 990 instructions at http://www.irs.gov/pub/irs-pdf/i990.pdf.)

ERI’s research using 2009 From 990 compensation data included these findings:

  • The highest paid CEOs – defined as those paid more than 2 standard deviations above the average salary – are a very small proportion of all nonprofit organizations.
  • Higher than expected compensation was not evenly distributed by type and size of the charity.  Hospitals had the greatest number of CEOs paid higher than 2 SDs above the mean, at all revenue sizes.  The categories of health (excluding hospitals) and public/societal benefit organizations also had more CEOs above the 2 SD range than all charities.  

The IRS determination of what is excessive is on a case-by-case analysis.  However,  a count of the CEOs that receive compensation that falls more than 2 SDs above the average in various revenue ranges and in different types of organizations is useful in understanding the incidence of higher than expected CEO compensation.

The percentage of CEOs with salaries that fell outside the two standard deviation criterion Is detailed by the highest revenue ranges of charities in Table 5 below. (While the revenue ranges make sense visually, they have not been determined optimally for statistical analyses.  In other words, there are any number of alternate revenue bands we could have constructed that may or may not have led to more apparent trends in the data.) 

Table 5. Percent of Charities Reporting Salary > 2 SDs in Higher Revenue Ranges, 2012

This table shows that roughly 3% of the organizations in all of these higher revenue ranges pay their CEOs more than 2 SDs more than the mean.  To further refine the analysis, the charities in these revenue ranges were divided into selected NTEE group.  The results are shown in Table 6.

Table 6. Percent of Charities Reporting CEO Salary > 2 SDs by NTEE and Revenue Range, 2012

This analysis shows that the clear differences in the percent of high compensation (defined as more than 2 SDs above the mean for the comparable group) among the types and sizes of charities still remain in 2012. 

While Table 6 shows the incidence of the type and size of charity that has reported higher than expected compensation levels, Table 7 shows the actual number of organizations affected. 

Table 7.  Number of Charities Reporting CEO Salary > 2 SDs by NTEE and Revenue Range, 2012

The total of all organizations reporting high compensation is slightly above 1,200, out of almost 100,000 organizations reporting compensation in 2012.  Although the number of charities paying their CEOs more than 2 SDs above what would be expected grew slightly between 2009 and 2012, it still represents a very small percentage of charities.  The table provides a clear blueprint for the most effective use of compliance resources.

Summary

The comparison of charity CEO compensation data reported on the Form 990 by all charities in 2009 and in 2012 revealed that average salaries grew for most organizations by about 3% per year.  However, there was a higher rate of increase for larger organizations and for certain types of organizations, specifically hospitals and public/societal benefit organizations.  In general, the average salaries would not be considered high by most observers.   

Using a definition of compensation of greater than two standard deviations above the mean as an indication of excessive compensation, the proportion of charities paying such salaries is relatively low. 

The results, of course, should only be used to give an indication of the extent of high compensation within the sector and to identify where these high-paying organizations would most likely be found.  As the IRS says, unreasonable compensation is determined on a case by case basis, but this type of analysis can provide a starting point for compliance investigations.  

While high compensation appears to be relatively rare, the occurrence is not evenly distributed when analyzed by type and size of charity.  Hospitals, with typically higher compensation, have twice the incidence of compensation falling 2 SDs above the mean as compared with any other group regardless of revenue size.  It appears that hospitals give less weight to organization size than other types of organization.  A more detailed examination of factors determining CEO compensation in hospitals would be of interest.

In addition to hospitals, the categories of health (excluding hospitals) and public/societal benefit organizations also had more CEOs falling outside the 2 SD range than charities as a whole.  These categories include a larger number of charities, but their revenue levels tend to be much lower.  However, these outliers should probably also be a focus of further research.

In conclusion, average compensation levels for charity CEOs seem relatively modest and did not increase dramatically from 2009 to 2012, even as the economy improved.  The data do show that there are some exceptions, particularly with larger charities and those classified as hospitals and public societal benefit.  This information can be used to focus compliance efforts by the IRS and others interested in ensuring that executive compensation in the nonprofit sector remains reasonable.