New York Governor Andrew M. Cuomo recently announced the creation of a task force to investigate executive compensation of nonprofit organizations that receive taxpayer subsidies from the state.  An article in The New York Times triggered interest from the state, highlighting salaries at nonprofit organizations that provide Medicaid-financed services to developmentally disabled New Yorkers. Using comparable salary data from ERI Economic Research Institute, research found that the Young Adult Institute was paying the two brothers, who led the organization since the 1970s, far in excess of what other similar nonprofits paid.  In fact, Philip and Joel Levy each received close to $1 million a year at the peak of their earnings.

The Times article included a list of executives of other providers of Medicaid-financed services to developmentally disabled people who were paid more than $500,000, most considerably above the average chief executive salary for similarly-sized nonprofit groups in the state.

While there are no state rules governing executive or administrative compensation at groups that receive state subsidies, the task force will focus on auditing current compensation levels and recommending rules to ensure that money is not wasted on excessive salaries and compensation. Some states, like New Jersey, New Hampshire, and Vermont, have considered salary limits and even caps – say, $250,000 – for nonprofit contractors, but that does not take into account what is reasonable pay for similar jobs in similar organizations in similar locations.  One size does not fit all, and it is important to look at comparable data to really determine what is reasonable compensation.  That is what the IRS expects a nonprofit to do when setting executive compensation. See the IRS Form 990 instructions for more information on what IRS wants.

Doug Sauer, chief executive of the New York Council of Nonprofits, raised a valid point in response.  He suggested that the governor’s task force should also examine the compensation of executives at for-profit companies working under state contracts in other areas of government.

One nearby state – Pennsylvania – has taken an interesting approach that perhaps New York State should consider.  Before a state grant is given by the Pennsylvania Department of Transportation, documentation of comparative executive salaries is required to ensure that the compensation is not excessive.  The state actually requires the use of ERI’s Executive Compensation Assessor to create an analysis that is submitted as a part of the grant application to document that executive salaries are justified by comparable data.

Requiring the submission of comparable salary data for both nonprofit and for-profit government contractors before the contracts are awarded could help ensure that tax dollars are spent to provide services rather than enrich the executives from either sector.  Let’s see if the New York State task force comes up with such a sensible and practical recommendation!