The Gap Between Executive and Average Worker Pay in Nonprofits

by Linda M. Lampkin, Senior Nonprofit Compensation Specialist 8. December 2015 13:16

 

In the business world, there is a lot of discussion about the often huge gap between the pay of top executives and the average employee within an organization.  While some interpret the data as executives reaping a windfall while worker pay stagnates, there is also research that focuses on the fact that the best-paying companies are pulling away from the worst-paying companies that is, while increased executive pay contributes to the wage gap, so does the success of the companies in their overall industries. See a recent Wall Street Journal article for a discussion of this issue.

Researchers will continue to debate whether or not the predominant driver of inequality is the gap between, not within, firms.  There are also some changes in the way companies are run that need to be considered.  For example, many companies now use contractors  rather than employees to perform some lower level functions (e.g., security guards, office cleaners, etc.) and also have turned some employees into independent contractors (e.g., writers, project managers, etc.).  The remaining core employees may tend to earn more in successful entities (Consider David Weil’s perspective in his book, “The Fissured Workplace”). 

So the argument goes that companies operating in a unique market niche can raise compensation for all employees more successfully than those in a more competitive environment. 

Does this same wage gap exist in the nonprofit sector?  First, the wage gap between nonprofit executives and the average employee in their organizations has always been a fraction of what occurs in the for-profit world.  One reason is the tremendous difference in size between entities in the sectors, as most nonprofits are small, and revenue size is one of the most influential factors in determining executive pay.  Of course, nonprofit status brings with it a burden to work for the public good and have salaries that are comparable to those in similar organizations – with salaries subject to scrutiny by the public, as well as the IRS and state charity regulators.

Many nonprofits operate in a very competitive environment, competing for government and foundation grants, contracts, donors, and even customers (e.g., concert attendees, museum-goers, college students, etc.).  Supporters have similar options for services, and dominant market positions may quickly change if a government grant is not renewed or a major supporter stops contributing.   So, the ability for nonprofits to build and maintain the unique competitive “moat” that helps for-profit businesses become successful may be more limited.

The IRS regulations call for setting compensation using compensation data of other nonprofits of similar size providing similar services.  So while size – based on revenues of the organization – is a very important influence on compensation levels, another major factor is the kind of work performed, reflecting the success of the subsector.  ERI’s Nonprofit Comparable Assessor was used to create the table below illustrating average salaries of CEOs of similarly-sized charities of different types.

While the largest nonprofits with $500 million in revenue have higher CEO average salaries overall than those with $50 million in revenue, hospitals have the highest salaries of the types of nonprofits shown.  Clearly there is a big salary difference among organizations of similar size depending on the type of service provided.  As mentioned above, this compensation information is public – anyone with an Internet connection can access Forms 990 – so clearly documented justification of pay is necessary for nonprofits to have ready for the media, donors, clients, etc. 

The decision of what to pay nonprofit executives is much more constrained than in the for-profit world due to government regulation and public review.  Nonprofits must base compensation on data from similar-sized organizations providing similar services.  To attract and retain the staff talent needed to run their organizations, CEOs must pay market rates for social workers, administrative assistants, security guards, and nurses, for example.  Typically, it is assumed that the salaries for these positions will be paid based on the market for that job, whether at a government, for-profit, or nonprofit facility. Does a staff nurse working in a large hospital with a highly paid CEO receive a higher salary than one in a human services agency with a lower paid CEO?  Only time and research will tell how much of this discussion of disparities will spill over to the nonprofit world.