Charity Navigator (CN) recently published its tenth Charity CEO Compensation Study, stating that it is “designed to serve as a tool for board members seeking benchmarking data and for donors who want to gain a better understanding of nonprofit compensation practices.” But the data won’t be of much use to many who are tasked with setting nonprofit executive compensation.
Which Charities Are Included in the Report?
The answer is probably not as many as you would think – of the 1.5 million charities registered with the IRS, Charity Navigator looks at about 4,500. CN requires that charities meet a number of criteria to be included:
- Reporting at least $500,000 in public support and more than $1,000,000 in total revenue for the two most recent fiscal years.
- Reporting at least 1% of expenses allocated to fundraising and 1% of expenses allocated to administrative expense for three consecutive years (showing a commitment to raising funds from the public and providing appropriate infrastructure for the charity).
- Not a hospital and not a university, college, or private elementary or secondary school (because they generate revenue almost entirely through program services).
- Not a land trust, sorority and fraternity foundation, community foundation, or donor advised fund (because revenues and expenses fluctuate widely from year to year).
- Not a foundation spending assets for grants and programs (since this type of charity does not raise money from the public).
What Are Charity Navigator’s Findings?
Median total CEO compensation is $123,462 in 2014.
- This median includes data only from the 4,500+ charities that meet CN’s criteria.
- ERI’s Nonprofit Comparables Assessor (CA) uses Form 990 data from all filers, representing well over 100,000 tax-exempt organizations that report compensation for their executives.
- CA allows the use of criteria to limit the comparable organizations included in the calculation; these criteria – type of organization, size, and location – are what the IRS uses to assess the relevance of comparable data.
Median CEO compensation increases 3% from 2013 to 2014.
- CN only uses data for the 3,452 charities that reported the same person as CEO for both 2014 and 2013.
- What is relevant to the IRS when reasonableness of compensation is assessed is what executives are earning when compared to those in comparable organizations. An overall median increase for a very limited group of incumbents is not likely to be very useful.
- A median increase from 2013 to 2014 is not very useful to consider when setting compensation to start January 2017.
The largest driver of CEO salary is overall expenses. The charity’s mission (category) and location also play a role.
- These criteria are of course those used by the IRS to determine the comparability of information used for comparison. ERI’s research has also shown that size is the most influential factor in compensation levels.
- ERI’s Nonprofit Comparables Assessor allows the user to calculate expected compensation by type of organization, by size, and by geographic location. Using all three criteria yields a list of the organizations that the IRS would consider comparable data in the estimate of reasonable salary – just what the IRS wants to see.
Is the Report Helpful or Not?
As discussed above, the organizations included in this report represent a relatively small group of tax-exempt organizations. In fact, many of the largest charities that include the highest paid executives (think foundations, hospitals, and universities) are not represented. Users of this information should carefully consider its relevance.
Does a 3% median increase for CEO incumbents in 2014 over 2013 help to set salaries? Not really. The data needed for comparison must be collected from similar organizations, and what is important is the salary actually paid, not the rate of increase. The goal is to review how current pay aligns with salaries in comparable organizations. Overall averages and medians always seem to be of great interest but are a poor basis to determine market rates that follow IRS criteria. See this blog post for a further discussion.
ERI would agree with one of the report’s conclusion – that most of the sector’s CEOs are paid very reasonably and the incidence of very high pay is unusual. For a detailed breakdown of CEO compensation by size and type of organization that includes all organizations that file Form 990 and report compensation, see this whitepaper.
Reports that cover only limited groups of charities and use single criteria – type or size or location – should be used very carefully in salary determinations. ERI’s Nonprofit Comparables Assessor can provide a group of similar organizations selected from all organizations that file a Form 990 – and the resulting estimate of compensation and list of comparable organizations will be accepted by the IRS.