The discussion of whether or not the NFL should have nonprofit tax-exempt status is heating up again, as proposed federal legislation that would end such exemptions is considered (see http://ftw.usatoday.com/2014/09/nfl-tax-exempt for a discussion, which is more nuanced than it seems at first glance).  Currently, the NCAA, NHL and PGA Tour do have similar non-profit status, while Major League Baseball gave up its non-profit status in 2007, and the NBA has never been tax-exempt.  Of course, tax-exempt status does not mean that the NFL is considered a charity (serving the public good and accepting tax deductible contributions), just that it is a non-profit trade organization and doesn’t pay corporate income taxes. In fact, the NFL does pay taxes on some of its activities.

But, there are a lot of other nonprofit recreation and sports organizations in the nonprofit sector.  The National Taxonomy of Exempt Entities, the classification system used in nonprofit research and in ERI’s Nonprofit Comparables Assessor, includes Major Group N – Recreation, Sports, Leisure, Athletics (shortened here as Recreation/Sports) as a part of the broader division of Human Services organizations.  These organizations are included in this group:

• Recreational and Sporting Camps (Day, Overnight, etc.)
• Physical Fitness/Community Recreational Facilities (parks and playgrounds)
• Sports Training Facilities
• Recreational, Pleasure, or Social Clubs
• Fairs and festivals
• Amateur Sports Clubs, Leagues
• Olympics Committees and Related International Competitions
• Professional Athletic Leagues

This is a category that is wide ranging in size and influence, encompassing the village hunting club and social club as well as some state fairs, the NFL, and the Olympics Committee.   Just computing an average of salaries for this group would be of very limited use to those wishing to set market-based salaries for their executives.

While close to one million nonprofit organizations are registered with the Internal Revenue Service in the United States (see IRS Exempt Organizations Master File, June 2014), only 37% of them have revenues that reach the level of $50,000 and meet the requirement to file a Form 990 each year (with the exception that all private foundations of any revenue or asset size must file a Form 990-PF).  So, out of the almost 355,000 reporting tax-exempt organizations (meeting the revenue requirement for filing a Form 990), about 34% are involved in providing what is defined in the NTEE as Human Services.  Although Human Services is by far the largest NTEE category of reporting nonprofits, Recreation/Sports organizations comprise only 8% of Human Services and less than 2% of all nonprofits.  The table below shows how this group compares in annual revenues and assets to the rest of the nonprofit sector.

While Human Services organizations are over one-third of the total of reporting nonprofits, their revenues and assets represent a much smaller proportion of the total in the sector, at 7% and 10%, respectively.  This finding is also evident with Recreation/Sports organizations at 8% of the total number of reporting nonprofits, but receiving only 0.9% of total sector revenue and holding only 0.7% of the total sector assets.

The disparities within the group are revealed by looking at the distribution of Recreation/Sports organizations by size, based on the annual revenues reported on their Forms 990.  Of the nearly 30,000 organizations classified as Recreation/Sports, only about 9,000 of them reported paying any compensation at all.  Of those, about 39% had revenues between $100,000 and $500,000, another 17% were in the $500,000 to $1 million range, and another 37% were in the $1 million to $10 million range.  While the compensation of very large organizations are often in the press (for example, the NFL with a Commissioner salary of $44 million), the reality is that almost all of these organizations are very small.  In fact, only around 60 have annual revenues of $50 million.   Thus, when doing salary comparisons for CEOs, it is necessary to use data from similar-sized organizations not averages for the group.

ERI’s Nonprofit Comparables Assessor can be used to calculate average CEO salaries by size and type of nonprofit organization.  The table below compares average CEO compensation for Recreation/Sports organizations with all nonprofits and then with all Human Services organizations.  An interesting pattern emerges —   at the lowest revenue ranges, salaries are lower than for both all nonprofit and Human Services averages, but that quickly changes as the organizations get larger.  At the larger revenue sizes, Recreation/Sports organizations pay more than other nonprofits, especially those in Human Services.  So the smallest ones pay less than other nonprofits, but those relationships change dramatically in larger organizations.

The IRS requires that public charities set executive salary levels looking at compensation data from similar organizations (typically defined as similar in type of service provided, size, and geographic location).  Detailed comparisons using relevant data is clearly needed to ensure compensation levels that comply with IRS regulations.  However, many of the organizations, particularly the larger ones, are classified as tax-exempt under the c6 subsection of the Internal Revenue Code – this means that they are not classified as charities (organized for the public good) and that compensation levels are not subject to IRS penalties.  Their executive compensation must be reported annually on Form 990 and is public information; however, there probably won’t be an IRS investigation of salary levels.  For smaller Recreation/Sports organizations, if they are tax-exempt as public charities (IRC Section 501c3), there is still a need to collect comparable data to set reasonable salaries, in accordance with IRS regulations.

It’s autumn, and thoughts of 2015 pay raises are forming in the minds of nonprofit leaders and their boards.  At the least, this seems to be the season of the publications of annual reports about pay raises for nonprofit executives.  Let’s review some of the findings of recent reports and see how helpful they will be for setting executive compensation that will be market-based and in line with IRS regulations.

Here are some key points from The Chronicle of Philanthropy’s annual compensation survey:

• Big nonprofits and foundations are beginning to finally pay executives more than the inflation rate, with a median increase of 4.9% between 2011 and 2012 (The Chronicle tracks only 82 organizations, the largest charities in the US.).
• Excluding the 20 groups that cut pay or kept it flat, the remaining 62 organizations in The Chronicle’s survey increased CEO pay 6.8% in 2012.
• Compensation was more than $2 million for 18 CEOs.

GuideStar’s annual study was also released this week and gives a broader view of increases in the sector, as the research includes data from about 91,000 organizations.  Consider these findings:

• The median pay increase for top executives at nonprofits was 2.2% in 2012, up from 2% in 2011 and 1.6% in 2010.
• There is a significant gap between pay in larger and smaller charities, and it appears to be widening. For CEOs in the largest charities, the median increase was about 4% in 2012 (median salary of $444,108), while the average increase for heads of charities with less than $250,000 was approximately 1% (median salary of $44,806).

So what is the “right” increase for 2015?  Using these reports, one could conclude a range between 1% and 7% – of course, the reports are of CEO pay increases between 2011 and 2012.  Obviously, those determining an annual pay raise for a charity executive must do research far beyond reading some averages and medians for the nonprofit sector as a whole or even the groupings available in these reports.

The factors that influence compensation remain the same:  what you do (the job) and where you do it (type, size, and sometimes location of organization).  The data that are needed for comparison must be collected from similar organizations, and what is important to the market is the salary paid, not the rate of increase.  The rate of increase for a CEO in a specific organization should be based on how the current pay aligns with the market rate for the position as determined by the comparable data.  Overall averages and medians always seem to be of great interest but often are a poor basis to determine market rates that follow IRS criteria.

For example, the table below, created using ERI’s Nonprofit Comparables Assessor, illustrates the variation in pay for different sizes and types of nonprofit organizations.  It also shows the danger in applying an average or median increase to a salary to attempt to come up with CEO compensation.

Table 1.  Average Nonprofit CEO Compensation by Type and Size

The differences in average CEO pay among large and small organizations are huge, but the differences among organizations with varying activities and services are also striking.  Obviously, just applying an average or median increase from a survey such as those cited above may not bring about a compensation level based on what is paid by comparable organizations.

To further illustrate, Table 2 shows how average CEO compensation for different types of organizations varies from the all nonprofit average at different sizes.  Again, it is clear that both the factors of type of organization and size influence compensation levels.

Table 2. CEO Compensation for All Nonprofits Compared to Different Types and Sizes

The only way to assess appropriate compensation levels is to look at levels for comparable organizations, using type of organization and the size as major factors.  In some types and sizes, geographic location will also be a factor.  Although this is a much more detailed analysis than reviewing more general national surveys, it is easily accomplished using ERI’s Nonprofit Comparables Assessor.  Nonprofit boards will then be assured that their CEO compensation is competitive and their process is in compliance with IRS standards.

Before addressing either the obvious question, “Does crime pay?” or, more precisely, “What do the CEOs of crime and legal-related nonprofits earn?” let’s take a look at how this type of organization fits within the nonprofit sector in the US.  The National Taxonomy of Exempt Entities, the classification system used in nonprofit research and in ERI’s Nonprofit Comparables Assessor, includes Crime and Legal-Related organizations (Major Group I) as a part of the broader division of Human Services organizations.  More specifically, Major Group I consists of organizations addressing and influencing policy and providing services in areas such as these:

• Crime prevention, including drunk driving and delinquency;
• Correctional facilities, such as half-way houses for offenders/ex-offenders;
• Rehabilitation services for offenders and their families, plus prison alternatives;
• Court reform and alternatives to litigation and sentencing, such as dispute resolution and mediation services;
• Protection against and prevention of neglect, abuse, and exploitation; and
  
• Legal services, including public interest law and litigation.

According to the Internal Revenue Service statistics, [i] close to one million nonprofit organizations are registered with the Internal Revenue Service in the United States, but only 37% of them have revenues that reach the level of $50,000, which requires the filing of an annual Form 990 (with the exception that all private foundations of any revenue or asset size must file a Form 990-PF).

Of the over 350,000 reporting tax-exempt organizations (meeting the revenue requirement for filing a Form 990), about 34% are involved in providing what is defined by the NTEE as human services.  Although Human Services is by far the largest type of reporting nonprofits, Crime and Legal-Related organizations comprise only 5% of Human Services and less than 2% of all nonprofits.  The table below shows how this major group compares in annual revenues and assets to the rest of the nonprofit sector.

Table 1. Number and Finances of Crime/Legal-Related Organizations, 2014

ERI’s Nonprofit Comparables Assessor can be used to analyze average CEO salaries by size and type of nonprofit organization.  The table below compares compensation of all nonprofits, all Human Services, and Crime/Legal-Related organizations.

Table 2. CEO Compensation for Crime/Legal-Related Organizations by Type and Size

Human Service organizations have lower average CEO compensation compared to all US nonprofits for all revenue levels shown above.  However, the averages for Crime/Legal-Related organizations (included in total Human Services) reveal a different finding.  The average compensation for CEOs in Crime/Legal-Related organizations at all sizes is less than the average in all US nonprofits, but it is greater at all sizes when compared to all Human Services. So crime, in fact, does pay, at least when compared to other Human Services organizations (just not when compared to all nonprofits).

Another factor that typically influences salary levels is geographic location.  The compensation averages for CEOs from the Nonprofit Comparables Assessor show significant differences among different states.  Since many of the nonprofits working to influence national policy are located near Washington, DC (including DC itself, suburban Maryland, and northern Virginia), the compensation data for organizations in this area are combined and shown as DC-MD-VA.  Indeed, salaries seem to be higher for organizations in this area that tend to focus on national policies relating to crime and the legal system, particularly for the largest nonprofits.

Table 3. CEO Compensation for Crime/Legal-Related Organizations by State and Size

The IRS requires that public charities set executive salary levels by looking at compensation data from similar organizations (typically defined as similar in type of service provided, size, and geographic location).  There is clearly a need for detailed comparisons using relevant data to ensure that compensation levels comply with IRS regulations.

New York State Governor Andrew Cuomo issued an administrative regulation in May 2012 that set a salary cap on nonprofit contractors that get more than $500,000 and 30 percent of their revenue from the state – they are not allowed to pay more than $199,000 a year in state money toward an executive’s salary.  Some nonprofits that have contracts to provide social services for the state have challenged this rule, and now two judges have come to different conclusions about these executive compensation restrictions.

In April 2014, State Supreme Court Justice Thomas Feinman ruled that that the NYS Health Department “overstepped its authority” in imposing pay caps for top officials at state-supported nonprofits. This was a case pursued by Agencies for Children’s Therapy, an association of 33 groups in New York City and on Long Island that provide early intervention and special education programs.  NYS representatives stated that the verdict would be appealed.

But, on August 11, 2014, in a lawsuit brought by a charity providing home care services under a state-funded contract, Suffolk County Supreme Court Justice Emily Pines came to the opposite conclusion – that the cap falls within officials’ authority “to regulate the financial assistance provided by the state in connection with public health care activities.” She made the additional point that the compensation was not truly capped, because organizations can use other funding sources to pay more than $199,000, if they wish to do so.

A ruling in another lawsuit filed in Albany County by the New York State Health Facilities Association is still pending.

The IRS regulations call for data for comparable nonprofits to be used in salary determinations and mention criteria such as size, location, and type of services provided to define which organizations are comparable.   Executive boards setting salaries must look at appropriate comparable data, but there are no defined salary caps.  The arbitrary salary cap approach does not take into account one of the main criteria for setting salaries – size of the organization.

A look at the salaries of top executives in human services nonprofits reveals that they are often paid more than $199,000, particularly the larger ones.  Included in this count are organizations providing rehabilitation services for criminal offenders, legal services, vocational rehabilitation, employment training,  food and nutrition programs, low income rental housing, homeless shelters, disaster preparedness and relief, recreational sports, youth centers and clubs, as well as the more typical family and children’s services.

Not all of these organizations will be directly affected by the salary cap, because the level of revenue received from state government grants is not available. However, the data do indicate the competitive compensation levels for similar organizations. In particular, the larger organizations may need to tap other revenue sources to enable them to pay market rates for executives. Many will be closely following the various court decisions on the legality of the NYS salary cap.

The compensation for executives in the medical field, whether their employers are for-profit or nonprofit tends to be high, according to conventional wisdom.  Yet a closer look at the nonprofit world shows that there are significant differences in pay, depending on the type of health-related activities or services provided.  Taking hospitals out of the mix leads to a more nuanced portrait of compensation in the nonprofit health sector.

The National Taxonomy of Exempt Entities, the classification system used in nonprofit research and in ERI’s Nonprofit Comparables Assessor, divides health organizations into four types:

1) Health General and Rehabilitative (Major Group E)

Including Hospitals and Community Health Systems, Health Maintenance Organizations, Family Planning Centers, Rehabilitative Medical Services, Ambulance, Emergency Medical Transport Services,  Organ and Tissue Banks, Convalescent Facilities, Home Health Care

2) Mental Health, Crisis Intervention (Major Group F)

Including Alcohol, Drug and Substance Abuse, Psychiatric, Mental Health Hospital or Group Home, Hot Line, Crisis Intervention Services, Counseling, Support Groups, Mental Health Disorders

3) Diseases, Disorders, Medical Disciplines (Major Group G)

Including associations, support agencies, and service organizations active in the prevention or treatment of specific diseases or disorders; categories are Birth Defects and Genetic Diseases, Cancer, Diseases of Specific Organs, Nerve, Muscle and Bone Diseases, Allergy Related Diseases, Digestive Diseases, Disorders, Medical Disciplines (Geriatrics, Pediatrics, Surgery)

4) Medical Research (Major Group H)

Including associations, support agencies, and service organizations active in research on specific diseases or disorders; categories are the same as in G above.

While there are close to 1.6 million nonprofit organizations registered with the Internal Revenue Service in the United States, only about 40% of them have revenues that reach the level of $50,000, which requires the filing of an annual Form 990 (an exception – all private foundations of any revenue or asset size must file a Form 990-PF).  Public charities (tax-exempt organizations to which donors can make tax-deductible donations) are a subset of the more than 30 types of tax-exempt organizations and comprise about 80% of the total.

The number of reporting public charities – meeting the revenue requirement for filing a Form 990 – is over 300,000 each year.  About 35% are involved in human services, while the second largest category is education organizations (almost 18%), followed by health organizations (12%). Of these health organizations that are large enough to file Form 990, the vast majority are not hospitals.

According to the annual report on the nonprofit sector prepared by the National Center for Charitable Statistics at the Urban Institute, while hospitals and primary care facilities all health care organization receive 59 percent of the revenues in the entire sector, other health related organizations account for only 9 percent of the total.  The table below is adapted from the 2013 NCCS report and shows that the over 34,000 health organizations account for 9 percent of the total revenues and 8% of the assets.

Table 1.  Number and Finances of Nonprofit Health Organizations, 2011

Using ERI’s Nonprofit Comparables Assessor, the table below illustrates the variation in average CEO salaries by types of health organization (excluding hospitals).

Table 2.  CEO Compensation for Health Organizations by Type and Size (excluding Hospitals)

Mental health organizations clearly have lower salaries, while it appears that the medical research entities, often headed by MDs, are paid higher than heads of the others working in health.  Other factors that typically influence salary levels are size and even geographic location.

The IRS requires that public charities to set executive salary levels looking at compensation data from similar organizations (typically defined as similar in type of service provided, size, geographic location).  Finding closely comparable organizations in health requires a close look at type of services provided and activities, since there is a wide variation among the broad category of all nonprofit health organizations.