- published in the December 2008 issue of the Charity Rating Guide & Watchdog Report

High salaries should not signal a red light to not give just as low salaries should not signal a green light to give. Charity salary levels ought to be based on the skill, experience and education necessary to forward the work of the organization. Charities compete with businesses and the government for employees and must therefore offer reasonable wages in order to attract, hire and retain competent people. Many charity employees are willing to sacrifice the higher pay in the private sector for the psychological rewards of working for a good cause. But underpaying employees could sabotage a charity’s programs if the only people willing to accept such low wages are unqualified to do the job. Underpaying lower level employees may be more damaging to an organization than paying top level executives too much. Charities that pay so little that they can’t retain their staff waste a lot of money by repeatedly recruiting and training new crops of employees, and losing valuable institutional knowledge in the process.

Knowing that many donors are highly focused on salaries, the decision makers at some poorly performing charities take advantage of this narrow view by keeping staff salaries low, and instead paying millions of dollars to outside professional fundraising companies or expensive consultants. In this way a charity can report certain overhead costs in a lump sum on its tax form rather than tying these expenditures to a specific employee as they would if the same fundraising or management functions were performed by its staff. Donors that are overly impressed with low salaries ought to be aware that F rated charities tend to pay far lower salaries than A rated ones.

Excessive compensation should certainly be avoided. But if a charity official runs a vitally important organization with thousands of employees and a budget of hundreds of millions of dollars, it may be worth it to pay the official hundreds of thousands of dollars. Even smaller charities may run programs that require skilled professionals – such as medical doctors, engineers, lawyers or accountants – and they therefore need to pay large salaries that may appear high to donors in absolute terms and as a percentage of an organization’s budget.

Higher Salary May Save Money

Paying a higher salary to a talented fund-raising employee with pre-existing donor contacts could pay for itself. For example, a charity would be better off paying twice as much ($150,000 vs. $75,000) for an in-person fundraising employee, if the higher paid employee could bring in six times as much as the lower paid one ($600,000 vs. $100,000). The higher paid fundraiser would have a 300% return and the lower paid only a 25% return. This is good for donors because a much smaller share of contributions would need to be spent on paying a fundraiser.

A good question to ask a charity that might appear to pay an excessive salary is whether or not it could hire a qualified worker for less, and show you a list of what people in similar positions are paid at other organizations. According to IRS rules, charities are supposed to consider the pay levels at similar sized and located organizations, either nonprofit or for-profit, when setting pay scales. When comparing nonprofit and government pay, don’t forget to take into account the generous health, retirement and vacation packages offered to government workers that are not often available to nonprofit personnel.

Salaries Are Not Always Overhead

A common misconception about charities is that money spent on employee compensation and benefits is not a program service expense and is not fulfilling a group’s mission. This is absurd since most paid charity workers spend the majority of their time operating programs that directly fulfill their organization’s mission.

This misconception is often perpetuated in the media, as in the following comment from a nonprofit consultant in an August 2008 article in The Atlanta Journal-Constitution:

Donors don’t want to contribute to salaries—they want to contribute to the fulfillment of the [nonprofit’s] mission.”

This consultant is not speaking on behalf of informed donors who understand that charities fulfill their missions primarily through workers that deserve to be paid a reasonable salary. How can nonprofit service organizations care for the sick, educate children or dispense aid in the aftermath of a disaster without employing nurses, teachers or relief workers? Volunteers may not require a salary but they usually require guidance, training and oversight by paid nonprofit employees.

Another false belief about charity finances is that administration
expenses are always overhead rather than program expenses. The following are two examples that dispel this myth: 1) Grant making organizations would not be fulfilling their mission if they just threw money randomly at individuals or groups. An essential part of a grant making program is the paid employees who conduct research, and recruit and screen potential recipients. 2) The compensation of a nursing supervisor is a program expense because she manages the nurses who provide medical care, which makes her an essential part of the program.

“You’re spending 50 percent of my money not toward programs and that’s what I’m giving you money for.” In the above-cited article, this was the consultant’s response to the Atlanta Police Foundation for spending about half of its 2007 budget on employees’ compensation and benefits.

The consultant is wrong again. He is implying that all of the money spent on compensation is not going toward programs. Charities typically allocate their compensation expenses based on how employees utilize their time among program service, management and general, and fundraising functions. This charity, according to its 2007 tax form, is counting 58% of the funds spent on compensation as program services and overall is spending 72% of its budget on programs.

Reported Pay May Not Reflect Total Compensation

Some charities may pay all or a portion of employee compensation through an outside management or consulting company. The value of an executive’s compensation paid through an outside company may not be separately disclosed on a charity’s tax form. Deafness Research Foundation paid a total of $352,034 to two management companies, according to its fiscal 2007 tax form. The only compensation tied to an individual on this charity’s tax form is $35,873 for its chief operating officer.

Furthermore, don’t assume that if a management company has the same name as a charity executive, it represents all the money being paid to him. For example, Mr. Doe may be paid through John Doe & Associates as well as through Acme Consulting.

The Asia Foundation, which promotes United States-Asian relations, has a clever way of boosting its President Douglas Bereuter’s payout without revealing it on the Foundation’s tax filing until years later. The Foundation’s fiscal 2006 tax form reports that Mr. Bereuter receives $229,787 in compensation and benefit plans. The form also identifies a $250,000 loan at 12% interest for housing assistance made to the president in 2004 with repayment terms or installments of escalating amounts from 2007 through 2010. What the form doesn’t tell you is that “Each installment [on the loan] shall be forgiven if, on its due date, the President has not resigned or been terminated for cause from the Foundation,” according to a note in its audit of the same year. The note also says that the Foundation’s management “expects the Note will be forgiven…” According to the Foundation’s CFO, John Croizat, the forgiven loan would not be counted as compensation on the charity’s tax form until it is forgiven. So even though Bereuter received the $250,000 in 2004, the Foundation will not report it as compensation to him on its tax form until fiscal years 2007 to 2010 ($25,000 in ‘07; $50,000 in ‘08; $75,000 in ‘09; $100,000 in ‘10).

A cautionary tale of a charity that paid its chief too much played out this summer in North Carolina. The Charlotte Observer reported that the United Way of Central Carolinas (UWCC) paid Gloria Pace King, its President, $1.2 million, including $822,000 in retirement contributions, in 2007. The paper reported that for months the charity defended King’s compensation until public outrage forced UWCC to oust its President and later caused its Chairman, Graham Denton, to resign.

Ever wonder if certain nonprofit executives fly first-class, receive housing allowances, country club memberships and are provided with personal chefs or chauffeurs? Next year charities will be required to disclose these perks, if the latest draft of the proposed fiscal 2008 tax form receives IRS approval.

Charities have a tough balancing act when it comes to setting employee salaries and benefits. On the one hand they have to worry about offending donors by paying salaries that may be viewed as excessive, and on the other hand they need to pay enough to attract the talented and dedicated people that will allow charities to accomplish their important missions.