Is it acceptable for the head of a nonprofit to earn a seven-figure salary? Upon what criteria should a salary be based? A recent study in JAMA Internal Medicine reveals that a CEO at a nonprofit hospital earns, on average, about $600,000 a year and the median salary of a CEO at a large nonprofit urban hospital is over $1.66 million.
According to this study which used 2009 salary data, these CEO salaries do not appear to be affected by the hospital's performance as determined by measurements such as mortality rates, readmission rates, and amounts of charity care and other community benefits. However, there is a correlation between salary and number of hospital beds, higher levels of advanced technology, and ratings from patient satisfaction surveys.
CharityWatch frequently fields questions from donors who are concerned that their money may be funding an executive's lavish lifestyle rather than going to the charity's cause. While CharityWatch understands concerns about excessively high salaries, we remind donors that nonprofits have to compete with both the private sector and the government for employees. In many cases, a higher salary may be justified because of the high level of experience, education, and skills needed to run a large and complex organization.
This is especially true with regards to a nonprofit hospital. The JAMA study points out that the highest salaries are paid to executives at large, urban hospitals, which are frequently teaching institutions, while lower salaries with a median of about $118,000 go to those running smaller, rural, non-teaching hospitals. Clearly, managing a larger hospital with more patients as well as maintaining a teaching program and medical research requires a higher level of responsibility and a different skill set than running a smaller institution without a teaching component, and the salaries should be set accordingly.
Though executive salaries at nonprofit hospitals are a lot higher than those at most other nonprofit organizations, a more useful comparison for nonprofit hospital salaries would be with equivalent positions at for-profit hospitals. Donors should also keep in mind that typically the bulk of CEO salary costs fall under the category of program service expense, rather than overhead. This is because accounting rules categorize salary costs related to program administration with other program expenses rather than with general administration costs, which count as overhead.
While CharityWatch understands the concerns that donors have regarding the seemingly high salaries paid at certain types of nonprofit organizations, we believe that it is important to weigh the many contributing factors when judging the reasonableness of a salary.