Reported Charity Salaries May Not Tell the Full Story
Posted on April 04, 2017
Donors often seek out information on charity executive salaries when considering whether or not to donate to a particular nonprofit. Such information is widely available online from aggregator websites that use software to pull and republish data from public tax forms. Unfortunately, the presentation of such salary data often causes donors to incorrectly conflate low salaries with financial efficiency. In addition, donors are prone to inferring that the salary data they are viewing represents the total payments received by a particular executive from the charity that employs them, when this is not always the case. To identify a worthy charity, donors must look beyond the face value of the salary data they encounter online and dig deeper.
Delayed Compensation Payouts May Surprise Donors
Charities are typically required to publicly report employee compensation as it is earned, including earned retirement compensation, irrespective of when it is paid. This gives donors the ability to consider whether or not a charity executive’s compensation is reasonable within the appropriate context of its other annual financial data. Charities can, however, award millions in additional compensation to their leaders decades after an executive’s employment begins. Based on IRS reporting rules, those payments may not be required to be reported until the same year as the payment is received. Charities also are not required to report future executive compensation until it is paid if it is “contingent on satisfaction of specified organizational goals or performance criteria” under a deferred compensation plan. In such cases, donors who previously contributed to a charity, in part due to its executives receiving low salaries, may later end up feeling duped.
Tiger Missing Link Foundation (Tiger Link), which also goes by the name Tiger Creek Wildlife Refuge, approved a payout to the charity’s founder and CEO/Executive Director, Brian Werner, that includes deferred compensation plus interest for “work performed from 1995-2013,” according to the group’s fiscal 2015 tax filing and audit. A note in the charity’s 2014 audit states: “The Tiger Missing Link Foundation Board of Directors held a special meeting on November 18, 2014 to approve a 7.5% interest accrual for the deferred compensation amount for Executive Director Brian Werner. This interest is retroactive back to Mr. Werner’s hire date of September 3, 1995 creating an accrued interest amount of $1,670,324.18. This interest will continue to accrue until his deferred compensation is paid in full.” This “accrued interest amount” represents more than 12 year’s worth of additional salary to Werner based on his 2014 base salary of $130,000.
The National Rifle Association (NRA) recently approved a similar arrangement for its CEO/Executive Vice President, Wayne LaPierre, who currently tops CharityWatch’s list of Top 25 Compensation Packages for charity employees. The NRA’s 2015 audit states that it established a 457(f) supplemental executive retirement plan for the benefit of certain executives. LaPierre received a one-time payout under this plan amounting to over $3.7 million “after 36 years of continuous service to the organization, which has included 25 years as the NRA’s top executive,” according to the NRA’s 2015 tax filing. His earnings that year topped $4.6 million, in total. CharityWatch thinks that from a donor’s perspective, it would be preferable if charities established and disclosed in advance the terms of such large executive compensation plans so that the accrued earnings are required by the IRS to be reported annually as part of the executive’s salary.
For example, charities that maintain traditional retirement plans compute the compensation earned by each employee under such agreements annually, then report it in their publicly available tax filings, along with each charity executive’s base salary and any other earnings. Large, multi-million dollar compensation windfalls to executives toward the ends of their careers are highly atypical among charities, though not unprecedented. In 2010, CharityWatch previously reported that Roger Chapin, the founder and president of the low-rated Help Hospitalized Veterans (HHV), received a $1.9 million payout for “38 years of service” upon his exit from the organization.
Limitations of Raw Salary Data
So why can’t aggregator websites provide complete data on payments made by charities to their executives? Many online sources electronically pull data directly from discrete compensation-related fields within publicly available charity tax filings. This data is often republished for public consumption without first being scrutinized for accuracy or completeness. The software designed to auto-generate data on thousands and thousands of charity salaries typically does not have the capacity to read or interpret the supplemental text charities provide in narrative form outside of machine readable fields. Instead, information sources that publish aggregated, raw financial data rely significantly on the presumed accuracy and completeness of numbers that a software program can easily pull from self-reported charity tax forms. In many cases, such data could easily be deemed to be inaccurate or incomplete were it instead analyzed by a competent professional. CharityWatch analysts frequently uncover information in charity audits and tax forms about related party transactions, retirement compensation, potential conflicts of interest, and payments to charity executives that charities are either not required to report, or that they otherwise fail to clearly report, in the compensation fields of their tax forms.
Donors Place Too Much Weight on Low Salaries
Donors must also consider how much weight to reasonably place on charity executive compensation as a factor in their giving decisions since other variables generally have a much greater impact on how efficiently a charity operates on the whole. Knowing that many donors are highly focused on salaries, decision makers at some poorly performing charities take advantage of this narrow view by keeping staff salaries low, instead outsourcing executive management or fundraising personnel to expensive management or professional fundraising companies. In this way, a charity can report certain overhead costs in lump sums on its tax form rather than tying these expenditures to a specific employee as they would do if these same fundraising or management functions were performed by the charity’s staff in-house. Other charities find vehicles through which they can funnel significant compensation to their executives or board members without being required to report it as salary. These may include licensing fees, lease payments, legal fees, investment management fees, or other payments to for-profit companies owned by charity executives.
Donors who are overly impressed with low salaries may be disappointed to learn that charities “F”-rated by CharityWatch tend to report far lower salaries than “A”-rated ones. For example, the recently dissolved National Vietnam Veterans Foundation (NVVF) reported salaries of only $65,000 a piece to its President/Chairman and Treasurer/CFO in 2014. NVVF had been consistently “F”-rated by CharityWatch prior to being permanently shut down in 2016 as part of a settlement with the New York Office of the Attorney General (OAG). The former founder and President, John Thomas Burch, Jr., admitted that NVVF had paid 90% of its donations to its fundraisers. Some of the remaining funds ended up being spent by Burch on his personal expenses and entertainment pursuits, according to the OAG. For example, Burch used NVVF funds to pay for foreign and domestic travel; to frequent night clubs and expensive restaurants; and to lavish gifts on women. Burch also misused NVVF’s discretionary “Emergency Assistance Fund” by making payments to his relatives, friends, and personal acquaintances, while legitimate claims by veterans for emergency assistance grants were denied or limited in dollar amount. Had NVVF’s salary reporting included all forms of compensation to Burch, his total earnings would have far exceeded his $65,000 reported salary.
Rather than believing a particular charity executive’s salary is too high or too low based on its nominal value, appropriate salaries are better determined by considering factors such as special skills needed for the position, relevant education and experience, and the complexity of the charity’s operations. An international aid organization operating across the globe will need to offer a competitive salary to attract a competent professional to run it efficiently and effectively. Whereas, a local cat shelter can likely recruit a competent candidate for comparatively far less. Charities that pay so far below market rate relative to the skills, education, and experience needed for the job can have trouble retaining staff and waste a lot of money by repeatedly recruiting and training new crops of employees, losing valuable institutional knowledge in the process.
Another point of confusion among donors relates to the common misconception that all salaries are considered “overhead” in a charity’s financial reporting, when this is not the case. Think of the time charity employees spend feeding or housing the homeless, performing research or efforts toward disease prevention, providing care to shelter animals, vetting potential scholarship or grant recipients, or administering vaccines to children in the developing world. The salaries related to the portion of time charity employees spend on these and other program activities are reported as program expenses by a charity, not overhead. The pie charts donors view in a charity’s promotional materials reflecting the percentage of its budget it spends on its programs vs. overhead often include significant salary expenses in the program portion, as they should.
Not all Payments are Included in Salary Reporting
Not all of the payments charity founders or executives receive are necessarily included in salary reporting. Girls on the Run International reached an agreement to pay royalties to its founder, Molly Barker, for the right to continue using its name and logo. As reported in an April 2015 article in The Chronicle of Philanthropy, “Ms. Barker…started Girls on the Run as a for-profit business in 1996” and “owned the rights to the organization’s name and logo.” At the time the nonprofit was established in the year 2000, the article continues, the organization was relatively small, teaching athletics and self-esteem to about 1,300 girls across 12 states. But as the organization expended resources to grow its operations significantly, it also grew the value of its name and other trademarks owned by Barker. The 2014 audit of Girls on the Run International states that in its fiscal year 2013, “the Organization acquired various trademarks from its Founder in exchange for a $607,783 note payable and an obligation to make royalty payments to its Founder at 6% of gross revenue received by the Organization [from local affiliate fees]…through December 31, 2033.” In total, the charity estimates total royalty payments to Barker will amount to approximately $1.93 million, according to its 2014 audit.
Some donors may also be surprised to learn that 4% of what they donate to Tiger Missing Link Foundation goes to a limited liability company (LLC) owned by the charity’s founder and Executive Director, Brian Werner, as a “licensing fee.” According to Tiger Link’s fiscal 2015 audit and annual tax filing, Werner is 90% owner of Cat Daddy’s Properties, LLC. Tiger Link paid Werner’s LLC $152,566 in fiscal 2015 as payment for its use of the logos. According to the audit, “The fee is based on total prior year gross revenues of the Organization.” CharityWatch reviewed Tiger Link’s audits for the fiscal years-ended 9/30/2012 through 9/30/2015 and identified no data reflecting the agreement’s effective date, the total amount Werner has received through his LLC under this arrangement thus far, nor an estimate of Tiger Link’s anticipated future licensing fee payments to the LLC under the agreement.
Unlike many nonprofits that hire graphic designers at or below market rate to create logos in exchange for a one-time service fee, Brian Werner instead set up an arrangement in which his LLC is paid by the charity he founded based on how much annual revenue it happens to raise. CharityWatch believes that such an arrangement is not in a charity’s best interest, and is particularly unethical when payments for services are going to a charity executive who has influence over how much gross revenue a charity raises. A charity’s founder should not be allowed to personally benefit from using the charity’s resources to increase the recognition, and therefore the monetary value, of trademarks he (or his company) legally owns, and then receive multiple six-figure payouts from the charity for its continued use of those trademarks. Rather, charities should pay for services rendered based on the market rate for the time spent to complete a necessary design project and should not be obligated to pay ongoing licensing fees for the use of such designs.
Licensing fees are not the only vehicle through which a charity executive can receive payments outside of salary-related compensation. Brian Werner’s LLC, Cat Daddy’s Properties, in which he holds a 90% interest, received $28,490 in rental payments from Tiger Link for a house “used as living quarters for Tiger Creek’s interns,” according to Tiger Link’s fiscal 2015 audit and annual tax filing. Tiger Link also rents “15 acres of land” from another LLC, Decision Points, which Werner co-owns with his former spouse, Terri Werner, who serves as Tiger Link’s Operations Director. Tiger Link’s fiscal 2015 tax filing reports that the rent received by Brian Werner through Tiger Link’s payments to Decision Points was $94,433, and Terri Werner’s portion of the Tiger Link rent payments to Decision Points was $62,959, in addition to her reported salary of $146,117.
Bottom Line on Charity Salaries
A good rule of thumb is that if something seems too good to be true, it probably is. Very few people working full-time in a position of significant responsibility at a charity can afford to work for free or vastly below market rate relative to the requisite skills, education, and experience necessary for the job. Do not assume that an executive’s reported salary represents all payments he or she receives from the charity that employs them, or that the raw salary data published online is accurate or complete. High or low salaries are not intrinsically good or bad. Consider how efficiently and effectively a charity operates on the whole when considering whether or not the salaries paid to its officers and other employees are justified.