To celebrate the release of our 2015 Nonprofit Compensation Report (download here), we asked Linda Lampkin from ERI Economic Research Institute to join us on the blog to discuss executive compensation. Welcome, Linda!
To those not well acquainted with nonprofit sector, the occasional headlines decrying the high salaries paid to executives in some charities may indicate that high compensation levels are the norm. However, the actual data on compensation reported by all charities annually on IRS Forms 990 tell a different story.
In 2012, ERI Economic Research Institute looked at the nearly 100,000 charities that reported compensation by size of organization. No one is likely to characterize the averages shown in Table 1 as being very high. However, the salaries do tend to increase as size (measured by annual revenue) increases; the variation in salaries as measured by the SD (standard deviation, a statistical measure of variation from the mean value) also increases with size
Table 1. Charity CEO Salaries by Revenue Range, 2012
To find where these high paid CEOs might work, Table 2 shows the same data by type of organization, and compensation for two groups stands out—Hospitals and Universities. Since hospitals and universities also tend to be large, it is not unexpected that the salaries are higher, but the variations from the average (measured by the SD) are also very high.
Table 2. Charity CEO Salaries by Type of Charity, 2012
These data are from ERI Economic Research Institute’s database of IRS Forms 990—our complete research white paper on salary increases for charity CEOs between 2009 and 2012 and the incidence of highly paid executives is found here.
ERI creates a database of Form 990 information, including revenues and direct cash and total compensation, for use in the Nonprofit Comparables Assessor (CA), software that calculates average competitive compensation levels for the executive jobs reported on the form. Users choose characteristics such as revenue size, type of organization, and geographic location to find the closest comparable organizations. CA is used by regulators (the IRS with multiple licenses and state charity officials), and many large nonprofits, as well as the lawyers, accountants and consultants who serve the nonprofit sector.
The IRS says nonprofits must pay employees “reasonable compensation,” and penalties for paying more include taxes on the employees who receive the “excess” compensation and even the organization managers who approve the payments. In extreme cases, the organization could lose its tax-exempt status. While compensation must be reasonable, the IRS gives few specific guidelines. The stated criterion is that total compensation must be compared with what would be paid for like services by like enterprises under like circumstances.
So where are all those highly paid CEOs in charities? ERI’s research found:
- The highest paid CEOs—defined as those paid more than 2 standard deviations (SDs) above the average salary—are a very small proportion of all charitable organizations.
- Higher than expected compensation was not evenly distributed by type and size of charity.
- Of the total of nearly 100,000 charities reporting compensation in 2012, about 1,200 paid their CEOs more than 2 SDs above the average expected for the size and type of organization.
While high compensation appears to be relatively rare, the occurrence is not evenly distributed when analyzed by type and size of charity. Hospitals, with typically higher compensation, have rates of CEO compensation higher than 2 SDs more than twice of any other group regardless of revenue size. In addition to Hospitals, the categories of Health (excluding Hospitals) and Public/Societal Benefit Organizations also had more CEOs falling outside the 2 SD range than charities as a whole. These findings can be used to focus compliance efforts by the IRS and others interested in ensuring that executive compensation in the nonprofit sector remains reasonable. Read the entire research paper here.
Linda M. Lampkin is Research Director for ERI Economic Research Institute, a compensation analytics firm that compiles job competency, cost-of-living, executive compensation and salary survey data. and is the company’s expert on nonprofit issues. Previously, as director of the National Center for Charitable Statistics at the Urban Institute, she worked with the IRS on the Form 990 revision and improvement of nonprofit reporting, with the goal of developing databases that make 990 data useful to researchers and practitioners. She co-authored the New Nonprofit Almanac and numerous research papers on the nonprofit sector. After a 30-year career as an economist working for various nonprofits and labor unions, she joined ERI ten years ago. She holds two degrees from Cornell University, in Economics and Labor Economics.