CEO Pay Grew Last Year, but a Slowdown Expected

Compensation rose by a median of 7% in 2008; many leaders take salary cuts, Chronicle study finds

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The steady rise in compensation that charity and foundation executives enjoyed for more than a decade may have hit a plateau.

In the 17 years that The Chronicle has tallied salary increases for leaders of the nation's biggest nonprofit organizations, compensation for chief executives at charities and foundations has kept up with inflation, and in many years their raises have left the inflation rate in the dust.

For example, in this year's survey, which measures compensation earned in 2008, chief executives at the nation's biggest charities and foundations saw a median change in pay of 7 percent, meaning that half got bigger raises and half got small ones or experienced a drop. Inflation during that time was virtually nonexistent.

The large increase in compensation for nonprofit leaders in 2008 is especially noteworthy considering the sharp drop in pay earned by for-profit executives. A survey conducted for The New York Times by Equilar, a San Mateo, Calif., company that studies executive pay in the for-profit world, found that total compensation dropped by a median of 9 percent in the 2008 fiscal year for executives at the 200 largest companies. But one of the factors that fueled the long-term climb in compensation for nonprofit executives — the increasing reliance by boards on salary surveys produced by compensation experts — may serve to curb raises in 2009 and future years.

Some executives are enduring pay cuts this year as charities reduce costs to cope with one of the most challenging economic environments in decades. Several leaders are taking bigger pay cuts than their lower-level employees, in part to show to their staffs and donors that sacrifices begin at the top.

Some 57 charities and foundations — 29 percent of the 195 groups that responded to the question — told The Chronicle that their top executive had taken a pay cut this year due to the recession, declined raises or bonuses, or had his or her pay frozen. The median pay cut was 10 percent.

Given the severity of the downturn, it is surprising that two-thirds of the organizations are not reducing pay for their top executive.

Ken Berger, president of Charity Navigator, a watchdog group in Mahwah, N.J., says explanations for the relative scarcity of cuts could include boards fearing that a pay cut would cause an executive to leave for another job, or selfishness by the chief executives, who typically get first crack at drawing up cost-cutting plans. Charities also may be turning a blind eye to the economy's troubles.

"A lot of people still haven't faced the fact that we're going over a cliff," Mr. Berger says. "This economic situation we're in is not over yet. People are hoping that things are going to turn around and it won't be necessary to be draconian in that way."

Mr. Berger is among the chief executives in the survey who have not taken a pay cut, although his $140,000 salary has remained flat in his 16 months on the job, and his workload has increased this year with the elimination of the charity's chief-operating-officer position.

At least two of the six most richly paid charity executives — Glenn D. Lowry, director of the Museum of Modern Art, in New York, and Peter Gelb, general manager of the Metropolitan Opera Association, in New York — are taking a pay cut this year (the remaining four did not respond to the pay cut question).

Officials at their organizations say Mr. Lowry's pay will drop by 15 percent (he made $2,111,882 in 2008, including nearly $1-million in deferred compensation and bonuses that he had earned in prior years) and that Mr. Gelb's pay will drop by 10 percent (he made $1,045,465).

The survey's biggest earner, James J. Mongan, chief executive at Partners HealthCare System, in Boston, was paid $2,729,076 in compensation in 2008, of which nearly $1.3-million was deferred compensation.

Compensation experts say that if a charity is cutting pay at all, it should cut most deeply at the top. Not doing so may hurt morale, says Brian H. Vogel, a principal of Quatt Associates, a Washington company that advises nonprofit groups and other employers on compensation.

"It sends a message that the people who lead the organization and receive the largest compensation are going to shoulder more than their share," Mr. Vogel says. "You're doing it most importantly for your internal stakeholders but also for your donors. It shows everyone who cares about your organization that there's an overall atmosphere favoring pay restraint."

In many cases, charity and foundation leaders are voluntarily reducing their pay. Sandra R. Hernández, chief executive of the San Francisco Foundation, who earned $347,188 in 2008, offered to take a 15 percent pay cut — a greater decline than other executives at the charity endured. The foundation has eliminated 10 percent of its staff through layoffs and by eliminating vacant positions.

Gail J. McGovern, chief executive of the American Red Cross, in Washington, who earned $467,252 in 2008, turned down an incentive-bonus opportunity for 2009 and will not receive a merit raise this year, according to officials at the Red Cross. The national headquarters also suspended merit increases for 2010.

Today's recession-fueled salary cuts could result in lower salaries for nonprofit leaders tomorrow, says David G. Samuels, a lawyer in New York and an expert in nonprofit compensation.

"We may see a lag effect over time," Mr. Samuels says "We could be seeing lower percentage increases in the future based on the belt-tightening that is going on right now."

Yet most executives at the nation's biggest charities continue to be extraordinarily well paid, relative to the staff members who work under them. And in many cases, the cuts are unlikely to sting.

Paula A. Kerger, chief executive of Public Broadcasting Service, in Arlington, Va., earned $534,500 in 2008, 26 percent more than the $424,209 she earned in 2007. Ms. Kerger and other non-union employees are taking 3.9-percent pay cuts for the first six months of the 2009 fiscal year, which began in July. Meanwhile, PBS has reduced its 500-person work force by about 10 percent by laying people off and not filling vacant positions.

Most of the salary increases that show up in this year's survey were approved back in 2007, when the economy was humming and the stock market was still near its peak.

The median compensation for chief executives at the organizations surveyed was $361,538, based on information from 253 groups that provided data for both 2007 and 2008. In 2007 the median compensation was $330,395.

The Chronicle's survey was based on the information of 325 organizations that are among those that raised the most money from private sources in 2008 as well as grant makers that held the most in assets that year.

The median income of the charities that provided data was $164.5-million. The median assets of community foundations in the survey were $902-million. The median assets of the private and operating foundations included among those surveyed were $1.8-billion.

In the nonprofit world, the difference between who gets a raise and who does not often depends on the financial health of the charity. Mr. Vogel says he is seeing far more variation in salary changes than he sees in a typical year — with struggling charities far more likely than financially healthy organizations to institute freezes or pay cuts.

But he also says he is already receiving inquiries from board members who fear that a continuation of pay freezes in 2010 may prove counterproductive if the economy continues to rebound.

"They're really wondering whether they can afford to continue to freeze salaries," Mr. Vogel says. "They are worried about losing people."

David W. Brown, a board member at GuideStar USA, a Williamsburg, Va., nonprofit organization that makes data about charities available to the public, dismisses such concerns. "The risk of losing people is relatively low in this environment," says Mr. Brown, who chairs the board's compensation committee. "Where are they going to go? Who's hiring?"

GuideStar's board has frozen salaries for 2009, and it is unlikely senior executives will receive the bonuses that they earned for 2008 due to continued declines in revenue. (Robert Ottenhoff, the charity's chief executive, earned $323,832 in 2008, including a $55,000 bonus, but that award was for his performance in 2007.) Typically, 2008 bonuses would have been paid in the first quarter of 2009.

GuideStar is affected by declines by financial companies, which had often bought its data in recent years, says Mr. Brown, a consultant in Bedford, N.H., who works with nonprofit organizations. "We're taking the prudent approach," he says.

Public disgust over and resulting government scrutiny of pay packages earned by leaders of failing financial companies may have a spillover effect on nonprofit groups.

Meanwhile, the new 990 informational tax form — which charities are filing with the Internal Revenue Service for the first time this year — requires organizations to make greater disclosures about housing allowances, expense accounts, and other sometimes controversial arrangements.

"We need to be mindful of the fact that the public tolerance for aggressive compensation arrangements is not as strong as it once was," says Michael W. Peregrine, a Chicago lawyer who works with the boards of charities. "A prudent decision would be to say, 'OK, let's take a second look.' The board may want to pull back a little bit."