Opinion: Why Charity Leaders Should Pay Close Attention to Obama's Pay Guidelines

February 06, 2009

Opinion: Why Charity Leaders Should Pay Close Attention to Obama's Pay Guidelines

By Ralph De Jong and Michael Peregrine

President Obama’s announcement this week that he plans to limit executive pay and perks at financial companies seeking federal bailout aid should send a message to nonprofit groups’ leaders and their board members.

The White House tapped into a growing public concern about the appropriate levels of compensation for people who benefit in at least some way from direct or indirect government subsidies.

While policy makers have yet to seriously suggest ceilings or other restrictions on compensation for nonprofit groups’ leaders, there is a growing sense that such pay must be based on common sense and an understanding of the country’s economic turmoil. Savvy trustees will get the message and and immediately re-evaluate how their organizations compensate top leaders.

Nonprofit groups’ boards need to both understand the government’s proposed guidelines on compensation for officials of companies receiving federal bailout money and think about perceptions of the standards for executives’ compensation.

Not only would President Obama limit their annual pay to $500,000, but he would also require full disclosure of their employers’ compensation structure and strategy. In addition, the guidelines would prohibit or strictly limit “golden parachutes” and other forms of severance arrangements, and would require boards to adopt policies to ensure that executives henceforth avoid spending lavishly on private jets, office renovations, entertainment, and attendance at certain types of conferences and events.

The guidelines are intended to assure that taxpayers are not in the awkward position of “rewarding” executives of failing organizations. They are not, however, intended to apply to other publicly traded corporations, much less to tax-exempt organizations.

But it is important to note that the president said the guidelines would be part of “long-term effort” to figure out how executive compensation structures have contributed to the current financial mess, and how corporate governance and compensation rules can be changed for the better. From that perspective, the guidelines would open the door to a broader governmental consideration of executive compensation structures and their relationship to tax revenue.

In essence, the federal bailout plan has let the genie out of the bottle by introducing into mainstream discourse topics, such as caps on executive compensation, that were previously considered too extreme to be seriously considered. The age-old lesson, of course, is that once released, the genie can never be put back in.

Given concerns that lawmakers and regulators have raised about whether nonprofit groups are providing enough social benefits to justify their tax-exempt status, it seems logical to think that those authorities will raise new questions about compensation arrangements.

State and federal charity officials are already increasingly willing to scrutinize alleged abuse of charity status in cases involving specific organizations.

Such concerns are likely to be exacerbated by a report soon to be released by Internal Revenue Service summing up its extensive investigation of nonprofit hospitals. The report is expected to point to high levels of executive compensation and a wide disparity in how much hospitals do to serve their communities and provide charity care.

Concerns about abuse in the nonprofit world have also led some government officials to suggest that charity groups must adhere to stricter governance standards and perhaps compensation guidelines, as a precondition for federal tax subsidies.

It is thus conceivable that the federal financial-bailout guidelines may signal a new, populist-themed regulatory era for organizations—whether publicly traded or tax-exempt—that rely on government money in one form or another. In response, nonprofit groups’ boards and their compensation committees will want to increase their emphasis on the exercise of sound, common-sense business judgment consistent with the general economic environment.

Specifically, compensation committees will want to take steps to assure:

The independence of both the compensation consultant and committee members.

The “apples-to-apples” nature of data used to compare pay levels at other organizations and recommend salary ranges and benefits for executives.

Ways to reduce reliance on compensation data from for-profit companies in producing recommended salary ranges based on comparative data.

The appropriateness of the organization’s benchmarking for each element of compensation, not just salary.

The nature and rigor of the performance goals established for incentive compensation.

The use of “clawback” provisions that allow the nonprofit organization to recover bonuses and other types of incentive pay in the event financial results must be restated.

Limitations on the terms and length of severance benefits.

The ease with which outsiders can understand the compensation structure and the review-and-approval process.

Reasonable controls on executive and board travel and on education and entertainment expenditures.

Whether pay levels throughout the organization have been reviewed for internal equities.

While it’s important to pay attention to compensation policies and practices, it is also vital for charity leaders not to overreact. Government-enforced compensation restrictions for the nonprofit world are not inevitable.

But it is up to nonprofit groups themselves to set their compensation so fairly and publicy that policy makers will not be tempted to consider limiting them. It is not just to avoid new regulation that boards must act, but to maintain the trust of of the American public.

Ralph De Jong and Michael Peregrine are lawyers at McDermott Will & Emery, a law firm in Chicago. They specialize in advising nonprofit organizations.

Comments

The revised Form 990 asks for details of the executive compensation process no matter the income, plus a listing of key employees making $100,000+, so I’d say nonprofits are already included in the transparency effort. Public opinion may make forced compensation limits inevitable.

— Donna Gregory Feb 6, 03:17 PM #
You have got to be kidding me! This is just one step closer to Obama’s marxist state. If he can control what people are making at the top level, just wait until he starts to control what we are all making. Very, very frightening!

— Bridget Feb 6, 03:30 PM #
The government shouldn’t be in the business of setting salary and bonus limits for any company or nonprofit — and the bailout money should have been tied to companies’ strategic plans, goals, and meeting certain benchmarks. Top executives of firms that have failed and are receiving bailout money should be fired or demoted. I wish I could fail and still earn $500K. Board members should be replaced as well.

Let the consumer dictate executive compensation, both for the for-profit and nonprofit. Annual reports, and public documents such as 990s should more clearly state the salaries, bonuses, and other perks of CEOs, Executive Directors, and other top executives. Consumers need to do better research before they give, invest, and purchase.

I am sure that there are charities that will feel the pinch from some of their larger donors that lead these failed companies. Those that made millions of dollars a year and are now limited to a half-mil will likely reduce their giving.

— Kevin Feldman Feb 6, 03:34 PM #
If you don’t like the restrictions, don’t take the money. There should be restrictions on corporate charitable contributions, too, with the public’s money.

— The Untied Way Feb 6, 03:36 PM #
Executive compensation, especially in the range of $300,000 and up, for multiple executives at the same nonprofit, should raise eyebrows—particularly when the nonprofit makes massive layoffs but only for lower-level staff.

— Jake Philips Feb 6, 03:37 PM #
I have a problem with these restrictions. It is setting up a bad precedent.

— Not cool Feb 6, 03:46 PM #
Salaries of top non-profit executives are already disclosed. If donors do not like what a non-profit CEO makes, they have a choice not to donate to that particular non-profit. If I don’t like what the CEO of GM is making, I’m not going to buy that kind of car. Let’s let supply and demand drive the market and let’s let these banks and other companies go under. Furthermore, if we are going to cap salaries, then we had better do that in major league sports, also.

— Allen Feb 6, 04:18 PM #
This is the definition of the slippery slope. Get ready for govt imposed restrictions on any nonprofit that receives public funding in any of its various forms. It’s already begun in Vermont where there’s a move afoot to force anyone making a whopping $60k or more at NPOs that receive most of their funding from the state to take a mandatory pay cut. Under a perverse banner of fairness, the government is going to decide how much each of our jobs is worth. Heaven help us.

— Brisket Boy Feb 6, 08:12 PM #
I am with Jake – executive compensation, especially in the range of $300,000 and up, should raise eyebrows. What are boards thinking?

— Mary Feb 6, 08:16 PM #
Do #s 2&3 understand what a bailout is—it’s nothing to do with socialism or Marxism. That’s rather alarmist. If a company is getting federal bailout money, it has to rightly abide by guidelines—however, tight they may seem. You were the same ones crying out, “Where’s all the first bailout going>” under the Bush admnistration. Where is Lee Iacocca when we need him?

— Dee, Rochester, NY Feb 6, 08:35 PM #
Keep the government out of charity and of business. My work in Scandinavia and Russia cry out for independence.

— Gary Sweeten Feb 7, 08:19 PM #

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