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From the issue dated September 30, 2004
Executive Pay Rises Modestly
Trend could continue as IRS increases scrutinyBy Ben Gose
Salaries paid to the leaders of the nation's largest nonprofit organizations in 2003 rose at their smallest rate on
The median salary of the 215 chief executives whose organizations provided The Chronicle with information both last year and this year reached $291,356. That means half the executives in the survey earned more than that figure and half earned less.
The median salary for executives at 52 community, operating, and private foundations rose 4 percent, to $307,765. At the 163 charities surveyed, the pay of top executives grew by 3.6 percent, to a median of $286,402.
The Chronicle's survey is based on information provided by organizations that raised the most money from private sources in 2002. Also included were the 50 wealthiest private foundations, the 20 largest operating foundations, and the 15 richest community foundations.
For the sixth straight year, nonprofit executives received higher percentage raises than their counterparts in the for-profit world, but the gap has nearly disappeared in the past two years. Salaries for corporate executives rose 3.6 percent in 2003, according to a survey by WorldatWork, a company in Scottsdale, Ariz., that conducts research on compensation.
Salaries Under Review
Some compensation experts believe salary increases for nonprofit officials could become more modest -- or far more rare -- in the next few years, due to increasing scrutiny of what nonprofit executives earn. This summer, the Senate Finance Committee held hearings to investigate abuses at charities and foundations, including excessive compensation. Meanwhile, the Internal Revenue Service has announced that it plans to contact 2,000 nonprofit groups as part of an effort to crack down on groups paying excessive salaries or benefits to top executives.
Against that backdrop, charity and foundation boards are taking a much harder look at what constitutes reasonable compensation, some experts say. "We'll see more of a flattening, or possibly even a decrease, especially on the foundation side," says Sally Sterling, a consultant in Spencer Stuart's Washington office who works with many nonprofit clients to recruit executives. "The tide is just beginning on that."
Ms. Sterling says that salaries at some types of nonprofit groups, including arts organizations and nonprofit hospitals, are still being driven higher because a relatively small number of candidates are qualified for those jobs. "There's a diminishing talent pool," she says. "It's becoming harder and harder to find established nonprofit leaders with a good track record."
Biggest Earners
The five highest-paid chief executives in The Chronicle's survey all work at hospitals. The list is led by Harold Varmus, president of the Memorial Sloan-Kettering Cancer Center, in New York. Mr. Varmus earned $1,693,710 in 2003.
Mr. Varmus is followed by Floyd D. Loop, chief executive officer of the Cleveland Clinic Foundation, $1,682,829; Herbert Pardes, CEO of New York-Presbyterian Hospital, $1,260,348; Peter G. Traber, president of the Baylor College of Medicine, $1,230,769; and James Mandell, chief executive officer of Children's Hospital in Boston, $823,680.
The relatively high pay for hospital executives, who have long dominated the top spots in The Chronicle's list, is coming under attack this year by those who believe nonprofit hospitals aren't doing enough to serve the public good.
The Cleveland Clinic and New York-Presbyterian, along with 45 other hospitals, are being sued in a series of class actions coordinated by Richard Scruggs, an Oxford, Miss., lawyer. The lawsuits allege that the institutions charged patients with little or no health-insurance coverage at higher rates than wealthier patients, and then aggressively tried to collect bills from the low-income patients. The lawsuits claim that the hospitals have abandoned their nonprofit mission, which includes providing charity care.
"Is it appropriate that a hospital administrator earns such a huge income when in fact the hospital is not fulfilling its mission to the uninsured, and has engaged in years and years of aggressive, almost goonlike collection tactics that have put a number of uninsured patients into personal bankruptcy?" asks Robert Siegfried, a spokesman for Mr. Scruggs.
Michael P. O'Boyle, chief financial officer at the Cleveland Clinic, calls the lawsuits "totally meritless." He notes that Dr. Loop was an accomplished cardiothoracic surgeon before becoming CEO, that he has been with the clinic for more than 30 years, and that he oversees an operation with 12 hospitals, 14 family-health centers, 1,500 physicians and scientists, and more $4-billion in annual revenue.
What's more, says Mr. O'Boyle, Dr. Loop and other Cleveland Clinic senior executives are paid a fixed salary, with no bonuses. "We don't have the potentially conflicting incentives that go with driving toward a specific income level or a specific performance level," Mr. O'Boyle says. "People here are focused on the mission."
Also on the list of the 10 highest-earning nonprofit leaders are Joseph Volpe, president of the Metropolitan Opera Association; two university leaders, Gordon Gee of Vanderbilt University, and John E. Sexton of New York University; and Michael Kaiser, president of the John F. Kennedy Center for the Performing Arts, in Washington. Each made more than $700,000, not including benefits. The top-earning foundation executive, Thomas M. Lofton of the Lilly Endowment, in Indianapolis, claimed the 10th spot overall with a salary of $678,125.
Charity's Changing Face
While some people think salaries at nonprofit organizations that approach or exceed seven figures are inappropriate, others see that compensation as a wise business practice.
"Charity is not what it used to be, some little mom-and-pop organization," says Sheldon S. Cohen, a former IRS commissioner who is now a lawyer in Washington. "Major universities and hospitals have over a billion dollars running through them, and it would be better to pay someone a few extra hundred thousand dollars and get someone who is really top of the line, rather than saving that money and getting somebody who's not qualified to run the place."
Key findings from the survey suggest that many groups are willing to open their wallets to obtain the right people to play leading roles:
- At 51 organizations, an employee other than the chief executive was the highest paid. Leonard Slatkin, music director of the National Symphony Orchestra, earned $1,117, 608, compared with the $728,182 earned by Mr. Kaiser of the Kennedy Center, which houses the symphony. Mike Krzyzewski, head men's basketball coach at Duke University, earned $800,000, while the university's former president, Nannerl O. Keohane, made $485,000. And David Williams, chief operating officer at Habitat for Humanity, in Americus, Ga., received $106,043, while the charity's president, Millard Fuller, earned $79,500.
- Eighteen high-level nonprofit employees made more than $1-million, led by James Grifo, a professor of obstetrics and gynecology at New York University, who made $2,747,904. Only the four chief executives of hospitals made more than $1-million.
- At 49 organizations, the chief executive made more than $100,000 in fringe benefits. James J. Mongan, chief executive officer of Partners HealthCare System, made $776,014 in benefits, including $150,000 in deferred compensation, insurance worth $350,000, and a $240,745 retirement-plan contribution. That benefits package exceeded his regular salary, which totaled $537,500 for his first nine months of work as CEO.
- Signing bonuses are substantial at some nonprofit institutions. Baylor College of Medicine paid a $1-million bonus to its new president, Dr. Traber, which would have placed him at the top of the list for CEO compensation if he had worked a full year, rather than just four months, at his annualized salary of $800,000. James Williams, chief investment officer at J. Paul Getty Trust, in Los Angeles, received $750,000 as an inducement to join the operating foundation.
- Four nonprofit leaders took no salary at all, including Patricia Stonesifer, president of the Bill & Melinda Gates Foundation; David W. Packard, president of the Packard Humanities Institute; and Curtis Priem, president of the Priem Family Foundation. The fourth unpaid CEO is Donald P. Hodel, president of Focus on the Family, who continues a tradition established by the charity's founder, James Dobson. Mr. Dobson did not accept a salary during his 27 years as president. The AmeriCares Foundation lost its unpaid CEO in early 2002, when its founder, Robert C. Macauley, retired. AmeriCares replaced him with Curt R. Welling, at an annual salary of $275,000.
Share of Income
The percentage of a charity's income earmarked for a top executive varied widely among different types of organizations. The median for the 193 public charities in the survey is 0.21 percent. International, religious, and youth organizations were on the low end of the scale: All three types of groups spent a median of less than 0.13 percent of their annual incomes on compensation for their top leaders.
Groups that gave the highest percentage of their income to their top executives included public-affairs organizations (a median of 1.21 percent), Jewish federations (0.65 percent), and arts organizations (0.55 percent). Two conservative think tanks in Washington, the Heritage Foundation and the American Enterprise Institute for Public Policy Research, are among the top five in the survey in the percentage of income spent on the chief executive's salary.
Edwin J. Feulner Jr., president of the Heritage Foundation, earned $540,776 in 2003, which consumed about 1.7 percent of the charity's $31.5-million of income. Mr. Feulner has received bonuses exceeding $200,000 in each of the past seven years -- a compensation structure that Ted Schelenski, Heritage's vice president of finance and administration, attributes to the organization's desire to "operate as much like a business as possible."
When setting up Mr. Feulner's compensation, the Heritage board does not consider what percentage of its income goes to his pay, Mr. Schelenski says. Instead, the board looks at what similar organizations -- both nonprofit and for-profit -- in the Washington metropolitan area are giving their own leaders, and the extent to which the think tank is meeting its goal of setting the agenda for the conservative movement. "The board's goal is to keep his salary competitive because Heritage has been a very successful organization," Mr. Schelenski says.
Victoria B. Bjorklund, a New York lawyer who also serves on an advisory committee for the IRS Exempt Organizations division, says salary comparisons are a valid way to identify potential abuses, but that such tools should only be the beginning of any analysis to determine what pay is out of line with others who do similar work. "You have to look at compensation almost on a case-by-case basis," she says, "and say, 'Why is this person an outlier?'
"Is the person an outlier because he's choosing to overcompensate himself, and the board is asleep?" she says. "You have to see who the person is, what their skill set is, and what they bring to the organization. I've personally seen cases where a specific person has transformed an institution and that person is worth every penny that the institution pays them."
United Way Pay
Among charities, the nation's United Ways are roughly in the middle of the pack for percentage of income going to the top executive (0.39 percent). Donations to the nation's 1,400 United Ways have dropped for two straight years, and some United Way leaders are enduring salary cuts.
Two United Way chief executives in the survey -- Douglas Warns, president of United Way of Tri-State (New York) and James Colville, CEO of the Greater Twin Cities United Way (Minneapolis) -- earned less in 2003 than in 2002. Mr. Warns's salary declined because a one-time merit increase in 2002 wasn't included in his base salary in 2003. Officials at the Greater Twin Cities United Way offered no explanation for Mr. Colville's drop. Both executives have left their organizations.
Foundation Compensation
The 33 heads of private foundations who were on the job for the full fiscal year earned the highest median pay in the Chronicle survey, $425,000. Eleven of the 33 earned more than $500,000.
Rick Cohen, executive director of the National Committee for Responsive Philanthropy, a watchdog group in Washington, says the boards at private foundations need to be aware that high compensation for a chief executive can alienate charities -- the very groups the foundations are set up to support.
"The depth of the sense among charities that they're getting the short end of the stick is increasing, not decreasing," Mr. Cohen says. "Trustees in particular have to be aware of the message that they send when they're paying an increasing salary -- not just $300,000 but four, five, or $600,000 -- when for many organizations out there, that's not a salary, that's a budget."
Jon Aikman, Leah Kerkman, and Cassie J. Moore contributed to this article.
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