Is A One Million Dollar Nonprofit CEO Salary As Bad As It Sounds?

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Your hard-earned money may be going toward a CEO's multi-million dollar pay package. If you donate to the American Cancer Society, The Museum of Fine Arts Houston, or one of at least 18 others that the Chronicle of Philanthropy reported as having CEOs making one million dollars or more, then that's exactly what you're doing.

It's easy to argue that this is outrageous, but is it really? As you might imagine, there are two very different perspectives on this issue.

That's Too Much for a Nonprofit CEO
It is not just a general sentiment. Lawmakers in numerous states including New York, New Jersey, Florida and Massachusetts have tried to introduce legislation that would cap executive salaries at nonprofit organizations that receive public funding. Florida wanted a cap of $129,972, while Massachusetts sought to cap executive pay at $500,000.

So far, all of these bills have failed to gain legislative approval, though the battle is not over. According to New York Governor, Andrew Cuomo, "These regulations will allow the state government to identify and stop the few providers that pocket taxpayer dollars rather than use them to serve the public."

The opinions of these lawmakers echo those of many people. If you are going to work at a nonprofit, you should have as your primary motivation the public good. It is reasonable to think that you would accept less compensation in order to move more money into the hands of those who need it.

According to Bloomberg, CEOs of the largest U.S. foundations and charities received $429,512 on average. That's a median pay increase of 3.8% in 2011. Other, smaller nonprofits gave their executives a pay raise of 2.7% according to the article (based on 2010 required tax filings).

It's Time to Change Our Thinking
Others would argue that most nonprofits do pay less than for-profit businesses. The Case Foundation reports that nonprofits generally pay less for qualified talent. In addition, a stigma remains that if you work for a nonprofit your retirement benefits, training, and a strong corporate culture will be virtually non-existent.

They also argue that highly paid CEOs are the exception rather than the rule. In a Charity Navigator study, only six out of the 3,786 nonprofits studied paid their highest executives more than $1 million and 65 received between $500,000 and $1 million.

What is most important, however, is what Dan Pallotta, author of "Charity Case" and "Uncharitable," identifies as a double standard. He argues that in the for-profit sector those who can afford it know that paying a premium for top talent often translates to more revenue. He goes on to say that in the nonprofit sector, the public frowns on hiring leaders who expect a higher compensation package.

Pallotta challenges the idea that when a person donates to a charity the money goes directly to the CEO and is never used for its intended purpose. Pallotta argues that a highly effective CEO will multiply that investment through effective and efficient management and systems that will increase the money raised. In other words, just as in a for-profit business, if paying more produces better execution of the goal, the higher salary produces greater value.

The Bottom Line
Whether or not it is irresponsible to have CEOs of nonprofits earning $1 million a year or more may not be an easy question to answer. On one hand, the public believes that seven-figure salaries are too high. For an organization that relies on donations, perception may truly be reality. On the other hand, very few decisions can be accurately made based on one metric alone. CEO compensation is only one data point. If a high salary results in higher revenue for the organization, it may be money well spent.

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