Bonuses For Performance And Longevity Boost Exec Pay

December 1, 2011       Mark Hrywna      

Maybe Willie Nelson and Waylon Jennings were on to something in their hit song, Mammas Don’t Let Your Babies Grow Up to Be Cowboys, suggesting they instead grow up to be “doctors and lawyers and such.”

To be sure, there aren’t likely many cowboys among the chief executives of organizations within the NPT 100, but doctors and lawyers are among the highest-paid leaders. The singing duo might also have added leaders of arts and cultural institutions. The NPT 100 is the listing of the nation’s largest nonprofits and is reported in the November issue of The NonProfit Times.

The compensation is still a far cry from the $13 million that Léo Apotheker got for his 11 months as CEO of Hewlett-Packard, but it ain’t bad. Some 15 organizations in this year’s NPT 100 paid the chief executive total compensation of at least $1 million. Six of the top 10 executives led arts and cultural organizations. That doesn’t mean they were the only ones who got seven figures during Fiscal Year 2010. At least three executives at New York’s Metropolitan Museum of Art earned total compensation of more than $1 million, which was more than Director and CEO Thomas Campbell, who earned $929,735.

Of the NPT 100 organizations, only one executive (almost two) earned base compensation of more than $1 million. Peter Gelb, general manager of the Metropolitan Opera Association in New York City, earned $1,219,809. Gelb’s total compensation of $1,330,025 ranked him third among NPT 100 executives.

Michael Kaiser, president of the JFK Center for Performing Arts in Washington, D.C., had base compensation of $997,884 and a total of $1,181,291.

Total compensation, recorded on Schedule J of the Internal Revenue Service (IRS) Form 990, is comprised of a base compensation, incentive/bonus compensation, nontaxable compensation and what has had a big effect on the highest-paid executives in this group: retirement or deferred compensation.

Deferred compensation or other compensation often boosts an executive’s salary considerably as a result of retention bonuses or supplemental retirement plans. In several cases, those categories were more than the base compensation.

Topping the list was John Seffrin, president and CEO of the American Cancer Society (ACS) in Atlanta, Ga. He earned $2.2 million for fiscal 2010, the majority of it categorized as “other.” As part of its Form 990, ACS explained the $1.6 million of “other reportable compensation” to Seffrin: “In 2001, the volunteer members of the compensation committee of the National Board of Directors approved a supplemental SERP agreement to preserve management stability, establish a foundation for succession planning, and in acknowledgement of environmental market factors identified by external independent compensation consultants. The terms of that agreement were met and value of the agreement was paid in return.” Seffrin is like several NPT 100 executives in that he’s paid by one organization, ACS, as well as a related organization, in his case the American Cancer Society Cancer Action Network (ACS CAN), ACS’ 501(c)(4) organization focused on advocacy. Of Seffrin’s total $2.2 million, approximately $200,000 was for his work as an officer of ACS CAN.

There are a lot of people who are coming over from the for-profit world where a performance incentive is just a way of life, according to Heather Eddy, president and chief operating officer of The Alford Group Executive Search, a subsidiary of The Alford Group in Evanston, Ill. “As they’re getting to know the nonprofit sector, they’re just asking for it, because that’s what they’re used to,” Eddy said. “It’s a new issue that boards are going to have to face, and really look at what’s the liability for that,” she said.

A 10-year retention plan is a positive because an organization has “that stability and leadership, but it can be very expensive if it doesn’t work out,” Eddy said. Boards are curious about how retention bonuses might fit in at their organizations and what liability might be placed upon them, Eddy said.

American Red Cross (ARC) CEO Gail McGovern has a base compensation of $500,000 that hasn’t increased since she was hired in April 2008, yet she earned a total $1,032,022 in Fiscal Year End 2010. The organization includes several notes explaining the salary structure on its Form 990. Of the $1 million, $476,912 was listed as “other” and included a one-time reimbursement to cover relocation costs — consistent with standard ARC policy for executives — from Boston to Washington, D.C.

The ARC also noted in its Form 990, filed in February of this year, that McGovern has personally given $175,000 to the organization since becoming CEO and chose to “forgo a performance bonus for 2009, as she did the year before, (a two-year total of about $250,000) even though she met and exceeded performance measures, including turning a $209-million operating deficit into a modest surplus.”

Total compensation often involves executive benefits, including those that are required by the nonprofit’s board. About a quarter of Wildlife Conservation Society President and CEO Steven Sanderson’s $1 million compensation includes the fair market rental value of housing and related tax payments for the WCS-owned, centrally-located New York apartment in which he’s required to live. Likewise, Glenn Lowery, director and CEO of the Museum of Modern Art, is required to live in an apartment in the museum’s tower, located in midtown Manhattan.

The JFK Center’s Form 990 noted that the center renegotiated and extended Kaiser’s contract through 2014, the terms of which make him no longer eligible to receive an annual bonus.

Kaiser and Lincoln Center’s Reynold Levy are regarded among the top leaders and fundraisers in the industry, both releasing books in recent years regarding fundraising and management. Kaiser has taught at New York University, started an arts management institute at the Kennedy Center and is credited with turning around several arts organizations, including the Alvin Ailey American Dance Theater and London’s Royal Opera House.

Had Memorial Sloan-Kettering Cancer Center made this year’s NPT 100, its president and CEO, Dr. Harold Varmus, easily would have topped all other executives in compensation, with $4.4 million on a base of $1.079 million. The New York City-based hospital was in last year’s report, however, it did not raise at least 10 percent of its total revenue from public support during 2010, a criteria for inclusion in the NPT 100.

In the case of Special Olympics, its President and Chief Operating Officer J. Brady Lum is paid by long-time sponsor Coca-Cola but is technically an employee of the charity. The Form 990 for Special Olympics’ national office in Atlanta, Ga., does not list a salary for Lum, only noting he is paid by Coca-Cola.

A combined salary and benefits of $233,333 is a best guess based on industry standards and booked as value in-kind on financial statements, according to Keith Lyon, director of budgeting and financial reporting for Special Olympics.

Despite the six- and seven-figure salaries, there’s been more than 10 percent turnover in the C-suite of NPT 100 organizations during the past year or two, with at least a dozen chief executives leaving their posts. “It’s incredibly hard to lead an organization these days,” said Eddy. It could also be that what an organization needs to transform itself might not be a skill set in the current person, she added. She pointed to the recent Daring to Lead study by CompassPoint Nonprofit Services in San Francisco, Calif., and the Meyer Foundation in Washington, D.C., which indicated that more than two-thirds of nonprofit chief executives expect to leave their jobs within the next five years.

In most instances, it’s the executive who initiates the turnover, Eddy said, but about a quarter of the time the board starts discussions, or at least talking about how to initiate those discussions.

Eddy said she’s encountering boards with the mistaken notion of not expecting to pay a successor the same as the previous CEO because they haven’t been at the organization. “I say, why not, you don’t want to go backward, you want to go forward,” Eddy said. Boards are aiming to “recalibrate” the CEO’s salary, but the pool of executives is at or greater than where the person vacating position was, Eddy said.

States are getting into the act of trying to tie nonprofit CEO compensation to public funding. “That’s one of the challenges organizations will be facing in the future, what to do with compensation if the governmental agencies start using that to penalize charities in funding,” said Daniel Romano, national partner-in-charge-tax, not-for-profit & higher education practices at accounting and counseling firm Grant Thornton LLP.

“It’s a new world, but what’s unfair to charities is they need to operate like a business, and the nonprofit industry is huge. So if you’re not going to allow people to earn what they can earn in the for-profit world, I don’t know what that says to the nonprofit industry. You’re not going to be able to encourage people to take those jobs, now how are you going to run those entities,” he asked rhetorically.

Nonprofits are starting to focus more on articulating program benefits and how they benefit society, given the new Form 990 and the IRS’s focus on community benefit, Romano said. Not only on the new return but on the Web sites, nonprofits are relaying information to the public. “That started with the hospital industry and organizations now realize there’s a vital need to show their worth,” he said.

“Executives know this is a challenging market, they know what it’s like to work in difficult financial times and working with boards these days, and they’re not willing to take less than the last person and they come prepared,” Eddy said. Salary is probably one of top three questions with her applicants, who also ask about boards and whether their programs and policies are up to date and whether they’re easy to work with.

“Candidates are expecting and wanting to work with high-performing top-notch boards. If it’s a difficult board, or fractured, that does cause candidates to take pause. As much as they might want a position, they don’t want to spend 80 percent of their time dealing, working with board issues.”

Eddy expects CEO turnover to be an issue for the next decade, at least, as the workforce ages, among other reasons. “Boards really need to be on top of it,” she said. NPT

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