Getting Paid — Part II

As I said in my last post, a nonprofit CEO has a challenging job. CEOs need to receive fair compensation. But there are limits.

The greatest challenge for CEOs is balancing external forces with internal needs. If a private school overestimates how many tuition-paying students will enroll, or if a theater consistently guesses wrong on ticket sales, or if an agency bases its plans on grants that don’t materialize, then the organization will not survive. Getting that income-expense balance right – and interpreting and managing the many forces, internally and externally, that makes it all work – is central to the success, and value, of a good CEO. But the CEO is not a god. In fact, the single most important thing a CEO can do is hire and motivate a good, smart, hard-working staff. And if there’s one way to undermine a good staff, it’s to grossly overpay and praise the CEO while taking the staff for granted.

Nowhere are CEO salary levels more unjustified than in the parallel universe of private foundations. Running a private foundation is, frankly, a relatively simple job. Prestigious and high-profile, certainly, and, given the grantmaking power, very important, but simple. And that’s because a foundation already has its money.

Most private foundations invest their endowment in perpetuity, and the return on those investments provides money for grants, as well as for the operations of the foundation itself. True, if the market returns are poor, that reduces both the amount that can be distributed and the amount available to run the foundation. But that’s a relatively easy problem to manage. It’s a closed loop. A foundation already has its money. There’s no need to compete in the marketplace for clients or contributions. Nor is there any need to worry about public relations, because good or bad publicity makes no actual difference in the operation of a private foundation. (This doesn’t stop foundations from seeking credit for their grants – but it fundamentally doesn’t matter whether a foundation is well regarded.) Certainly there’s work involved in making good grants. But there are no real consequences to the foundation for making bad ones. The foundation goes on and on either way.

And yet presidents of major private foundations get paid well – very well. The median salary at private foundations with assets of $500 million or more is $466,500, according to the Chronicle of Philanthropy. (A reminder: median means that half of the salaries are higher than that. Some, much higher.) This strikes me as a lot of money for a job that does not in any real way require interpreting and interacting with forces external to the organization. (Yes, a foundation interacts with grantees. But the grantees are dependent on the foundation, not the reverse. And yes, a foundation needs to invest its assets, but the CEO is hardly the one picking the stocks — that’s all farmed out to investments managers.) Running a private foundation is, in its basic structure, a safe and easy job. It’s not like running a private sector business or an operating nonprofit. It doesn’t have to gauge the demand for goods or services. It doesn’t have to convince others to buy its products or give it grants or donations. The foundation already has the money it needs to operate. It’s basically foolproof.

And, yes, this is another case of my questioning the efficiency and effectiveness of the perpetual foundation model.

Creating a perpetual charitable foundation is inherently an ineffective way to solve issues, because only a sliver of the value of the foundation goes out in grants each year. This small pay-out is reduced over time by the expense of running the foundation itself, which cuts into what would be available for grants. And that expense is made all the worse when the CEO is overpaid.

Copyright Alan Cantor 2012. All rights reserved.

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