Income Inequality: The Nonprofit Edition

Who here is old enough to remember the William Aramony scandal?

In 1991, Aramony, the head of what was then called United Way of America, was found to be having a series of affairs, culminating with a long-term liaison with a girl who was 17 years old (Aramony was 59) when they met. Moreover, Aramony traveled with her in style (four-star hotels, the Concorde to Europe, nights in a specially-purchased luxury condo in New York City), all on United Way’s dime. And this was on top of what was discovered to be a lavish $390,000 annual salary.

Aramony became the poster child for abusing the trust people place in charity. The scandal damaged the independent local United Ways, which were tarred by association, even though they had only a tangential connection to Aramony and his shenanigans. In fact, the scandal impugned the reputation of the entire nonprofit sector. And the United Way of America’s board of governors was roundly seen as equal parts negligent and clueless, and so extremely wealthy that they didn’t realize that paying the CEO of any charity that kind of money was utterly inappropriate. While Aramony’s travel style and sexual peccadillos clearly attracted attention, people were stunned enough by his salary alone that they raised their eyebrows and voices.

Flash forward a couple of decades. Aramony’s 1991 salary of $390,000, if adjusted for inflation, would equate to $667,000 in 2012. So it’s worth noting that the current CEO of United Way Worldwide, Brian Gallagher, earned a cool $1.2 million in 2012 – nearly twice the inflation-adjusted income of Bill Aramony. And it’s also worth noticing that Gallagher’s salary draws zero notice because it’s more or less in line with other executives at major nonprofits. In fact, compared with nonprofit hospital executives, many of whom earn several million dollars a year, it seems downright modest. (If you want to get really revved up about some of the salaries paid to nonprofit CEOs – not to mention university football and basketball coaches – you owe it to yourself to read Ken Stern’s With Charity for All. And I credit Stern with making this point about the growth in salaries since the Aramony scandal.)

From Occupy Wall Street to the latest State of the Union, in the past few years income inequality (and its first cousin, wealth inequality) have become a frequent topic in public discourse. Many people are upset because of the social and economic injustice: a growing number of workers and families are struggling to make ends meet while a tiny percentage of folks at the top are raking in millions. Some people are concerned because of the strain a weakened middle class and working class can place on the economy: if the masses can’t afford to buy products and services, they warn, economic activity will grind to a halt. And, of course, there are some people who think that income inequality is simply the market doing what the market does, and that to wring our hands and try to redistribute the wealth is counterproductive and socialistic.

Whatever your viewpoint, the inequalities that characterize the larger for-profit world have become an increasingly prominent fact of life in the nonprofit sector. At the hospital where the CEO is earning $2.5 million, it’s highly doubtful that the orderlies, nurses, technicians, and cafeteria workers are getting rich. In fact, they are likely to be facing staff reductions, salary freezes, and roll-backs of benefits – the kind of “tough measures” for which the CEO is rewarded.

Here’s one frustrating aspect about the absurdly high CEO salaries: for the most part they have come about not because nonprofit compensation committees are shooting from the hip, but because they are following to the letter the best practices encouraged by the IRS and state charity regulators.

You probably know the line from NPR’s “A Prairie Home Companion”: In Lake Woebegone “all the women are strong, all the men are good looking, and all the children are above average.”  That notion has given rise to the Lake Woebegone Effect in executive salaries. How it works is that a Board’s compensation committee will commission a study of CEO salaries at similar institutions – a course of action encouraged by the IRS. That study provides the committee with a salary range and average compensation. And then, because they will deem their particular CEO to be above average, the Board will pay their person at the top or even a bit above the range. When the next nonprofit undertakes a similar study, the average salary has consequently gone up – and then that group pays its CEO at the top or above the range. And so the salaries ratchet up, rapidly, inevitably, logically, and deplorably.

Some people ask me if nonprofit salaries are too high. Others ask me if nonprofit salaries are too low. I tell all of them: yes. The widespread veneration of the CEO, which has increasingly poisoned the for-profit corporate world, has infiltrated nonprofits. CEOs at many successful organizations are getting way too much credit, and way too much money. And the people in the trenches – the social workers, teachers, nurses, cooks, security guards, bookkeepers, and IT guys – are getting way too little.

And, there’s a second form of inequality in the sector: the yawning gap between small community-based nonprofits and the big elite institutions. But that important story awaits another post on another day.

Copyright Alan Cantor 2014. All rights reserved.

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7 thoughts on “Income Inequality: The Nonprofit Edition”

  1. Amen. Makes you want to throw up. Best bet is to support local charities as much as possible and forget about the big guys unless or until they put their houses in order. Besides the salaries, take a good look at the perks they also get. It will really open your eyes.

    1. Thanks for weighing in, Joe.

      I’ve seen effective management in local organizations, but also some abuses — or, at the least, inefficiencies. I don’t think large organizations are all bad and small organizations all saintly. There are good and bad in both categories.

      I think it certainly feels to the donor as though there’s less waste when they give locally, and that’s very often the case. It’s also true that for folks who are not billionaires, it seems as though $250 can help a local organization — say, the Boys and Girls Club — meet their mission more easily than the same amount of money going to a national group trying to end hunger in Africa. When the problem is of a modest size, a modest gift seems more effective than when the problem is huge.

      There’s a contrasting view presented by Peter Singer, the Princeton University ethicist and philosopher. He notes how dire the need is in the developing world, and also how inexpensive the solutions are. For example, you can feed a family in Africa for a dollar a day, whereas that doesn’t get you a bag of french fries in Long Island. He would argue (and does) that the best use of the money is to send that $100 or $250 to help in Africa or India, because it will impact more people. He reduces the equation to number of lives saved per dollar.

      But back to the salaries and perks. I will readily admit that it takes a significant amount of knowledge and experience to run a major hospital or a national organization with a $500 million budget. That person should be paid more than someone running a local nonprofit with three staff members, if only because the pool of people with the credentials to do it is smaller. But there are limits. I don’t honestly think you get better people by paying someone $2 million than by paying that person $250,000.

      I’ll say one other thing. In a highly resourced organization, the CEO has dozens of smart people to execute the work. In a small organization, the Executive Director does anything and everything. Proofread the budget. Change the copy toner. Hire each staff member. Negotiate property taxes with the city. Coordinate the audit. Speak at the Rotary Club. I would argue that in many cases the work is more demanding and stressful at the small shop: more sits on the head of the CEO.

  2. Very thoughtful piece Al. It somehow seems doubly shameful that blatant income inequality has become the norm in the NON-profit world. While CEOs and administrators have 6 figure salaries, the direct care workforce is not paid a living wage.

  3. Tell the Truth, Al! We need to reward experience and production, but we also need to look in the mirror and pass a straight-face test. To speak and act with integrity requires that we not live in another universe from those we serve – this is authentic leadership.

  4. A 1 million dollar salary is not even remotely a reason why there is income disparity in America. Once your wealth is over $100mn, you reach a critical mass of wealth accumulation which snowballs and cannot be stopped. Making $10mn off of $100mn in wealth is so easy, too easy. It is the ultra-rich that create problems. And also the minimum wage.

    1. I agree with you, Trevor, if the topic is wealth disparity in the United States. The issue there, from all I’ve read, is not about income so much as wealth. And it’s not so much about the top 5%, or even what the top 1%, but the top 10% of the top 1%.

      That said, within the context of a nonprofit institution, CEOs making a million dollars while the janitors and the nurses are getting laid off or having their benefits reduced, is unseemly and destructive and counter to mission. And it’s certainly destructive to morale within the institution. (I’ve see that first-hand.)

      I’m struck by the example set by Henry Ford, of all people. Ford was a horrible man in many ways — particularly in his virulent anti-Semitism. (Hitler hung a picture of Henry Ford in his office — yikes!) But Ford did some very good things, too. He created a stir when he started paying the workers in his assembly plants $5 a day, which was about double the going rate for industrial labor. His reasons? 1) To keep good workers, and 2) so his workers could go out and buy the Model T’s they were building.

      It’s an imperfect comparison to what’s going on today in large nonprofits, but narrowing the wage gap seems to be both the right and the smart thing to do.

  5. Few charities have salaries as obscenely high as the American Red Cross. Look at the IRS Form 990’s that Guidestar posts. There’s an information services VP there for example, who doesn’t even have an I.T. degree, making over half a million a year in compensation, just as one disgusting example. (I have lots of stories of my fights with Aramony leading up to his resignation, BTW)

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