Should NYS Tell Nonprofits What to Pay Their Execs?

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In 2009, Joel and Phillip Levy pocketed $2 million between them annually as leaders of a Medicaid-funded nonprofit serving the developmentally disabled. The Levys used tax dollars to purchase multiple homes, luxury cars, pay their kids’ college tuition, and support family members’ living arrangements in NYC. The misuse of public dollars violates the public trust. It makes us angry—and it should.

In January 2012, New York Governor Cuomo issued an executive order to limit executive pay and established a commission to investigate excessive nonprofit compensation. Now Cuomo and Attorney General Eric Schneiderman have announced proposals to regulate nonprofit executive compensation.  Schneiderman’s proposal–the “Nonprofit Revitalization Act”—was just introduced by Senators Carl L. Marcellino and Michael H. Ranzenhofer. Many of the elements reflect recommendations from the statewide task force (discussed in an earlier blog here).

Governor Cuomo’s proposal calls for a salary cap to limit the amount of state dollars applied to executive compensation to $200,000. His proposal also includes options for waivers to surpass the cap if an organization can justify the difference (hospital executives, for example, often have salaries well above seven figures and argue that this is required in the competitive health care market).

The heated debate over what is “reasonable” for nonprofit executive compensation is decades old. The Levys’ organization, the Young Adult Institute Network, is the largest group home provider in the state and is widely admired for the quality of care and range of programming. No question their “perks” went well beyond what is ethical – but it also appears to an outsider that they were high-performers providing a valuable service.

When funded by taxpayers, should the pay of organizations providing services to those in need be regulated? If pay is limited, can these complex organizations attract top talent? Is there a “reasonable” threshold when the care of people is involved? As we debate these and more, a few points to consider:

Egregious abuse is not the norm. The Levy brothers’ scandal makes all nonprofit executives suspect. Let’s remember that the vast majority of nonprofit executives are the good soldiers for the public good that we entrust them to be.

A salary cap is a blunt instrument. Setting pay limits may sound good, but have unintended consequences and may spawn creative workarounds. The nonprofit sector is complex and includes smaller service agencies to hospitals and universities. Compensation is heavily tied to cause area, geographic location, and the marketplace. A one-size-fits-all salary cap can create more barriers for an already stretched sector and distract energies of good organizations to find new ways around the artificial line of what is “reasonable” so they can get the job done.

Board of Directors need to be held responsible. Boards set compensation levels and must have the training and accountability to reasonably find the appropriate balance. While the Levy brothers became the poster children for compensation run afoul – their board allowed it to happen. The Schneiderman “Nonprofit Revitalization Act” avoids a specific salary cap, but outlines formal oversight procedures including establishing a separate board compensation committee, reviewing data of comparable positions, and requiring the full board to approve compensation recommendations for the top five highest paid employees. Enforcement and transparency of these practices are key to making the change successful.

It makes sense to pay to attract top talent. The nonprofit sector needs good leadership—particularly because public money is involved. Dynamic leaders and strong management pay for themselves by running efficient and effective organizations. Effective leaders may cost more, but ultimately should save communities money by providing effective services which improve outcomes and save taxpayer dollars over time. If nonprofits leaders aren’t performing this way boards are obligated – to those they serve and their financial supporters – to find someone who does.

The salaries of nonprofit leaders aren’t a secret. The Internal Revenue Service requires that pay of top executives be reported on the IRS Form 990. These “990s” are public documents that are easily consulted by contributors, public agencies or elected officials. Check out the following online resources:

Nonprofit organizations are complex and great leaders cost money. It is pennywise and pound foolish to operate otherwise. It is up to our leaders, the nonprofit boards who oversee them and the agencies which regulate them, to make sure that what we pay falls within the realm of reasonableness.