My post on nonprofit executive compensation from earlier this weekend drew a bunch of great comments, including two from Adam Forest Huttler. He writes:

It seems to me the devil is in the proverbial details on this one…

Is there a number you have in mind that, once crossed, makes compensation unreasonable? How much does an organization’s budget size matter? Is performance completely irrelevant, or are you more tolerant of high compensation when the long-term performance seems to justify it? Should we consider whether someone has grown an organization or merely stewarded it?

And then, a few moments later:

Another thought occurred to me…

What about compensation for specialists at NFP orgs? For example, the Chief Investment Officer at the Ford Foundation makes nearly $1M/year (see Guidestar). But that person is responsible for investing over $12B in assets. That’s pretty important! And the specialized skills involved would be in demand at any Wall St firm, so there’s real competition from the FP sector.

I don’t think it serves the sector to be skimping on some of this stuff.

These are important points, and kudos to Adam for raising them. The first thing I’d say is that I don’t disagree in principle with people like Dan Pallotta or Sean Stannard-Stockton who say that we shouldn’t care about the magnitude of compensation so long as the organization is producing a level of impact that justifies it. I guess where I differ with them is on a couple of points: first, I am deeply skeptical that performance and compensation are all that highly correlated among nonprofit executives, or that simply offering higher compensation would somehow increase that correlation. Secondly, I feel that one must consider an executive’s performance in terms of not only the total amount of impact generated but also the counterfactual scenario of the impact generated by a hypothetical lower-priced executive’s performance. Obviously that latter concept is impossible to measure exactly, but to explain what I mean in more basic terms, I want to know if a high-priced CEO is just coasting off of the firm’s own internal momentum and/or accidents of history, or is he/she generating that momentum him/herself.

To address the question about growth vs. stewardship, clearly one job of a CEO is to grow revenues. However, that’s not his or her most important job. The most important job is either growing profit or growing impact, depending on which sector you’re talking about. Either of these can be accomplished with flat or decreased revenues. So to me, growth is an interesting but ultimately fairly incidental factor when considering appropriate compensation. Budget size matters up to point, insofar as you can’t just make up money out of thin air, but after an organization gets past a certain size ($20-30 million?) I think impact should matter much more.

Is there a magic number? Following my logic above, no, but Seth Godin says the following in the post I linked to the other day:

After a million dollars or so in salary, the absolute amount that a person is paid has no real impact on their life. They can’t eat more meals in a day or wear more shoes. What matters to the manager is the relative amount. How much more would I make over there? Why does that company pay its CEO more than my company pays me?

Seth’s number is a million bucks; I’d put it a fair bit lower than that, particularly if one doesn’t live in New York City or the Bay Area. But basically that’s the idea. I have no problem with reasonably demanding jobs supporting reasonably comfortable, upper-middle-class (or lower-upper-class) lifestyles. As one gets further and further beyond that horizon, though, for me the expectation becomes exponentially greater that the higher salary will be justified by some sort of extraordinary evidence of impact. And if it’s not, then I for one start to lose trust in individual and organization alike.

Adam also asked about investment professionals. I just took an endowment management class where we discussed this very issue in some depth. Here’s the thing: it may be hard to believe, but those folks who earn $1m+ from managing Ford’s assets are actually already forgoing much higher pay packages that they could earn in the private sector. The other thing to consider is that investment professionals’ skills are more transferable between for-profit and non-profit sectors and that it is easier to measure their performance than that of CEOs. (Though Seth G., again, would argue that the whole system is messed up: “should the guys who drive an armored car that carries millions of dollars in bonds get paid more than the guys that drive an armored car that only carries thousands of dollars in cash?”) So I agree that there’s a slightly stronger rationale to pay investment managers what they get paid, though I would still think it’s important to consider whether the premium for a “blue chip” candidate over a less obvious but clearly mission-driven one is really worth it, especially when one considers the program funds and potential PR/trust issues at stake.

I will be back with my promised post on nonprofit compensation and lower-level employees in short order.

  • Sean Stannard-Stockton

    Good couple of posts on this topic. You’re points have helped me clarify my own thinking.

    What I believe is that the nonprofit compensation debate is a classic case of confusing inputs with outcomes. The issue isn’t should people get paid more or less, it is that the question should be framed as “Is it OK to pay someone more, even a LOT of, money if they can generate more outcomes per dollar.” I think the answer is YES!

    However, when Pallotta argues that fundraisers should be measure by the net amount they raise instead of keeping their costs low, I think the argument gets confused. Rising money is not an outcome. It might be in the interest of the nonprofit to think most about net revenue raised, but as a society there are ethical questions to confront.

    You bring up good points regarding pay not being a magic bullet. I agree. But the point is that in the nonprofit sector, the public believes it is unethical to pay employees high amounts. The appropriate measure is a value proposition, what level of impact are we getting per dollar, not a simple decision that X number of dollars is “enough” to pay someone.

  • Ian David Moss

    Thanks for the comment! I think your framing of the question is definitely legitimate and would come to the same conclusion as you. The problem, though, is that impact (of course) is really hard to measure, and until/unless we have extraordinary evidence of impact, I don’t think it’s wise to pay extraordinary salaries on pure faith that that impact is happening. So I guess my attitude toward high exec comp is that if a great case can be made, then fine, take all the $ you need. But if not, there are plenty of people who would be willing to do a mediocre job and charge a lot less.

  • Sean Stannard-Stockton

    Fair enough. Except no one has ever argued that nonprofit executives should be paid “extraordinary salaries.” I’ve only made the point that people should be paid for-profit level wages. While “extraordinary wages” exist in the for-profit sector, they are the exception not the rule.

  • Ian David Moss

    Ha, well I guess “extraordinary” is in the eye of the beholder, then. Certainly some of the figures I’ve seen on 990s before have made my eyes pop out of their sockets a bit, but perhaps I simply haven’t lived long enough. :)

    In all seriousness, though, I think that where we differ is that my concept of “ordinary” is based upon an absolute tally of normal consumption needs, whereas yours is based on the relative comparison to what someone with a supposedly comparable job would be earning in the for-profit sector. I’m not sure that one is more valid than the other, but they are certainly different. Where I’m coming from is that I have more sympathy for someone who wants to earn more money to meet those needs than for someone who just wants to earn more money because somebody else does. That latter territory is what starts to define “extraordinary compensation” to me.