Thursday, August 12, 2010

What communicators should know about nonprofit executive compensation

Washington's full of major nonprofit organizations, some of them with complex structures.  During a speaking engagement in which I talked about a credibility checklist for nonprofits, one communications director told me her nonprofit was too complicated for her to read through the organization's IRS Form 990--there were no less than six of them at her workplace.  At the same time, she confessed, the first media call she took in her first week there was from a TV network asking about executive compensation.

If that sounds like you, listen up: It's not a new story, but nonprofits' executive compensation is in the news more frequently these days--and smart communicators should understand the reasons this issue is coming to the fore yet again:
  • The economy, stupid:  Any time unemployment is high and your group is seeking a mix of a tax break, goodwill, volunteer time and donations, the measuring stick for your credibility gets longer and it's tougher to measure up in the eyes of public audiences.
  • Tighter IRS disclosures:  Form 990--the tax submission for nonprofits--includes new reporting requirements that aim to discern just how much top executives are paid, among other financial data.  The new requirements, set in 2008, are coming to roost now.  With these new reports will come more scrutiny, as reporters, citizens and regulators look at the new data cuts. The IRS has added more auditors for this purpose as well.
  • The rise of the SERP:  That's "supplemental executive retirement plan," not "search engine results page."  This payment, usually tied to performance and in addition to existing retirement plans, began in the corporate world, where it's the target of ire from unions and shareholders. But SERPs, which can make annual benefits look as large or even larger than an executive's actual salary, are equally controversial in the nonprofit sector, where they've been used increasingly over the past  10-15 years.
  • Tighter governmental budgets:  Nonprofits that receive support from state, local or federal agencies are finding that lawmakers are looking at executive compensation, as this New York Times article notes, as a justification for refusing funding or as an area where budgets may be cut.
This combination of factors is nearly a "perfect storm" for nonprofits. The Times article describes the fallout from one large nonprofit's unexpected clash with the U.S. Senate this year:
On Capitol Hill, four senators this spring refused to approve a $425 million package of federal grants for the Boys & Girls Clubs of America after staff members looked at the organization’s tax forms as part of a routine vetting process and were surprised to learn that the organization paid its chief executive almost $1 million in 2008 — $510,774 in salary and bonus and $477,817 in retirement and other benefits.
In this case, SERPs became the hot-button issue, and BGCA CEO Roxanne Spillett, a 32-year veteran of the group, asked her board to stop paying her the additional retirement payments, prompting a (public) discussion among some board members about whether that made it look like they'd done something wrong.

The Times notes that there's little consistency between and among the nation's one million nonprofits in how they compensate executives, and that the very largest nonprofits--those most likely to face such issues--are a tiny fraction of the whole.  My advice:  Any nonprofit executive's salary can be called into question.  This issue can scale up or down, and the controversy won't feel any more gentle if it's your leaders who are called into question.  What can communicators do?
  • Get close to your CFO and that 990:  Thanks to a variety of charity-watch sites, like GuideStar, the PDF of your organization's 990 is already online--so shouldn't you have read it yourself? Understand when the regular reporting deadlines fall throughout the year, even if your group defers filing, since those dates are when reporters will be calling. Ask about SERPs. 
  • Make sure you understand the value of what your group gets from its nonprofit status:  What would you be paying in income tax, sales tax, real-estate tax, at the local, state and federal levels? Those figures will arise in questions from regulators and reporters.  Should you pay some of those taxes, anyway--to build goodwill or avoid controversy?  For example, I've worked with large nonprofits that considered paying a local tax they didn't need to pay, like real-estate tax.  If you can do that, make sure it's known.
  • Talk about the public issues around compensation with your board and management team:  Form 990 requires listing compensation for the top earners in any organization, which means that they should be prepared to understand the story that may result and what will happen if their particular compensation becomes an issue.  Involve your board members in this discussion.  As the ultimate force behind top executive decisions, they too should understand the public and media ramifications around these salary and benefit decisions--long before the reporters get them to discuss it in the media, or a Senate committee calls it into question.  Even if this happens just once a year, make it happen.
  • Pay attention when the first questions arise about pay:  That's true no matter where they come from--and if you've done your legwork with management and board members, you may start hearing more about grumbling or just legitimate questions they hear.  In the Boys and Girls Club case, Youth Today notes that "The BGCA has declined to answer many questions regarding the congressional inquiry, including which clubs opened and closed, and details about Spillett’s salary. For several months the BGCA also has declined to answer a list of questions from Youth Today about how it spends its money, including how it arrived at the salaries of two other top officials."  In this case, then, the questions weren't new--they just got more visibility when some senators asked, and there was no need to get caught on this score.
  • Understand the zeitgeist on nonprofit salaries:  One sampling is in the 134 reader comments on the New York Times article, which run the gamut from supportive to scornful.  And if your organization has disaffected members, employees, volunteers or donors, you need to assess how they'd react. In the article comments, more than a few people recall hearing nonprofit execs talk about how they got good pay for not too much work. Ouch. Equally problematic: A big divide between executive and rank-and-file pay, another issue readers mentioned.
  • Look to the left and the right for comparators:  This shouldn't be a "we're no worse that that group over there" exercise, please. Instead, keep in mind (as the Times notes) that the IRS will be looking at similar-size groups based on how much money is raised or given away, executive compensation and other factors.  While most major nonprofits use compensation consultants to give them some cover on whether these benefits are "comparable and reasonable," it's rare in my experience that they're told not to proceed.  So use the comparators that reasonable outsiders would use:  The organizations closest to you in size, in your location and nationally (and size can be measured by revenue, membership, volunteers, etc.); those located near you physically (a measure folks in your community will use, if no one else); those in your subject category; and any other yardstick you can think of. 
Communicators must weigh in on this score--or as one attorney I worked with used to tell executives, "What we're about to do here is perfectly legal. Now Denise is going to tell you how it will be received."  Both should factor into the discussion when decisions are made.  What else would you share as advice for communicators on this issue? Share it in the comments or on don't get caught's Facebook page.  And if you need help auditing your fiscal credibility or devising a sound strategy to make sure you don't get caught on this issue, contact me at info[at]dontgetcaught[dot]biz.

Related posts:  The fiscal communicator's credibility checklist

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