2005 CEO Compensation Study
Charity Navigator
August 8, 2005
At Charity Navigator we receive numerous inquiries from donors, reporters and nonprofit board members asking "how much compensation is too much for a charity's CEO?" And they aren't the only ones asking this question. CEO compensation has become such a hot-button topic that the Senate Finance Committee discussed excessive CEO pay during recent hearings on reforming America's nonprofit sector. And the IRS, the entity responsible for regulating charities at the federal level, has prioritized CEO compensation as one of its main areas of focus in uncovering fraudulent nonprofit practices.
Given the level of scrutiny surrounding CEO pay, many would think that the IRS would designate a concrete figure as the threshold of acceptable pay. However, IRS rules simply state that nonprofit CEOs should receive 'reasonable compensation.' This is obviously not an especially helpful yardstick for the average donor. Yet, the procedure behind this terminology is useful. In determining 'reasonable compensation,' the IRS encourages a charity's board of directors to collect data on the compensation practices of similar nonprofits.
In the process of evaluating thousands of charities, Charity Navigator has collected a wealth of data on CEO salaries. Our analysts have examined nearly 20,000 nonprofit financial documents, giving us an exclusive insight into the real-world financial practices of America's largest charities. In fact, we know how CEO salaries vary by the charity's location, size and type of work. But, before we delve into the details, let's first look into the CEO compensation practices of the average charity.
According to our analysis, the average CEO's compensation (for the 4,257 charities in our database as of July 1st) is $148,477. This figure, based on each charity's most recently filed Form 990, includes salary, cash bonuses, and unusually large expense accounts, but not contributions to benefit plans or deferred compensation. To put it in perspective, the average charity's CEO's salary makes up about 3.4% of the organization's total functional expenses. This isn't outrageous when you consider that these are multi-million dollar operations, not mom and pop operations run out of someone's basement. Leading one of these charities requires an individual that possesses both an understanding of the issues that are unique to the charity's mission as well as business and management expertise similar to that required of for-profit CEOs. Attracting and retaining that type of talent requires a certain level of compensation - roughly $150,000 according to our analysis.
But donors should be aware that CEO pay does vary based on mission, size, and geography.
The compensation a CEO receives depends in part on the types of programs and services offered by the charity. Leaders at education charities receive the highest pay (average $230,276).
- Arts ($192,858), Public Benefit ($163,608) and Health ($157,487) charities also pay their CEOs more than the average charity.
- Human Services ($122,146), International ($120,586), Environmental ($106,400), Animal ($104,291) and Religious ($97,357) charities all report salaries lower than the average charity.
Of course, it is important to take into account the size of an organization when attempting to benchmark a CEO's salary. For example, we can look at educational charities, which offer the highest average CEO compensations. This category includes large, seemingly-private institutions like Johns Hopkins University
- The average Human Services (2.39%), Arts (2.48%) and Public Benefit (3.21%) charity also spend a smaller percentage of their expenses on the CEO's pay.
- Environmental (5.53%), International (4.52%), Religious (4.34%), Health (4.03%) and Animal (3.91%) charities spend a higher percentage on their top executive's compensation.
This following graph depicts the predictable relationship between the size of the charity and its CEO's salary.
- Charities with total expenses under $3.5 million ($87,390) as well as those between $3.5 and $13.5 million ($144,087) spend less on CEO compensation than the average charity evaluated by Charity Navigator.
- Organizations with total expenses greater than $13.5 million ($251,846) spend more than the average.
Just like the for-profit sector, salaries at nonprofits vary based on the part of the country in which the entity is located. The Northeast, with cities like New York and Boston, comes out on top in paying the highest average salary ($174,919).
- Charities located in the Mid-Atlantic ($155,803) region also pay their CEOs on average more than the average figure for all charities evaluated by Charity Navigator.
- Charities in the Midwest ($141,713), Pacific West ($138,475), Southwest ($136,513), South ($135,424) and Mountain West ($117,922) on average pay their CEOs less.
Advice for Donors
We suggest you use the following tips when critiquing the compensation of a charity's top leader.
- Do some benchmarking: Use the information provided in this article to compare a CEO's salary to other similarly sized charities, as well as those in the same category and region. Charity Navigator registered users can compare the CEO salaries of specific charities on their "My Charities" page and on each charity's rating page by clicking on the "compare peers" button. Registered users can also access Charity Navigator's "Sector Analysis" tool to calculate the average CEO pay by cause and state.
- Be skeptical of charities that report zero CEO compensation: There are very few individuals that can afford to work full-time managing complex, multi-million dollar organizations without receiving any compensation. If a charity you are considering reports no salary for its CEO, then we recommend you contact it directly- using the information we provide- to learn how it has been able to attract and retain a competent leader without paying that individual. It might have a legitimate answer. However, most likely the charity failed to appropriately report the CEO's salary to the IRS or respond to our analysts' requests for that data.
- Consider the performance of the charity in relation to the CEO's pay: If you come across a charity whose CEO pay is higher than other similar charities, don't immediately dismiss that charity's request for funding. You're better off supporting a charity that is fiscally efficient, achieving its programmatic goals and paying its CEO well, than a charity that has substandard fiscal health, fails to live up to its mission, but under-pays its CEO.
- Be cautious if the charity has given the CEO a loan: While it can be difficult to ascertain, if you do learn that a charity's top leader received a loan, you should think twice about supporting that charity. We maintain that a charity isn't in business to provide low or no-interest loans so its CEO can move into an exclusive neighborhood or purchase a new, luxury car. If the CEO's compensation is reasonable, then why does he/she require a discount loan to work for that charity?
