Pay for the Top Executive at New York-Based Non-Profit Organizations

Pay for the Top Executive at New York-Based Non-Profit Organizations

June 3 2016

Pages from Non-Profit Study_June 2016Overview
The Internal Revenue Service mandates that non-profit organizations pay reasonable compensation and imposes stiff penalties for those who fail to comply.  In its annual study of top executive compensation at New York-based non-profits, Steven Hall & Partners (SH&P) reviewed and analyzed pay and related governance data among 190 organizations as disclosed in Form 990s for the 2014 fiscal year, the most recent year for which such data is available.

Summary of Findings
Similar to prior studies, this study examines pay and related governance data by revenue and organization type for the organization’s top executive.  This study is based on the same 190 organizations that have been included in this study since 2010.  Findings for fiscal 2014 reflect the following:

  • Median total compensation increased +3.9% to $342,046 for fiscal 2014
    • Base salary increased +5.8% to $290,028
    • Of the 40 organizations (21%) that paid bonuses in 2014, the median amount was $40,938, up 6% from $38,486 paid in the prior year
      • 38 organizations reported paying bonuses in fiscal 2013
    • All other compensation was largely flat in 2014, increasing just +1%
  • Perquisites were provided and disclosed by 29% of the total sample in fiscal 2014
    • Most prevalent perquisite was housing allowance (21%)
      • More prevalent among Education & Research (44%) and International (44%) organizations
    • None of the organizations reported payments for business-use of personal residence
  • Governance measures related to executive compensation were reported by 95% of organizations studied in fiscal 2014
    • In general, organizations with higher paid executives utilized more governance measures, suggesting that organizations are aware of potential risks associated with higher pay levels and have taken steps to systematically mitigate those risks.

Compensation Findings

On an overall basis, total compensation increased +3.9% among top executives for fiscal 2014.  This increase is attributable primarily to a +5.8% rise in base salaries.  Payment of bonuses remained a minority practice, with just 21% of the organizations paying a bonus, but among those paying bonuses, the median bonus paid increased +6% from 2013 levels, to $40,938.  Use of one or more perquisites served as part of the total compensation package at 29% of the organizations in our sample.

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The highest total compensation was observed among Arts, Culture & Humanities organizations, which paid a median of $498,888, approximately $100,000 more that the next highest paid sectors, International (with median pay of $398,212) and Education & Research (with median pay of $397,150).  The lowest pay was observed among the Human Services sector, where median total compensation for the top executive was $257,698.

Similar to trends among for-profit companies, compensation levels were generally correlated to revenue size.  Among organizations with revenues greater than $40 million, median total compensation for the top executive was $458,140, compared to $291,187 paid at organizations with revenues less than $15 million.

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Perquisites
The use of perquisites was a minority practice among the total sample for fiscal 2014, disclosed by only 29% of organizations.  On a year-over-year basis, the prevalence of perquisites has not varied materially since 2010.  Housing (21% in 2014) is consistently the most common perquisite offered, by a significant margin.

 

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The prevalence of perquisites differs across organization types, a reflection of the variations in typical job responsibilities and the importance of remaining competitive with peers.  Education & Research and International organizations, where leaders are often expected to reside on-site, had the highest prevalence of perquisites, primarily focused in housing.

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Housing benefits were also the most commonly used perquisite across each of the four revenue ranges studied.  The greatest use of perquisites was observed among organizations that reported between $25 and $40 million in revenues.  This is likely more attributable to the prevalence of Education & Research organizations in this group (16 of 39 organizations or 41%), than a broader size-specific trend.

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Governance Findings
Governance measures are often used to help organizations develop reasonable compensation programs and establish rebuttable presumption which provides important legal protections for directors and organizations.  SH&P has tracked and analyzed each of the six governance measures outlined in Schedule J of Form 990.

In fiscal 2014, 95% of organizations disclosed the use of at least one governance measure.  Similar to prior years, the most common governance measure (employed by 89% of the total sample), was the requirement that the Board or Compensation Committee determine/approve top executive compensation.  A significant number of organizations also used a survey or other study to assist in the determination of pay (67% of organizations) and had an established Compensation Committee to oversee compensation-related matters (61% of organizations).  The review of Form 990s of similar organizations to determine compensation is becoming majority practice (48% of organizations), while the use of a compensation consultant remains a minority practice (only 30% of organizations).

Notably, the use of employment contracts has decreased in prevalence from fiscal 2010, a trend we have also observed among for-profit companies.  Such a move enhances the flexibility of the Board or Compensation Committee to make changes to pay structures, levels or incumbents as needed to better serve the mission of the organization.

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Utilization of governance measures was relatively consistent across organization type, although their usage was notably lower among Human Services organizations due in part to low pay levels at these organizations.

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Usage generally increases with organization size.  Board or Committee approvals, as well as the use of surveys and studies, were majority practices regardless of size, as was the likelihood of having an established Compensation Committee.  Larger organizations were more likely to utilize a compensation consultant compared to smaller organizations.

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The Internal Revenue Service may impose intermediate sanctions if pay is deemed excessive and unreasonable.  For this reason, higher compensation levels were correlated with a greater usage of governance measures.  Among organizations with higher levels of pay, these measures demonstrate an acknowledgement and acceptance of “best practices” with regard to establishing executive pay levels and provide a critical measure of protection against potential penalties.  As might be expected, the prevalence of all six governance measures was lowest for organizations in the bottom total compensation quartile.

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Methodology
Steven Hall & Partners analyzed top executive compensation data and governance practices for 190 non-profit organizations that filed complete Form 990s with the Internal Revenue Service from fiscal 2010 through 2014.  Executive compensation analyses reflect the components of total compensation (base salary, bonus, and all other compensation).  Base salaries for new hires have been annualized.  All other compensation includes contributions to benefit and deferred compensation plans, nontaxable benefits, and all other compensation as reported.  The study looks at each organization’s top executive who may be the Executive Director or Chief Executive Officer, and who is not necessarily the highest paid.  Perquisites and executive compensation-related governance practices are as reported in each organization’s Form 990, Schedule J.  Data has been analyzed in aggregate, as well as by organization type and revenue, as appropriate.

Study Authors
Sandra Pace is the leader of the firm’s non-profit practice and is a frequent author and speaker on executive compensation and corporate governance topics.  Ms. Pace assists non-profit organizations on executive compensation matters and related governance issues.  Clients include social/human services organizations and private foundations, among others.

William Hui is an Associate in SH&P’s New York office.  He assists various non-profit and for-profit clients in the analysis of their respective compensation marketplaces.