Salaries in Seattle are Drawn to Scale

Despite what Charity Navigator says, it's expected that small scale organizations will spend a high percentage of resources on their top staff. 

A story in the Seattle Post-Intelligencer puts a peculiar twist on salaries at charities.  The article looks favorably on the $367,000 salary of Richard Stearns, president of World Vision (EIN 95-1922279 Form 990), because it represents such a small percentage of the organization's $870 million in expenses.

By contrast, Nancy Mendoza of the Northwest Burn Foundation (EIN 91-1204009 Form 990) takes home  a mere $51,700 a year, but it represents over 10% of the organization's expenses of $512,000, according to the story (slightly different figures are in the current Form 990). 

The article quotes Trent Stamp of the (self-appointed) watchdog Charity Navigator (EIN Form 990) "You'd have to explain to me as a donor why one person is worth 10 percent of total expenses." And it cites a statistic that the national average for CEO pay is 3.4% of expenses. 

I don't recall ever before seeing a claim that the salaries of organization leaders should be evaluated as a percentage of expenses.  It's a bizarre idea to me: it would mean that the head of a $100,000 organization should receive just $3,400 a year, while the head of a $2 billion university could take home $68,000,000 (—maybe I shouldn't give them ideas ...) 

The simplistic ratio analysis favored by Charity Navigator does not address the reality that salaries are related to the scale of an organization, not its size.  There's a relationship between size and pay, but it's not a straight line relationship. 

In math terms, salaries are proportional to the log of the expenses of an organization.  Executive salaries in charity organizations fall in a range of about $50,000 to $1 million, with the highest about twenty times that of the lowest.  But the organizations they lead range from under $100,000 to billions, with the largest something like fifty thousand times larger than the smallest.  In very rough terms, a ten times increase in size corresponds to a doubling of executive salaries, like this illustration:

Total expenses	Salary of head
$100,000	$  50,000
$1 million	$ 100,000
$10 million	$ 200,000
$100 million	$ 400,000
$1 billion	$ 800,000

So for small scale organizations, the director's salary takes up a larger percentage of the overall resources.  This in itself is a function of the job market—the director is not getting away with something. 

However, there is a practical difficulty that arises for the small scale charity because the salary at the top consumes so much of the organization's resources.  It means there are inadequate resources left to implement internal controls, also known as checks and balances.  Lack of controls and excessive reliance on one person exposes these organizations to two risks: outright abuse and ordinary human error. 

That is why I sometimes consider whether there is evidence of a professional finance management position in the organization, or there are staff resources for "management and general" other than the top jobs.  The absence of either factor flags an organization at risk. 

The problem with small scale charities is not that the head person is overpaid: it is rather that there are not enough resources left to pay for the support the organization needs. 

Comments

[Tyler Graffigna]

Aren't all watchdogs "self-appointed?" Isn't that the point? Seems like a dumb way to start what may be a valid discussion by showing your bias against Charity Navigator. When was the last time you referred to Consumer Reports as a "self-appointed" consumer watchdog, or US News & World Report as a "self-appointed" college guide? Shows the immaturity of the sector that we have to tear down anyone that dares to try and figure out which of us is worthy. Obviously they're self-appointed; you think the DMA or the Independent Sector would have appointed them to keep an eye on things?

[janinsanfran]

Smart founders who become executive directors tend to underpay themselves in order to develop institutional infrastructure/capacity. Whatever else having a founder as director may eventually do to a non-profit, this is the up side.