Nonprofit Panel Ducks the Main Issue

The panel says nothing new about executive compensation and does not address the imbalance of power between board and CEO that causes the problem. 

Since I brought up the draft principles for nonprofits that have been developed by the nonprofit panel convened by Independent Sector (EIN 52-1081024 Form 990), I just want to take a look at one key provision that shows why we shouldn't expect too much of this project.  In the area of executive compensation, the panel offers us this (it's number eleven, for those who like to follow along).

The board should hire, supervise, and annually evaluate the performance of the chief executive officer of the organization, as well as approve annually and in advance the compensation of the chief executive officer unless there is a multiyear contract in force or there is no change in the compensation except for an inflation or cost-of-living adjustment.

That's as close as they come to addressing the issue of executive pay.  The discussion goes into more detail about the current process for setting executive pay that the IRS will deem reasonable, which chiefly involves finding out what other similarly situated executives are getting.  Unfortunately, that system has manifestly failed.  We have already discussed the concerns reported in the Wall Street Journal and elsewhere that the process of executive salary disclosure and comparison has had the opposite of its intended effect because it has heightened the competition by CEOs to keep up.   

It is also interesting that when the panel addresses the question of board compensation (#17), it recommends review by an external source:

Board members are generally expected to serve without compensation, other than reimbursement for expenses incurred to fulfill their board duties. Charitable organizations that provide compensation to board members should have it reviewed by an independent, external source and should, upon request, make available to anyone relevant information that will assist in evaluating the reasonableness of such compensation.

So if this is good practice for board compensation, which is typically modest for nonprofits in the rare cases when it's offered, it seems to me it should be the practice for executive compensation as well.  It seems to me that we need a new reference point that doesn't encourage competition.  There are two possibilities:  one is by reference to the OPM salary schedules for Federal executives (or the President, in the case of billion dollar charities).  The other is a compensation study based on an analysis of the cost of specific skills the top position requires.  Given the difficulty of the latter, using the OPM schedules might be the more workable approach. 

And more fundamentally, any standards about executive oversight have to recognize the challenge that arises from the imbalance of power between the paid executive and the volunteer board in a charity.  Ways have to be found to break the executive's tight control over information flowing to the board and to limit the executive's ability to unfairly influence the board's structure and composition. 

We've already looked at some ideas that are emerging in the for-profit sector that need to be considered mandatory for charity boards, as well (Seven Boardroom Innovations that Charities Need to Adopt, October 10, 2006):

• Board member access to senior staff other than the CEO (especially finance and human resources)
• Boards hiring their own consultants to review executive plans and compensation
• Excluding staff participation from the board's own nominating process
• Regular executive sessions without staff
• Boards and board committees setting their own agenda, not relying on staff to do so

And most difficult to work out, but essential, is addressing the imbalance of board and staff tenure.  There can be no effective executive oversight when board members rotate every three years while staff holds on for decades, which is not an uncommon scenario for charities.  There needs to be a way for charity boards to have an institutional memory and not be totally dependent upon staff.  This will require a fundamental rethinking of the nature of charity executive positions, career paths, compensation, and pension arrangements.  But it has to be done, because without a better balance between board and staff power in charities, principles are nothing but words on paper. 

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[バーバリーマフラー]

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