Giving to nonprofits
The end of the year is a big time for charitable giving. If you are considering a donation to a nonprofit group, you can review its recent tax filings at http://www.guidestar.org.
You can also check the Better Business Bureau's Wise Giving Alliance, http://www.bbb.org/us/Wise-Giving. It's a voluntary accountability program that's still small, so don't be alarmed if your favorite nonprofit organization isn't listed.
Did you know?
The U.S. tax code offers tax-exempt status to more than charities. Hospitals, credit unions and even country clubs can be established as nonprofit organizations by filing the necessary paperwork with the Internal Revenue Service.
The most common type of nonprofit is established under section 501(c)(3) of the U.S. tax code. According to the IRS, they are exempt from taxes if they exist for these purposes: “charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.”
Other sections of the tax code provide for tax-exempt status for business leagues, employee-benefit associations, fraternal societies, labor and agricultural organizations, social clubs and veterans groups. Credit unions fall under 501(c)(14). Country clubs fall under 501(c)(7), which governs organizations established “for pleasure, recreation and other nonprofitable purposes.”
Wayne Garlington is the kind of guy who comes to mind when you think of a nonprofit executive.
He runs Open House Ministries, which operates a downtown Vancouver homeless shelter with $2.3 million in revenue and a full-time staff of 16. He works for a stipend of $1,000 a month.
PeaceHealth's Alan Yordy is also a nonprofit executive. He runs a hospital system that took in $1.6 billion in 2011 and employs some 4,300 in Clark County. Even if you don't count deferred compensation, his paycheck topped $1 million in 2011.
Nonprofits vary widely, and so does the pay of their leaders. Organizations beyond charities qualify for nonprofit status, including such business-like enterprises as hospitals and credit unions. All nonprofits, however, receive a public subsidy in the form of tax-exempt status. Many rely on donations from people who expect that the money will be spent wisely. With that comes public scrutiny of executives' pay.
The Columbian analyzed 2011 Internal Revenue Service filings for Clark County-based nonprofit organizations with annual income greater than $500,000. Of those 120 nonprofits, 76 reported executive compensation. Hospitals and credit unions pay their leaders the most. Yordy tops the list with total compensation of $1.3 million. Foundations, national trade groups, mental health providers, unions, private schools and children's organizations round out the list of 36 local organizations that paid top executives more than $100,000 that year. We analyzed 2011 returns because that was the latest year records are available for all local organizations.
The IRS has the authority to revoke the tax-exempt status of an organization paying "excessive" salaries, but it doesn't define what that means or have the wherewithal to evaluate every nonprofit's return across the board.
For the most part, executives in the nonprofit sector make less than counterparts in the for-profit world, but often there's no comparable job for benchmarking. So nonprofit boards are left to set CEO salaries based on other factors: executives' experience and job responsibilities, the impact their decisions make and the organization's size.
"Therein lies the rub, therein lies the judgment," said Linda Lampkin, research director of the Washington, D.C.-based ERI Economic Research Institute. "That's why it's hard to say, 'This is excessive,' or 'This is not excessive.'"
On their annual IRS filings, nonprofits must report pay for all officers, directors and trustees, as well as that of key employees making $150,000 or more, and the top five if they make more than $100,000.
Nationwide, the median CEO salary for nonprofits with $1 million to $5 million in revenue is $86,277, according to Lampkin's 2012 paper "Improved Transparency of Charity Executive Pay." For nonprofits with more than $10 million in revenue, the median CEO salary is $189,943.
"The salary for running a big, complex organization -- it should be high," Lampkin said. "There's no reason that somebody needs to take a vow of poverty because they want to work in the nonprofit sector."
Yet they shouldn't expect a fat paycheck either, said David Madore, a prominent business and civic leader with strong feelings on the topic. In his capacity as owner of technology company US Digital, Madore donates office space to 39 nonprofits. But first, they must open their books. In his role as a Clark County commissioner, Madore held up the county's contract with the Southwest Washington Humane Society so he could examine its finances, including its payroll. Commissioners ended up approving the contract.
"Nonprofit organizations depend on the generosity of others to accomplish their mission," Madore said. "The people who give are not giving to enrich the leaders, but to accomplish the mission. It's not appropriate to make very large sums and justify that by the size of the organization. The leaders of the organization, they should be models of generosity --here to serve, not profit."
How much is fair?
"I don't have a number," Madore said. "I would be very reserved about any nonprofit executive getting up in six figures. I don't believe it's appropriate for any CEO of a nonprofit to make seven figures."
'Giving at the office'
That kind of pay is rare in the nonprofit world, but it certainly makes headlines.
"Most charities are so small, they are not by any stretch of the imagination overpaying their executives," said Mary Kay Gugerty, an associate professor of public affairs at the University of Washington.
The Columbian's analysis focused on the 120 nonprofits with annual revenue of more than $500,000 in 2011. Perhaps 1,000 more nonprofits in Clark County are so small they barely pay executives, if at all, judging from GuideStar, an online database.
"No one gets into this for the money," said Mike Westby, president of Westby Associates, a Vancouver consulting firm that advises nonprofits. "The compensation is more than monetary. It's a value proposition to them. It's altruistic. They literally give at the office."
That's true of Garlington, said Claudia Dalton, chairwoman of Open House Ministries' board of directors.
"He has such a heart for working for the homeless, he only allows us to pay him a monthly stipend, mileage and health benefits," Dalton said.
Garlington was a member of Open House's board of directors when he took over as interim director in 2010. The shelter was struggling financially, so he decided to leave his collection agency business in the hands of his partners and devote himself full-time to Open House.
"I love what I'm doing," Garlington said. "I've been in business for 30 years. I felt it was time to give back."
Dalton said Open House Ministries realizes it won't always be so lucky to have an executive director willing to work for a pittance. So the organization has hired Westby's firm to help plan for that future expense.
Westby often advises nonprofits on executive pay.
"It's the old sniff test: Does this seem like it's out of proportion? The standard we use is 15 percent. If overhead gets above 15 percent (of the budget), you start having explaining to do," Westby said.
Often there is an explanation.
Take the Vancouver Education Association. In 2011, the teachers' union paid its executive director $125,862 -- about a quarter of VEA's annual income of $521,366. That's the highest ratio of CEO salary to annual income among any of the nonprofits analyzed by The Columbian. But the VEA is not a donor-funded charity.
"We don't serve the public. We serve our members," said Courtney Eyer, VEA's president. "Then we provide a service back to our membership through contract negotiations and contract enforcement."
High pay also can be explained at hospitals, Westby said.
"The compensation at hospitals is headline-grabbing, but those are large, complex organizations. They have their reasons," he said.
PeaceHealth compares itself to other nonprofit hospitals and sets compensation at the 50th percentile for the Portland market, said spokesman Tim Strickland.
"We want compensation for all of our caregivers to be both just and competitive. We have to be able to balance those two imperatives in order to maintain our mission," Strickland said.
Like PeaceHealth, most nonprofit boards use studies of salaries at other nonprofits to set pay that will attract and retain executives.
"There's competition within the nonprofit world itself," Westby said. "Over the last 10 years, the talent level has gone up. Clark County has become more sophisticated. The nonprofit scene has become more sophisticated and more competitive."
That pushes salaries up, but it's hard to say if executives are worth it.
"We don't have good measures of nonprofit performance," said Gugerty, the UW professor. "How do you judge executive pay, or if a CEO is performing, without a comparable concrete measure of performance?"
She has studied voluntary accountability programs, and believes they offer a start. Much is at stake, she said.
"Even though it's a miniscule portion of nonprofits that are potentially overpaying executives, it has a wide-ranging effect for the public," Gugerty said. "It erodes the public's trust in the nonprofit sector. That is a net loss to society. Nonprofits provide a tremendous amount of public and social service."