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The Podium

Don’t put caps on compensation

Westfield State University. Liberty Mutual. American Red Cross. Blue Cross Blue Shield of Massachusetts. News stories in recent years have exposed eye-popping pay packages and jaw-dropping perks for the top executives at these nonprofit institutions and mutually owned companies.

It is easy to conclude after reading the news accounts about these companies that executive compensation has gone haywire; that the boards of these organizations have displayed a dereliction of duty in setting total compensation much too high.

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Such a conclusion, however, would not only be unfair. It would be inaccurate.

Nonprofit organizations and mutually held companies (those that are essentially owned by their customers, such as mutual insurance companies and cooperative banks) drive the Massachusetts economy. Many are highly cherished charities with important social missions. Some are vast, complex institutions focused on health or education.

Their leaders work hard every day to sustain operations, ensure compliance with complex regulations, and fundraise constantly to sustain programs.

Yet many believe that executives at nonprofits and mutuals are worth less than their counterparts in the private sector. This is particularly curious in some sectors, such as hospitals, where non-profit and for-profit CEOs have identical jobs, with the same responsibilities and worries, yet the public’s expectations around compensation seems to be different.

The headline-grabbing honchos listed above stand out as exceptions. Rarely do the critics ask just what the vast majority of nonprofit CEOs do before zeroing in on their salaries. Shouldn’t they make less money simply because the organizations for which they work are exempt from paying taxes, or they receive taxpayer funding to support certain programs?

The answer is quality leadership is just as valuable in the nonprofit or mutual arena as it is in the private sector.

Boards have the responsibility of recruiting, retaining, and ultimately retiring their executive. If the compensation is not competitive, the talent will be lost.

The fact that there are safeguards at the federal level, in the formidable form of the IRS, and at the state level, in the attorney general’s office, should assuage the fears of most who think nonprofit pay is out of hand. There are tools for finding abuses. What’s more, nonprofits face higher degrees of transparency than the private sector through the 990 forms they file with the IRS and, in Massachusetts, the annual reports submitted to the AG’s office.

This very transparency acts as check and balance against excessive compensation. Boards know that their CEO’s salary package will be sitting on publicly accessible websites and thus boards tend to give these matters an abundance of due diligence and deliberation.

The discussions of one non-profit board were recently shared with me. A board convened because they heard a major media outlet was working on a story about the substantial salary and retirement package for its CEO and another executive. When the board leaders were asked by an outside facilitator why they set compensation so high, one replied, “these two leaders are critical to the success of this organization and we wanted to remove every incentive for them to leave…better that people say the salary is too high than we lose these leaders.”

The 34,000-plus nonprofits across Massachusetts contribute substantially to the state’s economy, particularly in the health care, human services, and education sectors. Together these organizations held some $233 billion in assets and accounted for nearly 17 percent of the private work force in 2011, according to a study from The Boston Foundation.

A typical nonprofit CEO earns about $130,000, according to a recent compensation study by Charity Navigator. In the Northeast, the median salary in 2010 for these CEOs was about $157,000.

Hiring and compensation — including salary, benefits and retirement plans that provide for an adequate percentage of an executive’s pre-retirement income — should be tied to the job, to the experience and skills it requires, and to the goals of the organization.

Boards should avail themselves of important tools such as compensation studies and the advice of outside consultants, auditors and attorneys. They also must ensure that they are “disinterested,” meaning that no board member receives any benefit from the compensation chosen for the leader.

Broad guidelines on compensation are useful but should not handcuff members of the board of directors, who should be free to exercise their fiduciary duties.

Yes, headline grabbing stories about college presidents spending lavishly on travel and insurer CEOs earning tens of millions and using the company jet for vacations reflect serious issues for the organizations involved.

These stories, however, should not be an indictment on non-profit executive pay.

Here in the Boston area, we pride ourselves on the quality of our non-profit institutions. It takes leadership to build institutions of this caliber. Placing caps on compensation will ultimately undermine the quality of these organizations and weaken what they provide for our region.

Barry Koslow is president and CEO of MKA Executive Planners, a Woburn-based executive benefit and retirement planning firm.
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