Gov. Andrew Cuomo last week signed an executive order limiting to $199,000 the amount of state funds that nonprofit organizations can pay executives.
The order, which goes into effect within 90 days, applies to organizations that provide services on behalf of the state of New York — something the vast majority of nonprofit organizations do.
The goal is to prevent organizations that receive state funds from using those funds to pay for excessive administrative costs and outsized compensation for senior executives, “rather than devoting a greater proportion of such funds to providing direct care or services to their clients,” according to the order.
Under the order, 75 percent of state funds must be used for services, rather than administrative costs, and that percentage will rise by 5 percent each year until it hits at least 85 percent in 2015.
Doug Sauer, CEO of the New York Council of Nonprofits, which represents more than 3,000 nonprofit organizations, said there’s some concern over the cap amount.
“It concerns us because it’s an arbitrary number,” he said. “The vast majority of nonprofits fall under that cap, but $200,000 is not excessive for someone who is running an $80 million organization.”
Sauer said the council is more concerned about the mandate that 75 percent of state funds must be used for services. He said this rule will more likely hurt smaller organizations, which spend a higher proportion of their budget on overhead costs and are less likely to use sophisticated accounting systems. Another issue, he said, is that doing business with the state of New York is expensive.
“A lot of overhead is created by the state,” Sauer said. “Without the state reducing the administrative burden, those overhead costs are going to go up.”
Nonprofit CEO pay has become increasingly controversial in recent years. Today, many nonprofit CEOs earn six-figure salaries, and although these salaries are generally considered acceptable within the field, they often come as a surprise to donors.
The higher-paying jobs are typically found in health and higher education. William Van Slyke, a spokesman for the Healthcare Association of New York State, a nonprofit organization that represents health care networks and hospitals, said that HANYS is still studying the executive order.
“It’s a very complex proposal, and much of it is unclear,” Van Slyke said. “We’re reviewing it to see what the impact will be.”
He said one issue involves the definition of executive. “How are they defining executive?” he said. “In a hospital setting, you have chief operating officers, directors of medicine, directors of emergency departments. ... Who will this apply to?”
Pablo Eisenberg, a senior fellow at Georgetown University’s Center for Public and Nonprofit Leadership, has been an outspoken critic of nonprofit CEO pay. He voiced support for Cuomo’s executive order, saying salaries for nonprofit CEOS have gotten out of control and New York’s cap would be a good first step in getting things under control.
“Something has got to be done,” he said.
cap too low?
But Eisenberg also questioned whether $199,000 was an appropriate amount.
“Putting a limit on CEO compensation is quite reasonable,” Eisenberg said, “but what that maximum level should be, whether it should be $199,000 or $250,000, is [open to debate]. I’d probably raise it to $300,000.”
He said a higher cap would accommodate a greater number of larger nonprofits, who might pay their CEOs more than $199,000 but less than $300,000, and perhaps increase nonprofit support for the executive order.
Eisenberg said that, as far as he knew, New York was the first state to limit nonprofit CEO compensation.
Experts say nonprofit CEO pay should be determined by the person’s experience and length of time with the organization, as well as the size of the organization’s budget and how much organizations with similar missions pay their directors. One argument is that nonprofit organizations need to pay well if they want to compete with the private sector.
But critics such as Eisenberg say the nonprofit sector has adopted the worst practices of the corporate world, and rising CEO compensation has widened the salary gap between top executives and mid-level workers. Not only is this damaging for workplace morale, but it also causes nonprofit CEOs “to lose sight of the fact that these are public service jobs that are supposed to provide public services to people,” Eisenberg said.
And he scoffed at the idea that nonprofits should become more corporate.
“Look at all the corporations that have tanked, all the banks and financial institutions,” he said. “They know how to manage?”
Cuomo’s executive order directs commissioners of state agencies to create regulations and amend agreements with nonprofit providers. Agency commissioners can adjust executive compensation “based on appropriate factors and subject to the approval of the director of the budget,” but the order prohibits executive compensation from exceeding Level 1 of the federal government’s Rates of Basic Pay for the Executive Schedule, which is currently capped at $199,700.
Because the cap only applies to state funds, organizations can pay their executives more using other sources of money.
Sauer said he was interested to see which CEOs received adjustments to their salaries. “It needs to be consistent in how it’s applied,” he said.
Jeffrey Gordon, a spokesman for the New York State Division of Budget, said the executive order applied to all organizations that provide services for the state, with no exceptions.
Last year, Assemblywoman Deborah Glick, D-Manhattan, proposed limiting compensation of New York hospital executives to $250,000 a year. At the time, Van Slyke denounced the proposal, saying that capping hospital executive salaries would drive talented leaders and managers out of New York.
“We’re competing in a national marketplace,” he told The Sunday Gazette. “If the goal is to ensure the very worst hospital leadership in the nation, then this proposal would work.”
Cuomo’s cap came out of recommendations from an executive compensation task force formed last August after a New York Times story revealed that executives at the Young Adult Institute, a disability service provider in Tarrytown, received more than $1 million a year in Medicaid-funded salaries.
“We must make sure that taxpayers’ dollars are always used efficiently and effectively to improve the lives of New Yorkers,” Cuomo said in a statement. “This executive order will prevent public funds from being diverted to excessive compensation and unnecessary administrative costs and will ensure that taxpayer dollars are being used to help New Yorkers in need.”
A 2010 study of CEO compensation by Charity Navigator, a nonprofit organization that evaluates nonprofit performance, found that leaders at 3,005 mid-sized to large U.S. charities earned a median salary of $147,273 in 2008, an increase of 4.7 percent from the previous year. These charities all depend on public support and have budgets of $1 million or more.
The report found that CEO pay is higher in the Northeast, where the median pay is $185,000, and the Mid-Atlantic region, where CEOs earn a median salary of $164,575. In the South, CEOs earn a median of $128,678, while in the Pacific Northwest, they earn a median salary of $139,066.