Everybody has an opinion about whether nonprofit executives are paid too little or too much, but almost nobody has any real data outside their own experiences. At last! Economist Linda Lampkin (left) analyzed 100,000 nonprofit CEO salaries and has a definitive (if a little statistics-wonky) answer:
Sometimes it seems that the whole credibility of the charitable sector hinges on the issue of compensation. So what exactly is too much pay? And who is getting it? A colleague and I decided to analyze Form 990 compensation data to bring some real numbers to the discussion (database info at the end of this article).
The IRS says nonprofits must pay "reasonable compensation" but there are few specific guidelines other than that total compensation must be compared with "what ordinarily would be paid for like services by like enterprises under like circumstances." "Like enterprises" means organizations that provide similar types of services and have similarly sized budgets. Using the ERI Economic Research Institute database of compensation data from Form 990s in 2009 (the most recent full set available), we calculated the mean and median salaries for almost 100,000 CEOs of charities, by revenue size:
Analysis of 100,000 nonprofit CEO salaries
 Mean is the mathematical average, calculated by adding up the data points and then dividing by the number of data points.
 Median is the midpoint of the data, so the number of data points having values greater than or equal to the median is the same as the number less than or equal to it.
 Standard deviation, a measure of the variability of the data, is the average amount by which individual data points in a data set differ from the arithmetic mean of all the data in the set.
Although the amount of the Standard Deviation (SD) from the mean salaries above shows that there are some charities paying much higher than the average, there are also some paying much lower. And look at the levels of the mean and median salaries -- less than $50,000 for CEOs in the smallest group (the group with the largest number of charities), less than $70,000 in the next. In fact, the vast majority of CEOs are earning well less than $100,000 - not much evidence of lots of very high salaries.
But at the highest level of revenue -- nonprofits with annual revenue of $10 million or more -- the large difference between the mean and the median salaries and the significant standard deviation indicate a wide range of salaries within this group.
So we decided to take a closer look at the organizations by service type with revenue of $1 million or more. The chart below says, for instance, that among arts organizations with revenue between $1 million and $5 million, only 1.3% pay their executives more than 2 standard deviations away from the mean. Restated: Only 1.3% of arts organizations of this size pay significantly more than average.
These percentages are translated to actual number of organizations reporting high compensation for their CEOs in the table below.
The analysis of the Form 990 CEO compensation data from 2009 showed:
Finding #1: A great many nonprofits filing Form 990 had less than $100,000 in revenue and a majority of these had NO paid staff. And even among charities with more than $1 million in revenue (about 14% of all nonprofits), only 60% have a paid CEO. [Ironic question: does $0 per year seem unreasonably high?]
Finding #2: The highest paid CEOs -- defined as paid more than 2 SDs than the average salary - represent only about 1/2 of 1% of all nonprofit organizations.
Finding #3: Higher than expected compensation is not evenly distributed by type and size of the charity. Hospitals have the greatest number of CEOs paid higher than 2 SDs above the mean, at all revenue sizes. The categories of health (excluding hospitals) and public and societal benefit organizations also had more CEOs falling outside the 2 SD range than all charities.
Setting nonprofit executive pay
Whatever compensation decisions are made, nonprofits need to follow best practices by collecting appropriate data and using them to make defensible decisions that reflect the organization's compensation philosophy. Nonprofit resources need to be spent right - for instance, providing enough compensation to attract, retain, and motivate the staff, while leaving sufficient dollars to achieve the organizational mission. That becomes even more challenging in difficult economic times.
So the next time you hear that discussion about outrageously high nonprofit salaries, add some context to the debate with these numbers -- there are some high paying organizations, but not that many. And use the ERI data as a resource to document that your charity's compensation is on target.
Appendix: The ERI database and how you can use it
The ERI database of Form 990 information is available in the Nonprofit Comparables Assessor (CA), a software program that calculates average competitive compensation levels, based on organization revenue size, type of organization, and geographic location. You choose the type of organizations providing similar services (adoption services, day care, museum, etc.), the revenue level ($1 million, $50 million, $2 billion, etc.), and a specific geographic region (all US or a state). The majority of nonprofits can use a free version of CA to provide the data needed to document reasonable pay. The more comprehensive paid subscription versions are designed for larger organizations, watchdog groups, and regulators, including the IRS and state charity officials.
Linda Lampkin is former Director of the National Center for Charitable Statistics at the Urban Institute where she was instrumental in improving Form 990 and in developing databases that make 990 data useful to researchers and practitioners. She co-authored the New Nonprofit Almanac and numerous research papers on the nonprofit sector. After a 30-year career as an economist working for various nonprofits and labor unions, she now heads up the Washington, D.C., office of Economic Research Institute, where she "gets paid to write blogs about the nonprofit sector and play with compensation data." She can't believe her good fortune in finding this job.
See also in Blue Avocado: