Monday, February 2, 2015

For Nonprofits, it Pays to be in the C-Suite

Not a week goes by that we are not told that nonprofits should learn to be more like their for-profit counterparts, or at least be treated like them.  For those who see charities as offering something unique to society, this call seems particularly odd. Yet, the refrain repeats.

There is one dimension, however, on which the refrain has been widely adopted.  Where once Executive Director was the chosen title of most nonprofit leaders, more and more have switched to the popular for-profit moniker of Chief Executive Officer (CEO).  It hardly seems like a critical difference, but the change  (even if merely semantic) is often seen as necessary to gain credibility and grow an organization.  With this in mind, I decided to conduct a mini-experiment, looking at the pay of the highest-paid executive at each of the 100 largest charities in the US.  Looking at the data with an eye on whether pay varies between those who are called CEOs and those who are not reveals a striking contrast.

A few things worth noting about the data

  • The sample of 100 charities comes from the Forbes listing of largest charities.  For each charity, I reviewed the most recent Form 990 filing, noting the pay and job title of the highest-paid employee.  Due either to not having a Form 990 or not listing a job title, 3 charities were excluded, leaving 97 observations.
  • Of the 97 charities, 69 had a leader with CEO in his/her title; the remaining 28 instead had Director, Executive Director, President, Manager, etc.
  • Yes, the difference in average pay is statistically significant, with a t-statistic for a difference in means test of 3.02 (p-value < 0.01). There is, of course, the question whether the largest charities amount to a representative sample.
  • My first reaction to the large difference was that it must just reflect that larger charities rely more on the CEO title and larger charities also pay more.  However, this doesn't appear to be the case.  If one goes by the Forbes size rankings, the average rank of the Non-CEO charities was 52, whereas is was 51 for CEO charities.
  • Interestingly, the most common accounting performance metrics too are similar across the groups, with the CEO charities and non-CEO charities reporting an average program expense ratio (fundraising efficiency ratio) of 0.86 (0.09) and 0.85 (0.09), respectively.
  • Since we know that averages can be skewed by a few influential observations, I also compared median pay amounts. The difference shrinks but is still notable, with median pay of $421,198 and $306,251 for CEO charities and non-CEO charities, respectively.
In short and at the risk of oversimplifying, it pays to be a CEO.

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