Executive Comp at Smithsonian Raises Concerns

exec comp.jpg The topic of executive compensation seems to be coming up a lot of late. Much of the latest coverage comes in the form of a rising chorus of protest over the disparities between pay in the chief executive suite and the basement office. On June 13, NPR reported that more than half of corporate CEOs make over $8 million per year, and that a majority of people answering a Bloomberg/LA Times poll think CEOs are overpaid. According to a report at faireconomy.org, if minimum wage had tracked with increases in average CEO compensation since 1990, the minimum wage today would be hovering at about $23 an hour, rather than $5.15.

This week, the executive compensation question hit home for nonprofits with a particular punch. On 20 June, the Washington Post broke a story about a review of the Smithsonian just completed by an independent commission. According to the Post, the commission, led by Charles Bowsher, a former US comptroller general, found that Lawrence M. Small, the Smithsonian’s former secretary - he resigned in March - earned $915,568 in his last year, and was given unlimited paid leave. Over his seven years in charge, he took off 550 workdays, during which he earned $5.7 million in outside compensation. The deputy secretary, Sheila Burke - who resigned two days before the story - earned $10 million in outside compensation over six years, taking 400 paid leave days. (In the interest of transparency, please note that Burke is a former faculty member and employee of the John F. Kennedy School of Government at Harvard, where I work now, and where I was a student at the time.)

Based on the coverage in the Post, the 108-page report gives a cautionary tale in what not to do with nonprofit executive compensation, and with oversight of an organization’s senior executive(s). The Smithsonian’s problems are worth blogging about in and of themselves. What I find interesting, however, is that what happened at the Smithsonian, and what NPR reported on the corporate side last week, are bad regardless of whether they happened in a publicly traded company, a nonprofit arts organization, a school….

Let’s not get caught up in questions of organizational form here. Creating a compensation package that a) allows unlimited paid leave during which one can earn outside compensation worth multiple times what one earns at one’s primary employment; b) provides minimal oversight regarding things such as salary increases, housing allowances ($150,000 per annum for Mr. Lawrence) and expenses; and c) is not seriously tied to performance, is bad stewardship regardless of the tax status of the guilty institution. Just as compensating senior executives in a for-profit corporation at a ratio of more than 500 to 1 over the average employee is a moral issue regardless of whether the institution is publicly held, privately held or a 501(c)(3). The nature of an organization’s corporate form might make one of these transgressions even worse, but they are plenty problematic without having to take such matters into account.

It is important to acknowledge the other side of this discussion, too, though. One might balk at first when hearing that Lawrence Small’s compensation reached nearly $1 million. But the Smithsonian’s assets approached $2.9 billion in 2006. Is that ratio so unbalanced? A reporter from a Midwestern paper called me recently regarding a local scandal in nonprofit executive pay. The pay in question was in the low six figures. The reporter wanted to know if that was excessive, as local leaders felt it was. I began by asking a series of questions about the type of organization, budget size, number of direct reports, geographic area covered, etc. It had not occurred to reporter - who does not usually cover nonprofits - that those would be reasonable factors to consider when determining whether the compensation was reasonable. Her equation had been a simpler one: nonprofit organization + six figure salary. I understand that, because for a long time, that has been the acceptable way to figure that equation. It is time, however, for our analysis to become more sophisticated.

In either case, blindly jumping to the question of organizational form does not serve us well. In the first instance, it is just unnecessary. Sometimes bad practices are bad practices, period. In the second instance, it is insufficient. Just because an organization is a nonprofit does not mean its chief executive should be grossly underpaid, any more than running a for-profit corporation automatically qualifies a CEO to be grossly overpaid.

Tiziana Dearing

Posted at 6:00 AM, Jun 26, 2007 in Accountability | Permalink | Comment