Partner [email protected] 310-541-6233
In the last few weeks, we’ve seen mainstream media highlight the competition for talent at tax-exempt organizations. The Wall Street Journal reported that CEO pay at tax-exempt organizations increased in aggregate by a third from 2011 levels. While this increase can be explained in part by the economic rebound of these organizations since the Great Financial Recession, there are larger factors at work.
Complexity and organization size, two main drivers of executive compensation in the for-profit world, apply to tax-exempt organizations as well. From a complexity standpoint, tax-exempt CEOs must simultaneously attend to multiple priorities and constituents. They have a tough balancing act managing multiple stakeholders’ interests to achieve the organization’s mission. This visible position must serve his or her community, court donors, navigate the political landscape, handle the press, and fiscally steward the organization. In contrast, Fortune 500 CEOs’ primary focus is to satisfy shareholders’ financial expectations (with other demands being subordinate). Further, the number of executives with the experience of successfully leading significantly-sized tax exempt organizations is limited. As a result, the talent pool is small, and the demand for them is fierce. For example, the Los Angeles Times just reported that the storied but financially struggling New York Philharmonic hired Deborah Borda as its new CEO with the expectation that she can sprinkle on it the “same magic” she did during her tenure at the Los Angeles Philharmonic.
The structure of compensation reflects this intense demand for talent, as well as the strategic planning and economics of these tax-exempt organizations. The typical tax-exempt CEO receives a base salary and a bonus opportunity, which is prevalent in three-quarters of such organizations according to Vivient Consulting’s survey. Some organizations also provide longer-term financial arrangements that serve as a retention hook and provide financial security in retirement. Most large tax-exempt organizations have multi-year strategic objectives (such as passing important legislation, multi-year capital campaigns, etc.) and want to focus their top executive on the extended time horizon required to create lasting legacies. However, unlike for-profit companies, there is no equity compensation available. As a result, long-term incentives need to be designed to reflect both mission and fiscal success, incorporating qualitative and qualitative measures that support these organization’s values and mission.
From a governance standpoint, we find that CEO pay at larger tax-exempt organizations is governed in an independent and structured process that mirrors that of for-profit companies. In our experience, independent Boards of Directors spend a significant amount of time and attention to the reasonableness, fairness, and pay-for-performance (defined more broadly to include the achievement of the organization’s mission) of CEO compensation. This is not surprising as sophisticated businessmen and women who sit on these organizations’ boards of directors bring their independence and expertise to the pay discussion. Further, the boards are careful to maintain good governance process over CEO pay decisions in order to maintain the “rebuttable presumption of reasonableness” and avoid IRS intermediate sanctions.
With increased demand for talent, we see more cross-over of executives and compensation practices between tax-exempt and for-profit organizations. Thoughtful compensation practices and programs grounded to the organization’s mission and economics can help retain and motivate these uniquely skilled executives.