From Florida to Massachusetts to New York, state legislatures are turning up the heat on compensation for executives who lead non-profits, including social service agencies, museums and universities. Though the states differ in the actual cap they aim to impose – for example, lawmakers in Florida want to limit CEO salaries to $129,972, while in New York that number is almost $200,000 – the message they are sending is clear: non-profits are really "charitable" organizations so non-profit executives should "volunteer" a portion of their compensation via discounted salaries.
And lawmakers are gaining momentum. In New York, the heads of the 140,000 non-profits that receive state funding may be in line for pay cuts as Gov. Andrew Cuomo cracks down on CEO pay at social service agencies. The governor has set a limit of $199,000 on the amount of state money that contractors can put toward paying their executives, both non-profit and commercial. Non-profits that refuse to reduce executive pay could lose their entire grant or contract.
Initially introduced as an executive order in January 2011, the governor has now introduced proposed regulations designed to curb excessive compensation. The regulations, released on May 16, 2012, are subject to 45 days of public comment and possible revisions before taking effect next year.
"These regulations will allow the state government to identify and stop the few providers that pocket taxpayer dollars rather than use them to serve the public," Gov. Cuomo said in a prepared statement.
(It is important to note that executive compensation at large non-profit organizations, including hospitals, might be unaffected by the New York cap because they generate most of their monies from the federal government or through private philanthropy rather than via state funds.)
In New Jersey, Gov. Chris Christie started focusing on non-profit social service agencies that do business with the state back in 2010, when he issued "Amendment to Third-Party Contract Language," which was distributed to providers by the state Division of Developmental Disabilities. Beginning July 1, 2010, New Jersey capped the state reimbursement for salaries of top-earning executives at $141,000 for any non-profit social service agency with a budget over $20 million. Executive directors of non-profit groups with budgets between $10 million and $20 million could receive no more than $126,900 in state compensation; and non-profit executives overseeing a budget between $5 million and $10 million would get $119,850 a year from the state.
According to a 2009 analysis by the Office of Legislative Services, more than 30 executive directors at New Jersey's community non-profits earned more compensation than that newly implemented structure allowed.
Roadblocks
But not all lawmakers have met with success. In January, the State Senate Committee in Florida approved a bill to cap salaries at state-funded non-profits at a rate no higher than the salary of Florida's highest-paid elected official. Lawmakers introduced that bill after discovering that compensation at the state's 20 leading community-based care organizations exceeded $350,000 in salary and bonuses in some cases. However, the bill died on March 9, 2012 in the Florida's Governmental Oversight and Accountability Committee.
In Massachusetts, the story is similar. State Sen. Mark Montigny (D-New Bedford) has tried for more than six years to rein in million-dollar pay packages at non-profits complaining that non-profit oversight is well overdue. He and other lawmakers point to salary abuse as the compelling reason for his reform proposal, which would cap non-profit executive salaries at $500,000 and prohibit compensation to board members, but allow hospitals and some other organizations to seek waivers if they open their books to the public. Not unexpectedly, this proposal has stalled.
Stepping into the void, two other state legislators filed a budget amendment designed to impose compensation caps on the executive staff of Massachusetts non-profit corporations or public charities that received state funds, based on their organizations' annual operating budgets and executive positions. According to Amendment #407, "An act limiting non-profit corporation and public charity salaries" filed by Rep. Peter Durant (R-Spencer) and Rep. Keiko Orrall (R-Lakeville), caps would apply to public charities that receive at least 30% of their annual budget from state funds, but would exempt hospitals because, according to the lawmakers, many physicians who already earn more serve in an administrative capacity and "capping their compensation could force them to step down."
Again, as in the case of Florida's salary cap legislation, Amendment #407 was basically killed in committee when the amendment was reduced to a "report on the feasibility of setting limits on the annual compensation of the executive staff of a non-profit corporation" to be performed by the Inspector General. The report is due to both the House and Senate by December 31, 2012.
At an Impasse
Proponents of non-profit executive salary caps contend that the limits are in the best interests of the states and their taxpayers, as well as the far-less compensated employees who make the organizations hum (such as museum curators, security guards, educators, cleaners); that tightening the reins will help cash-strapped states close budget deficits; and that only non-profits that receive taxpayer money need to be concerned about salary caps. They even suggest that executives at many large non-profits can likely avoid salary decreases by paying themselves from non-state revenue streams — like federal grants or private donations.
On the other side, salary-cap critics contend that imposing pay limits would make it much more difficult for non-profits to hold onto top-tier executives and recruit new, qualified staff.
Whatever happens, it seems the chorus of salary cap-proponents is growing louder and some form of compensation reform may be inevitable. For more information, please contact your local CBIZ office.
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