Designing incentive pay for nonprofit executives can be a challenge. Do we pay for sound fiscal stewardship? Growth in donors and sponsors? Or should the lion's share of incentive compensation for nonprofits be tied to progress in accomplishing the organization's mission?
It isn't enough that the IRS, through its intermediate sanctions regulations, prohibits payment of any excessive compensation to nonprofit executives (imposing significant penalties on both the executives and responsible Board members when an organization is found guilty of such) or that it precludes executives from entering into revenue-sharing arrangements that can be construed as private inurement (where some portion of a tax-exempt entity's revenues or donations flow directly to an "insider"). There are unique forces at work when it comes to nonprofit executive incentives that can be easy for compensation pros and Board members to overlook or underestimate.
Case in point, a recent controversy that has emerged around diabetes nonprofits, driven by an activist donor. As reported in this week's Chronicle of Philanthropy, Nonprofit Leader Pushes Idea of Tying Executive Pay to Progress in Accomplishing Mission (full article behind subscription firewall - sorry), Brian Kelly, a New York video game executive and philanthropist and the father of a child diagnosed with Type I diabetes, is pushing hard on the idea that executive compensation in charities should be tied to progress in accomplishing their missions.
Mr. Kelly, co-chairman of the board of the gaming software developer Activision Blizzard, began to study the progress charities were making in finding a cure for the disease soon after his son was diagnosed. He was not thrilled with what he found.
So in 2011, with $1-million from his family foundation, he started a nonprofit called the Juvenile Diabetes Cure Alliance. Its goal is to persuade donors to demand that their money to diabetes groups be spent on research that’s headed toward finding a cure for Type I diabetes by 2025.
This month the alliance issued its second annual report that criticizes the nation’s largest diabetes nonprofits—the American Diabetes Association, the Diabetes Research Institute Foundation, JDRF, and Joslin Diabetes Center—because it says they don’t do enough to base executive bonuses on progress toward a cure for the disease.
“The major diabetes nonprofits pay a bonus to top executives apparently for building and improving their organizations rather than advancing cure progress,” the alliance’s report says. “Incentive compensation has arguably enabled these nonprofits to become more successful at raising money, but it has not been used to drive measurable progress toward a near-term cure for Type I diabetes.”
The charities attacked by the Alliance, along with a number of compensation experts, have responded. They note the many practical challenges and obstacles to the idea of tying executive bonuses to mission. These include the importance of executive attention to the things they see as paving the way for mission success, including the building of large medical research networks, and the cultivation of donors and sponsors. They point out that, for many organizations, mission is more broadly defined that just finding a cure: it focuses on improving the lives of those with diabetes by using exercise and healthy eating to reduce the effects of the disease. And they cite the common objective to financial incentives, often particularly acute in the charitable sector, that it is an "insult" to presume executives will focus more on mission if they are paid a big bonus to do so.
My take? I've done a fair amount of work with nonprofit executive compensation. I think Mr. Kelly has a point, and I think that charitable nonprofits blow off concerns like this at their own peril.
Considering what I know about IRS regulations and the advice of attorneys who specialize in this area, I have always advised my tax-exempt clients to ensure that executive incentives (if they are going to be used) are tied as much to mission-related metrics as to financial and fundraising accomplishments. Hopefully all these charities have a plan that reflects how they are directing efforts and resources toward the mission - including lead (efforts and results that are preconditions for success) as well as lag (efforts and results that measure success already achieved), that can inform incentive plan design.
What's your take and your experience in this area?
Ann Bares is the Founder and Editor of the Compensation Café, Author of Compensation Force and Managing Partner of Altura Consulting Group LLC, where she provides compensation consulting to a range of client organizations. Ann was recently named President Elect of the Twin Cities Compensation Network (the most awesome local reward network on the planet) and joined the Advisory Board of the Compensation & Benefits Review, the leading journal for those who design, implement, evaluate and communicate total rewards. She earned her M.B.A. at Northwestern University’s Kellogg School, is a bookhound and foodie in her spare time. Follow her on Twitter at @annbares.
Creative Commons image "Symbol of the American Dollar Amongst Question Marks " by kasiastock