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Lawmakers Taking Aim at Nonprofit Salaries

(Aug. 3, 2010) Federal and local governments are contemplating unprecedented restraints on nonprofit compensation both in the U.S. and in Canada. A recent article in The New York Times shows several state and federal lawmakers in the U.S. want to curb the salaries of nonprofit executives and staff. A bill in Canadian parliament drafted recently has a similar aim.

While it is important that a nonprofit always make the best use of its funds, many in the nonprofit sector, including AFP, believe salary caps and restrictions are harmful.

Policing Pay

A provision in New Jersey's recently passed budget includes a limit on what nonprofit groups can pay their chief executives if they are providing social services under state contracts. Other states are considering similar measures.

Federal lawmakers have expressed concern as well. Senator Charles E. Grassley, Republican of Iowa, has told Treasury Secretary Timothy F. Geithner that he is concerned that the Internal Revenue Service is not tough enough in policing pay in the nonprofit sector and that regulations governing compensation are too weak, reports the Times.

In Canada, parliament has voted in favor of legislation (Bill C-470) that would allow the Minister of National Revenue to deregister any charity, private foundation, or public foundation that paid any employee more than $250,000 a year. The $250,000 would not just be salary, but would include taxable and non-taxable benefits (eg. pension plan contributions, professional association fees, etc.).

AFP's Position

AFP opposes caps on charities' executive compensation for a number of reasons.  First, charities and their boards need the freedom to make decisions about staffing and compensation that are in the best interest of the communities they serve, and to be held accountable for those decisions through the transparency measures that are already in place.

We also believe that compensation caps represent discrimination against charities, as private companies that receive public funds do not face compensation caps.

It is worth noting that many charities are multi-million dollar organizations, tackling intractable economic, social, and environmental challenges, and dealing with extremely complex management issues. They operate in the same international market as all other employers. If the market dictates that a certain combination of skills, experience, and responsibilities merits a particular level of compensation, then charities-like any other employer-need to take this into account when making their compensation decisions. In other words, sometimes larger salaries are justifiable, particularly at larger charitable organizations.

Salary caps will lead to a loss of talented employees

It makes sense, then, that a salary cap likely would drive highly qualified individuals out of the charitable sector and into the for-profit world where their careers would not be limited by an artificial, government-imposed compensation ceiling. This could lead to a serious drain of talent from the sector at a time when the labor market is tightening and charities are increasingly competing with the public sector, the private sector and international organizations for talent.

Furthermore, the charitable sector has been struggling to attract young talent and develop a new generation of leaders.  The proposed arbitrary cap will have a chilling effect on this effort by establishing a clear career ceiling and sending a negative message about maintaining a career in the sector.  Salary caps would be a deterrent to young new graduates wanting to enter into the charitable sector at a time when charities need to attract the best talent.

Restraints on compensation do not lead to transparency

Finally, a compensation cap would not enhance transparency.  In both Canada and the U.S., provisions are in place to provide transparency around executive compensation.  In the U.S. where a charity's highly-paid employees already are listed in schedule A of the Form 990, and in Canada, charities are required to report their top ten salaries by range.  Imposing a salary cap in either country would not increase scrutiny or increase transparency-it would simply set an artificial (and arbitrary) ceiling on wages.

AFP in Action!

In the U.S. where AFP already has been fighting to preserve the charitable deduction, we will educate Congress about the damaging effects of compensation caps if such legislation comes to light. That strategy likely would include direct lobbying on Capitol Hill, as well as the creation of talking points and draft letters for AFP members to use.  AFP will adopt comparable advocacy strategies in New Jersey and other states as they contemplate similar policies.

AFP has been working closely with Imagine Canada and others on this issue in Canada and developed the following talking points (attached below), with a broader strategic plan being generated in case the bill is acted upon in the fall. 

Please look for updates and calls for action in upcoming issues of AFP eWire.

Attachments

Bill C470 Talking Points — PDF Format

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