Over Compensating

Huge salaries for private sector executives have been getting lots of congressional and media scrutiny lately. Before the economic collapse of late last year, you heard about big executive pay packages only in the context of the broader policy debate about income distribution--that it was unhealthy for our society to have too wide a gap between the haves and the have-nots. Now it's different. The Wall Street types are starting to get the kind of scrutiny that non-profit executives have been getting for years.

The plutocrats/corporate titans/Masters of the Universe (pick your own disparaging term) are now in the same boat with us and for the same reason. When the taxpayers started bailing out banks, insurance companies and perhaps even (by the time you read this) the Big Three automakers, the public's instinct for fair play kicked in big time.

As long as the Wall Street crowd was putting their own money at risk, most of us might have winced at the huge base salaries and gargantuan bonuses.

But we accepted them because--Hey! either you're a capitalist or you're not, and most Americans are capitalists. But with the bailouts, Wall Street began to put the taxpayers' money at risk, and they are suddenly a whole lot less tolerant of outrageous pay for people who essentially screwed up.

Welcome, Wall Street, to the tax-exempt sector where taxpayers are happy to give you a tax exemption to do good, but they don't want you to get rich doing it.

So now the question is: What is reasonable compensation for the for-profit executives?

You might think the non-profit sector could provide useful guidance in this area because our executives have been subject to the "reasonable compensation" rule for many years, and more recently we have been subject to tax penalties (called "intermediate sanctions") for getting too much pay (called an "excess benefit transaction"). By now, with all that regulatory structure and the ensuing rulings over the years, we should have a pretty good handle on how much pay is too much.

But we don't. In fact, we're all over the map on the issue.

Back in the mid-'90s, Rep. J.J. Pickle (D-Texas), chairman of the House committee with jurisdiction over tax-exempts, was so frustrated with huge salaries among the charities that he proposed no charitable executive should earn more than the U.S. president. At the time, the president was paid $200,000.

The Pickle proposal might have had some force had it been implemented, but in the meantime the president got a raise to $400,000. So much for a useful standard.

Other non-profit pundits proposed that no charity executive should earn more than the Chief Justice of the Supreme Court. Last year Chief Justice John Roberts was paid $217,400, which is a nice amount except that it is about $71,000 less than the median salary of 52 charity and foundation executives reported in a 2005-2006 survey.

More recently, in November, a San Francisco official proposed that an executive's salary and benefits for a non-profit receiving city funds should be limited to six times the total compensation of their lowest paid full-time employee.

This approach has some logical appeal in that it is linked to local pay scales, but it would apply only to city-funded charities.

How long would it be before there was an executive exodus to other charities that did not depend on city funds?

So far the easy formulas have not worked in setting non-profit executive pay, and they won't work in taming Wall Street salaries either.

The only method that seems to work is the so-called LOL test: If your compensation package makes the congressman laugh out loud, it's too much.

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