Ethical Principles Of Nonprofit Executives Commerce Essay

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This paper explores the relationships between nonprofit executive compensations and the performance of the organization. It looks briefly at those organizations that have performed well

despite the executive management receiving little to no compensation for their time. We will also briefly look at those nonprofit organizations that pay high executive salaries, yet seem to be very effective in their outreach. The last segment we will review are nonprofit organizations that pay seemingly extravagant salaries to their executive management, and seem to provide little to no community support. Finally, we will conclude by comparing nonprofit executive compensation with current business ethics standards as well as social responsibility expectations.

Ethical Principles of Nonprofit Executives Comparing the Levels of Compensation for Nonprofit Organization's Executives' Against Their Community Impact As Well as Ethical Business Standards and Social Responsibility

In today's business environment ethical standards are becoming more and more important in the daily operations of corporations and financial institutes. Recent high profile cases of mismanagement such as Enron and Lehman Brothers have shown the need for ethical standards. These standards ensure business executives are adhering to their fiduciary responsibilities of looking out for the health of a company and the interest of all stakeholders. Given the public trust involved, ethical practices and social responsibility are just as important, if not more so, for the management of a nonprofit organization. One of the important issues in ethical behavior among nonprofit organizations has been in the area of executive compensation.

"Even the appearance of impropriety can be detrimental to philanthropic foundations

and charitable organizations. The public relies on the nonprofit sector to utilize

funding for the intended use. Abuses within the nonprofit community range from use

of endowment money to pay for personal expenses to excessive compensation for

executives." (Gregorian, 2004 p. 43).

We can also see where some executives try to take advantage of the system as well. A recent conviction of a former American Motorcyclist Association Board Chairman highlights this problem:

"Former American Motorcyclist Association (AMA) Board Chairman Dal Smilie

was sentenced Monday, Feb. 22, to eight months in prison and two years probation for

embezzling more than $100,000 through fraudulent travel reimbursement claims


Ethical Principles of Nonprofit Executives

Submitted to the AMA over a period of years ending in 2007. Smilie pleaded guilty to

felony counts of grand theft by deception and of receiving stolen property in the

Fairfield County, Ohio, courtroom of Judge Chris Martin. He was taken directly into

custody to begin serving a sentence that could see him request early release after 30

days. He was also ordered to pay a $1,000 fine and court costs."

(, 2010).

This action has likely done severe damage the AMA's credibility and will probably take years to erase, if ever. It also brings into question the type of work environment and ethical standards that would lead an executive to believe he could get away with fraud.

Oddly, in conducting research for this paper, it became clear that few nonprofit professional journals touch on the subject of executive compensation. It almost seems to be a taboo subject within the nonprofit circles. Most of the commentary found on executive compensation seems to have come from news organizations and watchdog groups such as Charity Watchdog. Another excellent source to gauge the "honesty" of nonprofit organizations is the American Institute of Philanthropy. They provide a free weekly journal rating various charitable organizations. On their home web page, they give the following statement about their purpose:

"This web site will provide you with information about our organization, the charities

we rate, and our method of grading charities. Special features will focus on top salaries,

top-rated groups and hot topics in America's most popular causes such as: Abortion,

Animal Protection, Cancer, Child Sponsorship, Environment, Human Rights,

International Relief, Senior Citizens, and more. (


Ethical Principles of Nonprofit Executives

Watchdog groups are essential in this age to help the consumer learn more about the charity

they are considering donating to. It would be wise for all to scrutinize any nonprofit organization's financial reports before giving them any donations.

At what point does a nonprofit executive's compensation go from enticing the best and brightest to accept the leadership position to bilking the public and neglecting the target issue for which the nonprofit was formed? There was a case of a charitable organization that paid seventy-eight cents of every dollar donated toward executive salaries, over twenty-nine cents of every dollar goes to operational costs and less than three tenths of a cent actually makes it to the "cause", does this show ethical behavior in the management of the nonprofit's funds? Is the nonprofit organization merely being mismanaged? Or, was it a ruse to form cushy, high paying jobs for a group of thieves? Another case does not have to do with salaries, but shows a high level of unethical behavior that would likely coincide with unreasonable executive salaries. A well established environmental group was successful in halting logging in a section of northwest forest on environmental grounds. However, after the successful court battle the founder of the nonprofit group sold the trees off of his property to the logging company. His property was adjacent to the area they shut down, and he sold roughly the same amount of timber at four times the price.

We will look into various nonprofit organizations and their executive compensation to see if there is any correlation between management salaries and the effectiveness of the organization. We will also look at the perceptions and ethical dilemmas created by high executive salaries


Ethical Principles of Nonprofit Executives

within nonprofit organizations. It is the opinion of this paper, when executive compensation in a nonprofit organization exceeds funds given out in support of the issue they have come together to solve, this becomes unethical behavior that needs immediate resolution. Executive compensation should fall within an ethical threshold when compared to how much is being spent on their actual outreach.

Social responsibility, when compared to the level of compensation, is really hard to identify in some cases. According to the article published in the St. Petersburg Times, written by Emily Steel entitled "He's the highest paid charity executive around", Emily Steel states that in 2003 CEO R. Lee Waits earned a salary of $530,693. Waits is the CEO of Good Will Industries-Suncoast, Inc. The article states that the head of the Florida Blood Service, Inc., Donald D Doddridge earned $408,730 during the same time span (St Petersburg Times, 2005). What is even more interesting is that the article indicates that the average salary for executives as heads of charities averaged $257,393 in 2003.

The emphasis on these rather large salaries did not seem to imply a much deeper concern for the public that the charity said that it would service; but it seems to compensate the CEOs for developing a business plan that raised money while at the same time competed for the same customer base as for profit businesses.

It is very hard for the public to understand and accept salaries of this magnitude when so many of the people that it serves barely have enough money to make ends meet. When nonprofit

organizations pay excessive salaries like the salary paid to Gloria Pace King, president of The United Way of Central Carolinas. She was paid $1.2 million in 2007 which included an


Ethical Principles of Nonprofit Executives

$822,000 retirement fund (Charity Watchdog, 2008). United Way's case also shows how compensation scandals can have a harmful, lasting effect on the nonprofit organization:

"Entry to the office she inherited from Gloria Pace King, who had been fired as CEO by

United Way's board after a wrenching community explosion over a compensation

package the board had approved, included not only an office door but two sets of glass

outer doors. 'We just opened all those doors and leave them open,' McIntyre says. 'We

just made it more accessible.' Charged with fixing an organization stunned by the one-

two punch of the scandal and the recession; McIntyre aims to transform United Way.

That will include communicating better with donors, breaking down walls within the

organization and focusing on urgent community needs." (Philanthropy Journal, 2010).

In United way's case, they have at least been blessed with a new CEO that intends to clean up the organization. Oddly though, her compensation package is not mentioned anywhere in the story. This could raise the question of whether the proposed reforms are all smoke and mirrors.

Many board of directors and salary compensation review boards seldom see the problem with awarding increasing salaries to their top executives. They often feel that these salaries must be paid to keep the business running and in order to attract top-tier executives. It is very hard to distinguish whether or not these soaring salaries impact the social responsibility of the nonprofit organization, but one thing remains certain and that is nonprofit organizations want to attract the top-tier executives that have vision and influence. The levels of compensation are being paid for the executive's talent and the ability to increase the organizations funding sources.


Ethical Principles of Nonprofit Executives

Because it is difficult to determine what a reasonable salary is for a CEO that manages a highly complex nonprofit organization, society puts a certain amount of trust in the organization that it can find a good balance between the compensation packages of their CEOs and the monies spent on the people that the organization is supposed to help. Recently an article appeared in the Huffington Post citing a nonprofit charity's CEO was under Senate investigation for excessive salaries that she and her staff received during 2008. Roxanne Spillett, CEO of The Boys and Girls Club of America, received a total compensation package of $988,591 which included a base salary of $360,774; a cash bonus of $150,000; other compensation of $83,152; a deferred compensation of $385,500 which was in the form of a retirement plan; and nontaxable benefits of $9,165 (Ohlemacher, 2010). The Senators state that there is much to question because in that same year The Boys and Girls Club of America posted a $13.6 million loss for 2008 according to tax records. The Senators also questioned why in the same year officials spent $4.3 million on travel; $1.6 million on conferences, conventions, and meetings; and $544,000 on lobbying fees. All of this, during a year where the club posted a loss for 2008 as well as the closing of numerous local clubs due to a lack of funding (Ohlemacher, 2010). Senator Chuck Grassey of Iowa, the top Republican on the Senate Finance Committee was quoted as saying "The question is whether or not a very top-heavy organization might be siphoning off federal dollars that should be going to help kids." (Ohlemacher, 2010)

There are some that are sitting on the fence as to whether or not the compensation package for Spillett was justified due to the significant growth within the club from 1,850 local clubs to 4,350 local clubs (Ohlemacher, 2010). This had been a tremendous addition to their organization but


Ethical Principles of Nonprofit Executives

now, the compensation package doesn't fit the economy. It can't go on when they are posting losses and their executives are being paid exuberant salaries.

Another seemingly scandalous case regarding non-profit executive salaries is the legal case of

The State of New York vs. Richard Grasso:

"The payment of $139.5 million, in a lump sum, to the CEO of a relatively small not-

for-profit trade organization and regulator (albeit a well-known and very powerful one).

According to the complaint (and there is substantial publicly available data to support

this) the compensation and benefits for Mr. Grasso expensed over the period of 2000-

2002 equaled slightly less than 100 percent of the New York Stock Exchange's (NYSE)

net income over this same period. Complaint, para. 34. Over these three years, this

represented $130.3 million of compensation and benefits to Mr. Grasso compared to

$132.8 million of net income." (The New Your Law Journal, 2008 p. 35)

Although the case was dismissed by courts, it really raises questions about executive

compensation in a nonprofit organization. Mr. Grasso was the head of the New York Stock

Exchange. Although numerous other improprieties were cited in the case, the most glaring of all

was Mr. Grasso's compensation as it nearly matched the Exchanges total assets.

In Charity Navigator's 2009 CEO Compensation Report, the average salary for a CEO that leads a nonprofit organization with $100 million or more in expenses is $462,037. Ken Berger, president and CEO of Charity Navigator was quoted saying: "The people who use our site, donors, would be appalled by a salary like this. If you want to be a millionaire, go and work in the for-profit sector." (Charity Navigator, 2009).

In 2004, issues around executive compensation became a source of debates and controversy. Key issues and questions that were developed during this timeframe were: "How should


Ethical Principles of Nonprofit Executives

executives be paid, how much should executives be paid, what kind of disclosures should be made into the financial statements?" (Yu, Johnson, & Zhang, 2004). All of these questions brought about scrutiny at the process that was in place. That scrutiny revealed that a better checks and balances had to be implemented. That same year, 2004, the Internal Revenue Service (IRS) began a Compensation Compliance Program that was focused mainly on 501(c) (3) and 501(c)(4) and large 501(c)(6) organizations (Kalick, 2004). Executives of those organizations were subject to penalty excise taxes if they received unreasonable compensation and may even have had to pay the excess back to the organization (Kalick, 2004). The type of scrutiny that the IRS is putting on the directors of non-profit organizations also puts a stronger demand on directors to make the compensation structure more transparent so that the directors will care more about how executives are paid (Yu, Johnson, & Zhang, 2004). In an article published in the Journal of Accounting & Finance Research there was talk of corporate governance. One of the components of corporate governance is the use of executive compensation as a mechanism to line executive's performance to the performance of the corporation (Yu, Johnson, & Zhang, 2004). There is a direct relationship between executive's compensation and the organization's performance (Yu, Johnson, & Zhang, 2004).

Maintaining ethical standards seems to have become an outdated notion as presented earlier by several example of outrageous perks, privileges and salaries of our modern-day nonprofit CEOs It is inconceivable that seventy-nine cents of every donated dollar goes towards a nonprofit CEOs salary in comparison to the great needs of others that could be met if that money was appropriated as it should be.


Ethical Principles of Nonprofit Executives

Sometimes it appears funds are used for the purpose of lining the pockets of a few who feel their services require such a hefty salary. Among a growing list of examples, the most recent and well know case of Jack Abramoff heavily involved non profits as well:

"Newly released documents in the Jack Abramoff investigation shed light on how the

lobbyist secretly routed his clients' funds through tax-exempt organizations with the

acquiescence of those in charge, including prominent conservative activist Grover

Norquist." (Schmidt, Washington Post, 2006, p. 1).

Equally important, The Chronicle of Philanthropy concluded in their report that

"An analysis of survey data shows what percentage of organizations gave bonuses to

their top executives, supplemented their pensions with deferred compensation, or made

payments toward such costs as housing, automobiles, or a variety of other perks.

Organizations exercised wide discretion in accounting for such payments." (Chronicle of

Philanthropy, 2000, p.1)

As discussed earlier, leaders such as Dale Smile taking advantage of the system to embezzle money or Gloria Pace King's huge salary and perks totaling 1.2 million dollars is not the example future nonprofit leaders need to see or the image the media projects to people who are prospective donors to one of these nonprofit organizations. "Every day there are revelations of organizations behaving in discreditable ways. Sometimes these actions result in damage to an organization's reputation" (Reuber, & Fischer, E. 2010, p. 39) Damaging a nonprofits public image is an invitation for failure and ongoing law suites not to mention loss of public trust. At


Ethical Principles of Nonprofit Executives

times, CEOs within a nonprofit organization have created the following problems:

"If the CEO can influence the board structure, agency problems arise, which in turn

allows the CEO to extract rent and demand compensation in excess of the equilibrium

level." (Barros & Nunes, 2007, p. 811)

Even our government finds it hard to regulate and monitor the activities of many public and private organizations. One source in my research pointed out the following:

"With respect to the other types of tax-exempt organizations, the IRS restrictions on

their political activities are less clear and there is almost no IRS guidance to help clarify

the situation. The lack of guidance is not unexpected because it does appear that these

other organizations participate in a significant amount of political activity." (Lunder ,

Erika, 2006, p.1 )

Non-profit organizations constitute a sizable economic force. According to the Proceeding of the World Academy of Sciences and Technology

"Analysis of the accounts of nonprofit institutions, including calculations of the value

added by volunteers, conducted across eight countries, revealed that non-profit

institutions contribute an average of 5% to GDP" (Renshaw, S., & Krishnaswamy, G., 2009 p. 456).

With that sizable contribution to our economy, nonprofits are under a lot of pressure. This can lead some down a path that is unworthy of the purpose nonprofits were created for. Giving back to communities should be top priority and not elevating leaders political or income status. Setting the ethical standards for the way of doing business in nonprofit organization is primarily the task


Ethical Principles of Nonprofit Executives

of management, specifically the function of the board of directors and the CEO of the organization. Nonprofits should never lose their original sense of purpose which is to fill a much needed service that the private sector may not be capable of doing. Balancing the traditional standards of profitability and burden of social responsibilities is not an easy task. In recent years, it has been a trend of setting standards of corporate ethics according to a stringent degree of moral behavior:

"Several variables affect the CEO, namely, organization performance variables, board

composition variables and individual variables. This result highlights the urgent need

for a code of governance practice to be introduced in this sector."(Barros & Nunes, 2007,

p. 813)

A company should make the most of this strategy as an expectation of conduct, and responsibilities of its employees. Ethics are important in every level of a business organization, but especially in the day-to-day actions of its employees. As one business text stated "the most important factor in most surveys is honesty/ethics." (McShane, Von Glinow, 2010, p. 52)

In conclusion, ethics is doing what is right even when no one is looking. When people are looking, they are looking at issues which are on the minds of many in our communities: fairness, justice, right and or wrong. A society with a strong code of ethics tends to run smoothly. A society with no code of ethics devolves into anarchy. Although arguments have been made to the contrary, ethics are just as vital in the workplace. Ethics are about how we should live, and as Christians, we should reflect Christ's presence in our lives and decisions. These are strong values where nonprofit boards and CEO's can lead by example. The public image that will result can only enhance their funding for much needed services.