According to the NY Times, some legislators think so:
A provision in New Jersey’s recently passed budget, for example, includes a limit on what nonprofit groups can pay their chief executives if they are providing social services under state contracts. The cap, based on a formula that also applies to for-profits providing such services on behalf of the state, is part of a broader effort by Gov. Chris Christie to rein in salaries on state workers. ...
“Many donors feel that paying the leader of a charity a six-figure salary is outrageous,” said Ken Berger, the group’s president.
So what do we know about executive compensation at nonprofits?
On the one hand, you might think that "people who work for nonprofits are inherently altruistic and unconcerned with pay." But you would be wrong. Even among religious nonprofits, where presumably non-monetary incentives ought to be most prominent (money being the root of all evil and all that), we see non-profits using pay for performance compensation schemes.
On the other hand, you might think that "the principal-agent problem" should be worse in the nonprofit sector, since they are less subject to market forces and there is, by definition, no ownership constituency to monitor the performance of agents. If so, you would be right.
There is evidence that "nonprofit executive compensation is not significantly related to CEO performance, as measured either by improved fund-raising results or better administrative efficiency." Worse yet, "CEO compensation is significantly higher in organizations where free cash flows is present, as measured by commercial revenues, liquid assets and investment portfolios."
The latter point is especially significant, because agency cost theory teaches that it is not money--but free cash flow--that is the root of all evil. Free cash flow exists when a firm has earnings in excess of that required to fund all available investments that have positive net present values. Experience teaches that managers are likely to waste free cash flows on such things as high compensation, perks, and empire-building. Which is consistent with the evidence about which nonprofits tend to have higher CEO compensation.
The question is: What is the appropriate response? Here the story conflates several issues: (1) Should there be caps on the amount of compensation a nonprofit can give executives? Because the evidence seems clear that pay is an important element in recruitment and retention of nonprofit executives, capping nonprofits would disadvantage those that must compete with the for profit sector for employees. Hospitals spring to mind as an example. Ditto money management outfits like TIAA-CREF or university endowments.
(2) Should government contract out services to nonprofits with high paid CEOs? Put another way, should government contracts be conditioned on a cap on nonprofit executive compensation? James Joyner observes:
First, it’s quite debatable whether these public-private partnerships ought exist at at. I don’t have a firm position on the issue. Second, if they do, then it makes sense to evaluate them on a cost-benefit basis. And I’m not sure why that would be done on a line-item basis. Either Boys & Girls Clubs of America is providing whatever service the government wants provided at a level of cost and efficiency that outcompetes other potential bidders or it doesn’t. A high CEO salary should make them less competitive than outfits paying lower salaries, all things being equal. But if they still come out on top even with that drag, what’s the problem?
Sounds right to me.
