Here’s what happens when nonprofit CEOs are kept out of the board meetings that decide their pay

business meeting
  • Since 2013, New York has prohibited nonprofit CEOs from attending meetings where their pay is discussed.
  • A group of researchers found this change lowered local nonprofit CEO salaries by 2% to 3%.
  • Nonprofits may also face pressure from donors to avoid executive pay that could appear excessive.
  • See more stories on Insider’s business page.

The Research Brief is a short take about interesting academic work.

The big idea

Keeping nonprofit chief executive officers out of meetings when members of their boards discuss or vote on compensation can lead to these CEOs making less money and working harder.

This is a key finding from a study of nonprofit pay I recently completed with two fellow finance scholars, Benjamin Bennett and Rik Sen. We reached this conclusion after reviewing data for more than 14,700 nonprofits across the country from paperwork most nonprofits must file with the Internal Revenue Service every year, known as Form 990, and the associated Schedule J, which includes compensation.

We zeroed in on 1,698 nonprofits located in New York to see if their CEO pay changed after new regulations took effect in 2013. Since then, New York has prohibited nonprofit officers from being present at meetings where their pay is being discussed.

We found that compensation was an average of 2% to 3% lower than expected by comparing pay for nonprofit CEOs in New York with pay in other states. We also compared the change in CEO pay with compensation changes for other executives’ pay at the same nonprofits – since they weren’t affected by this legislation.

We also found that many nonprofits changed how they handled executive compensation. That is, they were more likely to set up compensation committees, perform an independent compensation review, or adjust pay to be in line with similar organizations. Nonprofit CEO bonuses also became more correlated with the growth of an organization’s budget – a strong indicator of overall performance.

And we found that, despite earning less than they might have expected, nonprofit CEOs spent about 2% more time working – without any additional turnover.

Interestingly, we also determined that by some measures, the nonprofits became better-run after the legislation took effect. For example, 2% more people chose to volunteer, and funding from donations and grants grew by 4%.

Why it matters

High CEO pay is a hotly debated topic.

Nonprofit CEOs make considerably less money than corporate CEOs and have experienced a slower wage growth over the last decade. Based on our estimates, corporate executives saw their annual pay grow by 54% from 2009 to 2017 to an average value of US$3.2 million, while nonprofit executives experienced a 15% increase in pay, reaching an average value of $396,000 in 2017 – the most recent year for which we obtained IRS data.

Nevertheless, because most nonprofits are exempt from income tax and many accept donations, it’s only natural that the government and funders would not want to waste their money on excessive compensation. For example, food bank donors might prefer to see nonprofits spend more of their dollars on feeding the hungry as opposed to perks and big pay packages.

In recent years, some alarming accounts of exorbitant CEO pay and self-dealing practices at nonprofits have come to light. These include the scandals that have rocked the Wounded Warrior Project and the National Rifle Association.

What’s next

One possible reason why nonprofit CEO pay is growing much more slowly than for-profit CEO compensation is that nonprofit leaders are committed to specific causes and have more motives aside from money to excel at their work than their corporate counterparts. Other possibilities could be that nonprofits face pressure from donors to avoid high executive pay or that nonprofit CEOs have little leverage.

We hope that our future research will answer this question.

Ilona Babenko, associate professor of finance, Arizona State University

The Conversation
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Gates Foundation staff are ‘freaking out’ about the nonprofit’s future as Bill and Melinda divorce, an insider reportedly said

Bill Gates Melinda Gates
Bill and Melinda Gates head up the Gates Foundation.

A former top executive at the Bill & Melinda Gates Foundation has said that staff are “freaking out” about the nonprofit’s future, according to a report in the Financial Times.

“I think people are freaking out a little bit,” the unnamed former insider told the newspaper. “People are really worried that the credibility and standing of the foundation is in jeopardy now, especially in areas like gender empowerment.”

Bill Gates and Melinda French Gates, who co-chair the foundation, announced their divorce in May after 27 years of marriage. An investigation by Insider later found that Bill Gates, the Microsoft co-founder, was an office bully who pursued sexual affairs.

The Financial Times on Sunday reported hearing “murmurs of dissent and doubts” about the organization’s future.

Insider has reached out to the foundation for comment.

On Wednesday, the foundation announced that it would add trustees, saying those new voices would help drive its “strategic direction.” Bill Gates and Melinda French Gates also committed another $15 billion to the foundation.

“These new resources and the evolution of the foundation’s governance will sustain this ambitious mission and vital work for years to come,” Gates said Wednesday.

French Gates said: “I believe deeply in the foundation’s mission and remain fully committed as co-chair to its work.”

However, the release also signaled a shaky bond at the foundation’s highest level, with Gates and French Gates agreeing to only a two-year committement as co-chairs.

The press statement said the decision for both to remain was to “ensure the continuity of the foundation’s work.”

But, it said that “if after two years either decides they cannot continue to work together as co-chairs, French Gates will resign her position as co-chair and trustee.”

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How Raleigh-based nonprofit RIoT is boosting entrepreneurship and job growth in the city

Rachael Newberry, RIoT's program director, connecting virtually to a cohort of startups during pandemic gathering restrictions.
Rachael Newberry, RIoT’s program director, connecting virtually with a cohort of startups during the pandemic.

  • RIoT is a nonprofit organization driving innovation and entrepreneurship in the Raleigh area.
  • One program, RIoT Your Reality, is a competition where teams pitch AR ideas to improve the city.
  • Other initiatives include an accelerator program and a data-centric stormwater management project.
  • This article is part of a series focused on American cities building a better tomorrow called “Advancing Cities.”

In July, six teams will demonstrate their ideas for how augmented reality can help solve some of the challenges facing Raleigh, North Carolina, and the surrounding areas.

Through the program RIoT Your Reality, the teams are examining ways to improve diversity, inclusion, and accessibility in city programs, promote workforce development, and reinvent the Raleigh Convention Center to drive economic development.

Tom headshot
Tom Snyder.

“It’s the intersection with government,” Tom Snyder, executive director at RIoT, a local nonprofit working to advance innovation, told Insider. “The city of Raleigh and town of Cary together posed a few problem statements that they’re looking for help on. And we’re running a challenge where people are developing new prototypes of augmented-reality applications to serve those challenges.”

RIoT Your Reality is a partnership with RIoT, the city of Raleigh, the town of Cary, Google Fiber, US Ignite, and Facebook Reality Labs. It kicked off in April with several teams pitching their AR ideas. Six were selected to receive $1,000 to build a prototype, which they’ll demo during an event on July 27. A final winner receives $40,000 and a spot in the RIoT Accelerator Program to launch a new startup.

Snyder said the goal is to create a municipal pilot project and learn how to scale a startup to assist cities beyond North Carolina.

The AR competition is just one of the ways that RIoT works to drive innovation and entrepreneurship in the Raleigh area. Here’s a look at some of the organization’s other major programs.

Helping businesses create new tech jobs

RIoT was founded in 2014 as part of the larger nonprofit Wireless Research Center, located in Wake Forest, North Carolina, which works to advance wireless technology innovation.

Originally, the name was an acronym for Raleigh Internet of Things, then Regional Internet of Things. Now it just goes by RIoT.

“Our grounding thesis is that the best new jobs are created at the forefront of emerging technology,” Snyder, who helped found the organization, said. RIoT’s programs help entrepreneurs start companies and established businesses grow through new technology adoption, all of which creates new jobs.

Being headquartered in Raleigh offers advantages, Snyder said. The area is home to several top universities, including Duke University, the University of North Carolina at Chapel Hill, and North Carolina State University, which fosters a talent pipeline. Several major tech and data companies, including IBM and SAS, have a presence in the region, creating a “great diversity of industry” within the tech sector, he said.

“There are just massive industries and a really nice balance here that makes it a more attractive place for people to be,” Snyder said. “You can’t just job hop during your career, but you can industry hop successfully. And that brings fresh ideas and really makes us a strong place to live.”

RIoT has another location in Wilson, North Carolina, though its presence extends beyond the state. The organization hosts events around the country and is planning to establish new offices in Colorado and Virginia.

Enabling startups to get off the ground

One of RIoT’s programs to boost economic development, the RIoT Accelerator Program, connects entrepreneurs with partners in their industries and gives them access to prototyping tools and other resources.

RIoT
RIoT Accelerator winner Michael Bender, founder and CEO of Intake, a healthcare analytics company, holding the RIoT championship belt.

The accelerator is currently on its eighth cohort. Snyder said RIoT is purposeful in supporting underrepresented groups when selecting startups to participate, and about 60% of the companies involved have been run by women, minorities, and veterans.

Since 2014, the companies participating in the accelerator have created more than 200 jobs, generated more than $100 million in revenue, and earned millions in grant and venture funding, he said.

Growing the accelerator to help more startups is one of its goals. By the end of 2021, Snyder said the accelerator will be offered in multiple cities.

To help startups prototype and experiment with ideas without having to spend money on equipment, RIoT Labs offers hardware, wireless, and software prototyping tools, including a 3D printer, electronic equipment, soldering irons, and more.

“We can provide that equipment for you to go create your new connected device, do the performance testing on the front end, do the regulatory certification testing on the back end, and get it to market,” he said.

RIoT works with government and corporate partners, including Cisco and SAS. Snyder said the organization is always on the lookout for new ones willing to support the entrepreneurial community.

“We want Raleigh to be the place that anyone in the world who wants to participate knows if I come here, I can find the partners that I need to be successful,” he said.

Making Raleigh the center of the ‘data economy’

RIoT worked with Raleigh and the surrounding communities on a data-centric stormwater management project.

Partnering with local startup GreenStream Technologies, they used water-level monitoring sensors to better understand water movement and predict when to shut down a street before it floods or dispatch emergency responders before flooding reaches emergency levels.

Snyder said Raleigh has done a good job of thinking about how to make data collected at the city level accessible – and has the potential to be the “center of excellence of the data economy.” Processing and measuring data depends on the advancement of artificial intelligence, augmented reality, and automation technologies.

“We’re moving from a world where the economy was driven by the internet to now one where it’s being driven by real-time data,” he said.

Through programs like RIoT Your Reality and the water management project, Raleigh serves as a testbed to experiment with new ideas and technologies.

“When we can do that successfully, not only are we solving the city’s needs in a way that they can remain focused on their day-to-day operations, but if it’s a local company that provides for those needs, we’re creating jobs here in the community,” Snyder said.

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Philanthropy is still dominated by the ultrawealthy, but asking billionaires to solve inequality is colossally stupid

Finding Nemo Bruce
Bruce, one of the vegetarian sharks in “Finding Nemo.”

  • If 2020 has made anything clear, it’s that billionaires aren’t going to save us — and that goes for all the millions they spend on philanthropy.
  • Philanthropy is currently dominated by high-net-worth individuals, and philanthropy was already serving an outsized role in American life even before the inconsistent government response to the pandemic.
  • Anand Giridharadas, the author whose book “Winners Take All” criticizes this overreliance, told Business Insider that instead of funneling money into causes they’re passionate about, billionaires should instead be taking less from workers.
  • The reliance on high-net-worth individuals for philanthropy also leaves a gap that the government needs to step in and fill.
  • Visit Business Insider’s homepage for more stories.

There’s an apt metaphor for the rhetoric of “billionaires will save us” in beloved children’s cartoon “Finding Nemo.”

Our protagonists – both fish – come across sharks who paradoxically claim to be vegetarian. The sharks, to their credit, seem pretty nice. They’re trying to reform, and don’t want the fish to be scared of them. Their refrain? “Fish are friends, not food.”

They seem to be holding strong until Dory gets a nosebleed. There’s literally blood in the water; primordial instincts win out, and the sharks attack. The fish were right to be scared.

In the case of widening inequality during the coronavirus pandemic, the refrain could become: “Lower-income people and workers are friends, not food.”

But when billionaires’ net worths grow by nearly $1 trillion during a pandemic – all while their frontline workers fall ill or don’t receive hazard pay, per a report by the Institute for Policy Studies – workers are right to feel scared. Even when those billionaires turn around and give hefty donations to coronavirus-related causes.

Philanthropy and charitable giving has become one major way for Americans to help each other in times of need, particularly during the coronavirus pandemic. When the world came to a halt in March, Americans turned to GoFundMe, which the New York Times called “America’s Safety Net,” while the Gates Foundation has poured millions into pandemic-related causes, all as the government has failed to pass another stimulus following the expiration of the previous package in July.

Philanthropy on the whole is also “top-heavy,” dominated by high-net-worth individuals. Per a report from Inequality.org, small donor giving has declined over the past two decades, and “any increase in giving has been driven by donations by mega-donors and mega gifts over $300 million.” That means there’s fewer – but richer – people driving donations.

“We don’t need the richest and most powerful people in the society to give more. We need them to take less,” Anand Giridharadas, the author of “Winners Take All: The Elite Charade of Changing the World,” told Business Insider. 

“We don’t need them to make a difference. We need them to stop making a killing at the society’s expense. We don’t need them to increase their generosity. We need them to reduce their complicity and injustice.”

Anand Giridharadas
Anand Giridharadas, author of the book “Winners Take All.”

Giving is still dominated by high-net-worth individuals

This week, nonprofit organizations and foundations observed Giving Tuesday. It’s a day that a grassroots movement has been increasingly successful in connecting to charitable giving after the consumer blitzes of Black Friday and Cyber Monday.

Giridharadas said there’s an important distinction between everyday Americans donating to causes they support and the ultrawealthy pouring huge donations into various causes. Someone donating $100 to a beloved cause is, as Giridharadas notes, “for the good” and worthy of celebration.

But ultrawealthy philanthropy is a different beast entirely, he said, because it’s “engaging in giving at a scale that is quasi-governmental in ways that often seek to erase and obscure” the ultrawealthy’s role in causing many of the social problems that they laterally become interested in solving.

Even though “Winners Take All” was published in 2018, it remains a hot-button publication, and still comes up in interviews with billionaires. In December 2020, one such billionaire, former Google CEO Eric Schmidt, was asked by TIME magazine to comment on the book. 

Schmidt said he hasn’t read the book, that it has been described to him, and that he thinks there’s plenty of examples to both prove and disprove its thesis. Schmidt also said that Giridharadas’ main argument, that billionaires use philanthropy to alleviate social pressure while shaping change in a way to benefit themselves, “is certainly not my goal.”

A notable Democratic donor, with close ties to the Obama White House, Schmidt acknowledged that “the American Dream is in trouble,” as the average person hasn’t been doing much better over the last decade, while “the elite, obviously including myself, have done super well.”

A representative for Schmidt declined to comment to Business Insider.

Eric Schmidt
Eric Schmidt, former executive chairman of Alphabet Inc., and former CEO of Google.

A U-shaped philanthropy curve

Research has shown there’s a “U” shape of giving, with lower-income people – particularly those making under $30,000 a year – and higher-income people giving the most. 

Jacob Harold is the executive vice president of Candid, a nonprofit that helps connect people with information and data on giving. He said when looking at the numbers of how much people are giving, it’s important to recognize the distinction between giving as a percentage of income or as a percentage of wealth.

“You have folks at the lower end of the spectrum who really don’t have a lot of wealth,” Harold said. “And you also have people at the upper end of the spectrum, who are giving a lot as a percentage of their income, but actually aren’t touching their wealth, and so from that perspective are actually being less generous.”

High-net-worth individuals do generally give at a higher rate than anyone else. A 2018 study from Bank of America found that 90% of high-net-worth households had donated to charity in the past year. Meanwhile, a May 2020 Gallup survey found that 73% of American adults said they’d given to charity, a new low. That figure was even lower for lower-income households.

Dianne Chipps Bailey, managing director, National Philanthropic Strategy Executive at Bank of America, said the gap is “huge,” but grassroots initiatives like Giving Tuesday can help bridge it.

Among Bailey’s clients, she said she’s seen a “significant increase in interest” in giving “to achieve racial equity.” Her team has created a four-part starting plan for impactful giving towards racial equity. 

Jacqui Valouch, head of philanthropy at Deutsche Bank Wealth Management, works with high-net-worth and ultra-high-net-worth individuals. She told Business Insider that giving came to a halt in March, but was boosted “enormously” in the second half of the year.

Bill Gates Melinda Gates
Bill and Melinda Gates head up the Gates Foundation.

Some high-net-worth individuals are calling for stricter regulations on that giving

A subset of potential megadonors have even started to call for their own power to be curtailed.

Scott Wallace is the co-chair of the Wallace Global Fund, a member of the Patriotic Millionaires. This group of self-described “proud traitors to their class” wants all Americans to hold the same power as millionaires – and for its own taxes to be raised.

Wallace, who ran for Congress in 2018, told Business Insider, “if I have a choice between annoying some of the wealthiest dynasties in America by making them spend more” and “helping the people in my district be served by nonprofits,” the decision is “a total no-brainer.”

Its current crusade? Reforming charitable giving. The Patriotic Millionaires want to raise the minimum amount of assets that private foundations need to donate per year from 5% to 10%. Wallace said many foundations treat the 5% requirement as a floor, not a ceiling.

Another reform? Deductions for donor-advised funds (DAFs). Currently, someone can put assets into a DAF and deduct that full amount from their taxes immediately; all of that money is earmarked for nonprofit causes, but it could sit there for a while.

Under a related reform proposed by Wallace, DAF users would only get their tax breaks once the money leaves their account, instead of when it enters. Per Wallace, the reforms could unlock $200 billion for nonprofits – which could certainly need it this year.

The groups behind the initiative call it a “Emergency Charity Stimulus.”

anand giridharadas
Anand Giridharadas speaks onstage at Conversations About America’s Future: Senator Elizabeth Warren during the 2019 SXSW Conference and Festivals at Austin City Limits Live at the Moody Theater on March 8, 2019 in Austin, Texas.

But while reforms in giving could help, ultimately the government – and not billionaires – can provide the relief we need

Even if billionaires are donating meaningfully, they’re still individuals with their own interests.

Most importantly, they’re also not a replacement for the government – and that’s only become clearer with the lack of structural support in fighting coronavirus and racial inequities. A nonprofit can’t singlehandedly fend off the devastating effects of a global pandemic.

“We only will succeed with deep government involvement,” Harold said. “Even though it sounds like billionaires have a lot of money, in some ways it’s quite small compared to the trillions that the US government is able to bring to bear.”

That’s not to say there isn’t a role for billionaires. Rather than giving toward individual causes, or putting black squares on Instagram in support of racial equity, Giridharadas said they can fund programs that would benefit not just Black people, but all people – if they pay “proper taxes.”

“Are any of the wealthiest and most powerful people in our society serious about bending the arc toward justice?” Giridharadas asked. “And if so, are they willing to do the only thing that is actually going to get us there, which is fighting for the kind of systemic change that would reduce their own power?”

“And the good news is if they don’t want to do that, that’s fine. That’s sort of what I expect,” he said. “The rest of us have a way to do that – which is called democracy.”

[Editor’s note: The fifth paragraph was amended after publication to clarify that billionaires’ net worths grew by nearly $1 trillion amid the pandemic, per a report by the Institute for Policy Studies.]

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