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You've earned it.

As a CEO, you're entitled to compensation that builds your net worth.

One of the basic assumptions of business is that profit is the primary reason for operation. The same mind-set holds true for executives, be they employed by for-profit or nonprofit organizations.

In the case of for-profit corporations, executives receive monetary compensation, fringe benefits, and stock options. Examples abound of executives who have made millions of dollars from stock options--a benefit not available to nonprofit executives, who are generally restricted to direct compensation and pension benefits. Certainly there are so-called perks such as health insurance payments, automobiles, and club dues, but these are not truly considered compensation from the standpoint of building a net worth.

In general, research indicates that trade and professional association executives receive less compensation on average than do for-profit business executives. Philanthropy Monthly (April 1992) states that "generally, total compensation levels in for-profits are approximately double total compensation levels in not-for-profits." The goal, then, should be to make compensation for nonprofit executives more comparable with that provided to their for-profit counterparts.

Some members of the business community contend that some corporate executives are paid excessively. Anyone who has read accounts in the Wall Street Journal and the New York Times would undoubtedly agree.

Proposals have been raised in various circles to limit corporate compensation. One bill before Congress, for example, would restrict corporate deductions for a single executive's compensation to $1 million a year. The Securities and Exchange Commission has recently adopted new disclosure rules with respect to executive compensation.

The resignation last February of United Way President William Aramony after news reports raised questions about his $463,000 salary and benefits package and allegations about a lavish business lifestyle also focused attention on nonprofit compensation practices. The Aramony-United Way affair, however, did not stem from compensation issues so much as from alleged side deals and practices of cronyism by United Way officials.

Legal parameters

There is no existing case of normal facts and circumstances in which a nonprofit executive's compensation was determined to be unreasonable. (The Internal Revenue Service did find compensation for former PTL head Jim Bakker to be unreasonable, but this obviously was not a typical case.)

IRS does not have rigid rules about excessive salaries, according to Marc Owens, chief of the exempt organizations division. It does, however, rely on several factors to evaluate whether individual salaries are appropriate:

* the official's background and experience;

* his or her duties and contribution to the success of the organization;

* the size of the association;

* the amount of time he or she devotes to association duties; and

* what people at similar organizations are being paid.

Excessive compensation "is not an easy case to make, because the standards are so vague," notes Owens. Indeed, executives of nonprofit foundations can make as much as $500,000-$600,000 a year.

Special circumstances

Association boards composed of members who are not well-compensated in their own jobs and who, in fact, earn less than the association executive can pose a difficult situation. In truth, the executive is paid more than the board members because he or she has a better job.

Another variable is the source of executive compensation. Associations that rely heavily on dues for income find it much more difficult to provide appropriate compensation for their chief executive officers than do associations that have substantial income derived from investment interest and various activities, such as trade shows.

Working hard

If an executive is willing to work diligently for an association, he or she should receive the maximum compensation possible. Harvard Business School once had a teaching that still remains valid today: The hardworking, bright individual should be paid. At the other end of the spectrum, an individual who is not productive should be fired.

The Harvard perception is that if a person is not a hardworking, competent individual, efforts to improve such an individual would not be worth the time and money. This principle is one of the major factors in determining executive compensation.

Executives should be considered greedy only when they try to obtain excessive compensation for minimal work. Association executives should not be embarrassed to ask for reasonable compensation, but once they're granted such compensation, they have the responsibility to earn it.

Remember too that when an executive leaves an association, his or her name is generally forgotten the same day. Intelligent planning dictates that it's prudent to seek and receive appropriate compensation that enhances an executive's net worth while it is being earned.

Loyalty to an association from an executive and loyalty from the association to an executive both evaporate when the executive leaves, or soon thereafter. This should be clearly understood. Sad tales are legion about executives who fail to appreciate this fact until it is too late.

It is always nice to have expense accounts and the use of clubs and automobiles, but these perks are basically living expenses and do not add anything to the net worth of the executive. Smart executives should look at their compensation from the standpoint of a Las Vegas gambler: What can they take from the casino window at the end of their stay with the association?

George D. Webster is general counsel to ASAE and a partner in Webster, Chamberlain & Bean, a Washington, D.C., law firm. Hugh K. Webster is an attorney with the same law firm.
COPYRIGHT 1992 American Society of Association Executives
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:perspective; chief executive officers' pay
Author:Webster, Hugh K.
Publication:Association Management
Date:Dec 1, 1992
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Next Article:Satisfying members' appetites for information.

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