Charity Leaders Should Pay Close Attention to Obama's Pay Guidelines

February 6, 2009, The Chronicle of Philanthropy — President Obama’s announcement this week that he plans to limit executive pay and perks at financial companies seeking federal bailout aid should send a message to nonprofit groups’ leaders and their board members.

The White House tapped into a growing public concern about the appropriate levels of compensation for people who benefit in at least some way from direct or indirect government subsidies.

While policy makers have yet to seriously suggest ceilings or other restrictions on compensation for nonprofit groups’ leaders, there is a growing sense that such pay must be based on common sense and an understanding of the country’s economic turmoil. Savvy trustees will get the message and and immediately re-evaluate how their organizations compensate top leaders.

Nonprofit groups’ boards need to both understand the government’s proposed guidelines on compensation for officials of companies receiving federal bailout money and think about perceptions of the standards for executives’ compensation.

Not only would President Obama limit their annual pay to $500,000, but he would also require full disclosure of their employers’ compensation structure and strategy. In addition, the guidelines would prohibit or strictly limit “golden parachutes” and other forms of severance arrangements, and would require boards to adopt policies to ensure that executives henceforth avoid spending lavishly on private jets, office renovations, entertainment, and attendance at certain types of conferences and events.

The guidelines are intended to assure that taxpayers are not in the awkward position of “rewarding” executives of failing organizations. They are not, however, intended to apply to other publicly traded corporations, much less to tax-exempt organizations.

But it is important to note that the president said the guidelines would be part of “long-term effort” to figure out how executive compensation structures have contributed to the current financial mess, and how corporate governance and compensation rules can be changed for the better. From that perspective, the guidelines would open the door to a broader governmental consideration of executive compensation structures and their relationship to tax revenue.
In essence, the federal bailout plan has let the genie out of the bottle by introducing into mainstream discourse topics, such as caps on executive compensation, that were previously considered too extreme to be seriously considered. The age-old lesson, of course, is that once released, the genie can never be put back in.