Most grant-making foundations in the United States operate on very modest budgets, are largely unstaffed and are run by unpaid trustees. But that's where their similarities end. A fierce, slow-motion debate has been raging about how much is appropriate for them to spend on staff, overheads, trustees, and administrative expenses. To underscore how dissimilar the spending needs of similar-sized foundations can be, a new report was released on Feb. 3 that “cautions against the ‘one size fits all’ approach to setting standards” that seems to dominate reforms being considered in Congress.
The Foundation Expenses and Compensation report issued Feb. 3, emphasizes the need to consider the impact of foundation type and size and the diverse goals and missions of foundations on staffing levels and expenditure patterns. It also points out the gaps in our understanding of foundation operations and practices, suggesting the need for further research and for revisions to current reporting requirements.
The report was prepared by three not-for-profits groups serving the philanthropic community: the Urban Institute, the Foundation Center and GuideStar. They looked at the 2001 expense and compensation patterns of heavy hitters of the foundation world — the 10,000 largest independent, corporate, and community foundations in the United States.
The major findings: all foundations cannot run on the same “appropriate budget” and their expenditure and operating costs vary based on a number of significant factors, including size of foundation (based on staff numbers), type of the foundation (corporate, community or independent), type of work done by the foundation and the value of assets controlled by it.
The starkest differences are between different types of foundations. For example, about 20 percent of independent foundation trustees were paid, compared to only 3 percent of corporate foundation trustees, while less than 1 percent of community foundation trustees receive compensation.
Of the 2,923 foundations that have paid staff, just 1,005 had executive directors, chief executive officers or presidents with a mean executive salary of around $100,000 a year. But foundations that had more than $200 million in assets paid a mean executive salary of around $200,000, and those with less than $10 million in assets paid a salary of about $50,000.
Although the largest foundations seem to pay the highest salaries, when the overall median expense and compensation-to-distribution ratios are considered, these large foundations showed more efficiency and lower expenses, the study reported.
The study used 2001 financial and programmatic data as reported on the 10,000 foundations' tax returns (Forms 990-PF and 990) and supplemented by data from the Foundation Center. In 2001 alone, these foundations made grants of $24 billion and had $372 billion in assets, accounting for 78 percent of foundation giving and 77 percent of foundation assets of the almost 62,000 grant-making foundations active that year.
To examine trustee and executive compensation patterns, the study used individual-level compensation data on more than 51,000 officers, trustees, and key paid staff reported by the foundations.
The report comes while Congress — led by Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) — is considering legislation to prevent abuses in spending and compensation at charitable foundations. With the encouragement of the Senate Finance Committee, The Panel on the Non-Profit Sector was formed in October 2004; its 24 members represent a range of nonprofit community organizations, charities, foundations and corporate giving programs. In June 2005, the panel issued a report making 120 recommendations on how to improve the governance and reduce tax abuses at charitable organizations. Among other suggestions, the report stated that most foundation staff should not be compensated, hinted at making it mandatory for foundations to hire professional consultants to help determine specific appropriate range of compensation for paid staff and other spending, and suggested caps for the amounts foundations pay their executives. There also were recommendations that there must be specific guidelines in writing, establishing definite parameters for compensation and spending at all foundations.
The reception to these ideas has been mixed. Carolyn DeVore, a partner at Cummings & Lockwood LLC in Stamford, Conn., worried that “these proposed reforms will mean more paperwork than many small foundations have the time or resources for.” She also is concerned that grouping all small grant-making foundations together for compensation purposes might be ill-advised as they operate differently: “Some foundations require their staff to go out and do a lot of traveling, fieldwork and research to find deserving candidates for funding, while in other foundations, employees just sign on dotted lines to approve funding. Expecting them all to get the same pay doesn't make sense.”
Other key findings of the recently released the Foundation Expenses and Compensation report included:
Staffing is the most significant factor influencing charitable operating expenses. Across the types of foundations surveyed, those with paid staff had higher operating costs.
Thirty percent of the foundations surveyed reported no charitable operating and administrative expenses. Corporate foundations were least likely to report operating expenses, as they are generally staffed by the company's employees. In other words, that expense is shifted to the corporate parent's books. Community foundations were the most likely to report operating expenses, as most have paid staff.