09/21/2011 10:57 am ET Updated Nov 21, 2011

Challenging Not-for-Profit Executive Compensation

Are There Limits To What The Government Should Be Doing?

Governor Cuomo didn't necessarily relinquish his role as Attorney General on the day he was sworn in as the governor of New York. Rather, his executive actions as governor bear a resemblance to the Spitzer model of making his new more powerful office more than just a bully pulpit. You will remember what Eliot Spitzer as Attorney General famously communicated to those he regulated: Change your business plan to play by my (new) rules, or I'll indict you. Obviously, given his abbreviated tenure, Spitzer didn't have the time to use his gubernatorial muscle to change society from that lofty perch (and, of course, no governor has a gubernatorial power to indict).

At one point, it was solely the Attorney General's office that would press a social agenda through enforcement of the law in New York. Nowadays, those who face government regulation and oversight face not only the Attorney General, but also a governor with a powerful regime of executive agencies. For instance, when Cuomo merged New York's Department of Insurance and Department of Banking into the combined Department of Financial Services -- an entity clearly greater than the sum of its parts -- he created a Herculean agency that not only regulates but which may also "socially engineer" (a dirty word to some; just ask President Obama).

One of Cuomo's first efforts to use that power was through a task force employing the Department of Financial Services, the State Inspector General and the Office of the Medicaid Inspector General, following an expose by Russ Buettner of the New York Times on August 2, 2011 that uncovered executive compensation abuses in the nonprofit arena.

Admittedly, the man on the street is mistaken in the common belief that nonprofit or not-for-profit organizations are just charities. Wrong; they include charities, trade unions, trade associations and a whole array of organizations that fall within the rubric of not-for-profit organizations because, among other things, they don't issue stock shares or distribute their surplus funds to owners and shareholders, but instead use their funds to help achieve their social goals. And some -- indeed, many -- obtain government funds through various programs to further their goals which in many, many, case are estimable.

But there are indeed sometimes abuses, and dare we say "crooks" who run some of them. Put simply, not-for-profit organizations - like for-profit organizations - are not immune to fraud and abuse. The government needs to uncover and throw the book at those crooks who would use the non-for-profit coffers and state money to line their own pockets. And we laud the Governor and Attorney General for aggressively going after them.

Still, it is not universally or even significantly the case that executives of not-for-profits who receive generous compensation packages are undeserving of those packages. In an effort to ferret out abuses, the governor's task force has seemingly set about to discover the executive compensation information seemingly for virtually all not-for-profits in the State that receive government funds. Respectfully, such a universal dragnet, with a scattershot information request seems like an unnecessarily ambitious and intrusive. One can expect that lawyers for some of those entities may argue -- possibly in a court -- that it is a governmental usurpation of authority to demand compliance with such information requests (although that is not our point here).

Rather, our point is this: evidence that a not-for-profit executive receives an exceptionally high compensation, without more, does not demonstrate in any way that he or she is either not worth it or is abusing "the system." If, for instance, the New York Post (or any other news outlet, for that matter) were to learn that the head of not-for-profit with $500 million in assets earned $200,000 in total compensation in the previous year, it might report such facts as scandalous -- but, without more, it would be wrong in the extreme to do so. Sort of like throwing out the baby with the bath water.

There are, for example, some university presidents who add to the university's caliber, endowment and bottom line; or directors of museums that add so immeasurably to a community's culture; or presidents of hospitals or social service agencies that so ably help the public in ways never before considered, that they more than earn the millions that might constitute their compensation to maintain their services.

Yes, a New York governor's salary is only $179,000 per annum, and any man or woman who occupies that position surely deserves far more. But public servants choose public service fully recognizing that they will be underpaid -- indeed, they take the position, or stand election for it, for the lofty goal of public service. When a high ranking public official such as a governor leaves government service and goes to the private sector she may receive significant compensation -- maybe millions -- based on all the skill sets she brings to the table, including those honed during her government service. And that's the way it should be.

But having government employees alone make determinations as to what constitutes legitimate compensation packages for executives of private sector not-for-profits, merely because they receive state funds, is somewhat shortsighted. Oftentimes the reason not-for-profits succeed in their valuable work is because they secure effective, no-nonsense, charismatic executives.

The real issues for a task force should be these:

Is there transparency -- real transparency?
Does an independent board closely scrutinize the not-for-profit's financial workings?
What is the true compensation, including perks, of each high executive?
What is the "going rate" for such executives in the industry?
Is the executive in question worth it (is he the likes of Derek Jeter, or simply a rookie or even veteran ballplayer with a .220 batting average)?

The Governor, his Task Force and the Attorney General are true professionals, and they will do a good job. Sunlight, particularly in hard economic times, is always a good thing and, as Brandeis described it, can be the best disinfectant. But as we all know these days, in excess, it can also cause melanoma.

If one seeks to universally cut back too closely on executive compensation in the not-for-profit sector, we may lose the best and the brightest. Or as a thoughtful client once told me:  You pay peanuts, you get monkeys!