The Toronto Star recently had an article, “Law Society of Ontario hires retired senior judge to investigate CEO’s new, near-$1-million contract,” and it is well worth reading.
This will be a learning moment for the LSO as well as other non-profits and charities. The Law Society of Ontario (LSO) is a regulator of lawyers and paralegals in Ontario. Apparently, a compensation committee at the LSO made the decision to dramatically increase the CEO’s salary, and the benchers (like directors) were unaware of the salary increase. Second, apparently, the salary survey conducted that was used to determine the compensation of the CEO compared the LSO, which has about $100m in revenue, to much larger entities in the range of $500 million to $1 billion when determining that the CEO was underpaid. In other words, the salary survey was looking at the wrong comparables.
What can we learn from this debacle? In 2010, I wrote an article, “How does a Canadian charity determine appropriate compensation for an executive of the charity?“ It is still largely relevant today. Also, in August of 2024 I wrote a piece on When is a charity providing an undue benefit? which is very relevant for registered charities.
Unfortunately, many groups, especially registered charities, don’t understand how to determine compensation. Many smart business people think it is similar to compensation in the for-profit world. That is a big mistake.
Here are some of the parameters to take into account when thinking about compensation and Canadian registered charities:
-is it reasonable, necessary, proportionate and no more than FMV? You need to consider each of these factors, and they are each very important. You can read more about this here.
-benchmarking is important but of limited value. The two main surveys are from Charity Village and AFP. These reports are helpful but not determinative. Other groups also do benchmarking. There are also compensation consultants, and while some do a good job, it is a subjective area, and some do a very questionable job. Because a compensation consultant suggests a number or range does not mean it is appropriate from a legal, standards or reputational point of view.
-consider the responsibilities, complexity of the role and experience required. Keep in mind this is a relative matter. One can argue that all senior executives have a lot of responsibility, complexity and experience required -but in fact, some have more and some have less. This is not a criticism of the organization or the individual – just a realization that what one group needs may be more than another. Consider two different issues then namely 1) what is the fair market value for the executive? The second is whether your charity can afford someone at that level. Let’s say you have a healthcare charity with revenue of $2 million per year, and it would be really beneficial for you to have a neurosurgeon as your CEO because they understand so much of the work that you do. The neurosurgeon is earning $800,000 at a major hospital. The issue may not be whether $800,000 is an appropriate amount to pay a neurosurgeon, but whether your small charity can afford to pay $800,000 for a neurosurgeon to be the CEO of your small charity.
-try to avoid conflicts of interest where people with close personal ties are involved in the decision-making around compensation.
-be transparent about the decisions made and also the process used to arrive at the decision. Don’t try to obscure compensation by having, for example, two entities pay one employee. Make sure that the filings of the charity are correct in all facets especially compensation.
-keep in mind compensation is not just base pay but all compensation and benefits provided.
-there can be legal, contractual or standards requirements that affect or limit compensation for particular charities
-do you have a compensation policy or philosophy that applies to all of your employees, not just the most senior employees? Do you update that policy occasionally?
-do you consider all stakeholders when making important decisions like executive compensation? There can certainly be reputational impacts for both the NPO or charity and the executive involved if the process is not handled appropriately.
-keep in mind vertical and horizontal equity. Often, horizontal equity, and comparing the CEO to other CEOs is the extent of the analysis. What about vertical equity? If you cannot afford to pay a living wage to the lowest compensated employees, then you probably should not be paying the highest compensated employee at the top end of any range.
-do you keep good records as to how decisions were made relating to compensation?
Determining appropriate compensation for a senior employee is vital. If you make a mistake and pay too much you might be creating compliance problems for the charity and also creating reputational problems for both the charity and the senior executive.