DATELINE: August 6, 2007, Chicago
Geoff Edgers of the Boston Globe wrote an article last week entitled Amid Struggles, Arts Center Chief Got $1.2M Bonus (July 31, 2007). Its focus was Josiah Spaulding Jr., the CEO of Citi Performing Arts Center (formerly the Wang Center) in Boston. Edgers honed in on Spaulding's $1.265 million bonus, which was on top of his $432,135 annual compensation. That is a lot of money by anyone's standards, but is it too much money?
Edgers infers that it is. To make his case, he points to...
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five years of budgets deficits, as well as significant cuts in the number of performances of a popular Shakespeare program. Edgers also notes that the overall usage of the Citi Center's main performance space is significantly down from its peak. That appears to be due in large part to competition from other venues for Broadway shows, once the mainstay of the Citi Center's schedule. Edgers, in pointing out that Spaulding has been with the Citi Performing Arts Center since 1987, did at least acknowledge that Spaulding was instrumental in reviving what Edgers characterizes as a "once run-down hall, and making it one of Boston's most successful Centers during the 1990s."
Edgers criticizes Spaulding's level of compensation both in absolute terms and as compared to other performing arts groups. He notes, for example, that Edger's salary for fiscal year 2006 constituted 6.5% of Citi Center's operating budget. Michael Kaiser, the head of the Kennedy Center, earned a salary only equal to .7% of the Kennedy Center's budget, according to Edgers. We, however, are not at all certain that comparing the Kennedy Center to the Citi Center is appropriate. For starters, roughly 43.55% of the Kennedy Center's contributions came from government grants for its fiscal year ending October 2, 2005. For its fiscal year ending May 31, 2005, the-then Wang Center received no government support according to its Form 990. Clearly the Kennedy Center is courting a funder with an entirely different mindset than those funding Citi Center and its activities. Moreover, each organization operates in different geographic markets, with differing competitive environments.
You cannot just look at a couple of metrics to assess whether an executive's salary is excessive. That determination is highly factual and requires a great deal of information. Although our gut tells us that the amount of Spaulding's retention bonus is excessive, that is our gut speaking. We don't know all the facts. A revolving door in the executive suite can be very costly to any organization. Just ask the Milwaukee Public Museum, which two summers ago revealed a crisis resulting from a financial meltdown. Some believe the problems that led to the meltdown were rooted in a succession of executive directors. We simply are not disturbed by the notion of a retention bonus, particularly if the executive receiving the bonus is being wooed by other organizations, as one Citi Performing Arts Center trustee indicated was true for Spaulding.
Edgers has previously written about the sponsorship arrangement with Citigroup. In November 2006, under Spaulding's leadership, the-then Wang Center for the Performing Arts inked the arrangement, which calls for Citigroup to make a total of $34 million in payments to the Wang Center over a 15-year period ($2.26 million per year, assuming pro rata payments) in exchange for renaming the Center. See Geoff Edgers, For $34M, Citigroup Gets Naming Rights to Wang Center, Boston Globe, Nov. 9, 2006. One might argue that any CEO who could pull that deal off is worth his weight in gold. It turns out that Citigroup was looking to make a splash in the Boston retail banking market, planning to expand the number of its branches to better compete with Bank of America. See, Geoff Edgers, For $34M, Citigroup Gets Naming Rights to Wang Center, Boston Globe, Nov. 9, 2006. If Spaulding was instrumental in inking this deal, we would argue that the $1.265 million retention bonus was worth every penny. Was Spaulding instrumental? At the last minute, did Spaulding snatch the Citigroup money from another organization that thought it had the prize in hand? Did Citigroup originally offer the Wang Center $15 million, with Spaulding then negotiating the much larger amount? We simply don't know, and based on Edger's articles describing the Citigroup deal, he doesn't know either. Therein lays the problem. Nobody can assess the reasonableness of compensation from outside an organization unless all the facts are in the public domain.
The very fact that Citigroup was willing to make a $34 million investment in a Spaulding-led organization does say something. We are not that familiar with Boston as a community—although we have visited the Boston area five or six times over the years. Certainly Citigroup had alternative options. It might have sunk its $34 million into sponsoring a major sports event (like a golf tournament or a marathon), any number of other theatres or performance groups, a public space (like the zoo), or public television. It didn't. Citigroup chose what is now the Citi Center for Performing Arts. Presumably before making that choice, Citigroup did some research in an effort to make sure its investment would provide it with maximum exposure and goodwill. We assume that Citigroup examined the Citi Center organization, its leadership, plans, and prospects. They must have been aware of Spaulding's compensation, abilities, and past track record. Despite what Edgers views as apparent problems, Citigroup decided to move forward. To us, Citigroup, unlike Edgers, viewed the Center's glass as half full (if not overflowing with potential) rather than half empty. Doesn't Edgers think that before becoming what appears to be the Center's major funder, Citigroup would have demanded changes at the top if Spaulding were as incompetent or destructive as Edgers is apparently willing to suggest?
What we find most disturbing about Edgers' article and other nonprofit compensation exposes is the apparent belief that those who work in the nonprofit sector aren't entitled to market rates of compensation. Why shouldn't nonprofit employees be entitled to send their kids to college, take an occasional vacation trip, and own a house? We would argue that they should. Well then why are CEO salaries frequently portrayed as taking food out of the mouths of starving children (or in this case, resulting in cuts in performances)? This is a false dichotomy. It is not a choice between paying people and feeding children. Organizations need employees to carry out their missions. Good employees are much more likely to be successful in achieving the mission.
We hear a lot about the upcoming transition in nonprofit leadership positions that will occur as the Baby Boomers retire. Who will assume the mantle? A kid coming out of college or professional school who is saddled with a $100,000 or $200,000 of debt? Probably not. That kid will opt for the for-profit sector out of necessity if nonprofit salaries remain low. People like Edgers can continue to play this populist game, but in the long run, it is mission that will suffer if nonprofits don't pay competitive salaries.
And then there is the question we have asked before: If nonprofits tackle the most difficult problems that face our society, why do donors, watchdogs, and some government officials want to deny them the opportunity to compete for the best talent in the labor marketplace? The faulty assumption is that lower salaries are a sign of efficiency. That assumption is nonsense. Talented people want to be paid for their skills. Some talented people are generous, meaning that they will accept something less than market rates if the employer is a nonprofit. But there comes a point where the burden of underpay becomes unacceptable, insulting, and inappropriate. We acknowledge that Spaulding is probably not the poster child in support of our arguments, but Edgers' article and its underlying assumption are too simplistic and unrealistic. Moreover, his analysis and approach are highly flawed.
Edgers and others who are quick to criticize compensation levels also forget an important point. Nonprofits are private entities. Granted they do receive government subsidies, but they are nevertheless private entities. Trying to limit or regulate compensation levels challenges the freedom to privately associate, a value that is very dear to many who work in the nonprofit sector. We would be the first to argue that the government can set requirements for government subsidy without violating that constitutional right. However, when members of the public and the media attack compensation levels, they are effectively challenging the right of private citizens to organize. Even the IRS intermediate sanctions and state laws regarding board duty of care don't focus on absolute levels of compensation. Instead, these laws and regulations focus on the process by which compensation is determined. Most important, in the case of the Citi Center, Citigroup is a private entity that is willing to bear a significant portion of Spaulding's compensation package.
THE OTHER SIDE OF THE COIN. We are not going to let the Citi Center, its board, or Spaulding off the hook so easily. Their conduct reflects anything but best practices. To begin with, every board member should understand and be able to explain the compensation packages for key employees, particularly the executive director. We therefore find it disturbing when Citi Center board chairman John William Poduska Sr. refers to all the competing offers that Spaulding had been receiving, but is unable to provide details. Poduska's defense sounds pretty hollow, although from the mouth of a more articulate spokesperson it might not.
We are also disturbed by the number of spokespersons. Although Lynne Kortenhaus was apparently designated the board spokesperson, Edgers' article suggests that others spoke to Edgers. There should be one spokesperson. Even more troubling is the misjudgment of Kortenhaus, an apparent public relations professional. According to Edgers, following a July 10 interview, Kortenhaus asked the Globe to submit questions. After the requested questions were submitted, Kortenhaus refused to answer any of them. Chairman Poduska then sent a statement to the Globe, providing:
As is common practice in both profit and nonprofit organizations, we do not comment on internal operations, personnel issues or proprietary information on employees, outside vendors or consultants beyond what is required by law. . . . We have complete confidence and fully support the institution's senior management team and the leadership of its President & CEO, Josiah Spaulding, Jr."
If an organization's policy is not to comment on internal operations and personnel issues, then it shouldn't ask the press to submit questions. That policy should have governed from the outset.
There is also the question of conflicts of interest. In this case, Citi Center had hired Spaulding's wife as its Web site manager. It also retained Kortenhuas's firm for public relations work, paying the firm $43,109 for the fiscal year ended May 2006, according to the Edgers article. Edgers also points to over $99,000 in legal fees being paid to a trustee's law firm during the same fiscal year. Conflicts certainly aren't illegal if properly reviewed and validated. However, the services in question were commodity-type services. Citi Center could have looked elsewhere for these services and should have. As we have said many times before, nonprofits can engage in conflicts-of-interest transactions, but those transactions almost always become public when there is an unflattering incident involving the organization and its governance. That is true regardless of whether the conflict was the precipitating factor. As a public relations professional, Kortenhaus should have been more attuned to that reality than she apparently was.
EDGERS WON THE BATTLE, BUT WILL HE WIN THE WAR? Edgers' crusade against what he views as the excessive compensation being paid to Spaulding is now part of the public discourse. It will be interesting to see whether Edgers is correct. As far as we know, he is not a compensation consultant or a tax lawyer. Were he either, he would know that characterizing compensation as unreasonable is often difficult. Given the Globe's coverage, the IRS will undoubtedly have auditors all over the books of the Citi Center sometime in the not too distant future. At least that is a good assumption because the IRS has acknowledged that it tracks these sorts of news stories for the purpose of taking enforcement action. Only if an IRS audit ends in litigation will the full facts be available for evaluation. One thing is for sure: Spaulding better hope that the board was independent in setting his compensation and that it relied on comparables. If the IRS can establish that the process by which Spaulding's compensation was set was inadequate and that Spaulding's compensation is excessive, it is Spaulding who will suffer the consequences, conceivably being required to pay the excess back to Citi Center, plus a 25% penalty. But at least the analysis will be more thorough than the one undertaken by Edgers.
A FINAL POINT. Edgers notes that Spaulding and his wife have homes in Charlestown, Massachusetts and Hobe Sound, Florida. According to Edgers, they also have a 42-acre property in Vinalhaven, Maine. What these facts have to do with whether Spaulding's compensation is reasonable is unclear to us. Edgers seems to imply that these three properties were financed by Spaulding's excessive compensation, but the acquisitions easily could have been financed through inherited wealth or compensation earned by Spaulding's spouse through independent activities. Possibly Edgers is calling for a modern day Russian Revolution in Boston, with the Spaulding properties being confiscated and the sale proceeds being used to feed Oliver Twist.
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