A CAUTIONARY NOTE FOR ALL NOT-FOR-PROFIT ORGANIZATIONS
By: Paul R. Dorf, APD, CRI
Upper Saddle River, NJ – The Governor of New York signed Executive Orders Nos. 38 and 43 which address limits on the use of State funds for administrative expenses and executive compensation. The State is expected to provide details by mid-May; however, the two specifics already promulgated indicate that:
(a) “No less than seventy-five percent of the State financial assistance or State-authorized payments to a provider for operating expenses shall be directed to provide direct care or services rather than to support administrative costs, as these terms are defined by the applicable State agency in implementing these requirements. This percentage shall increase by five percent each year until it shall, no later than April 1, 2015, remain at no less than eighty-five percent thereafter.
Translation: only 25% of State financial assistance may be directed to administrative costs, which include executive and staff compensation, and this figure will be reduced to 15% by 2015, resulting in fewer dollars available for compensation.
(b) To the extent practicable, reimbursement with State financial assistance or State-authorized payments shall not be provided for compensation paid or given to any executive by such provider in an amount greater than $199,000 per annum, provided, however, that the commissioner of each agency shall have discretion to adjust this figure annually based on appropriate factors and subject to the approval of the Director of the Budget, but in no event shall such figure exceed Level I of the federal government’s Rates of Basic Pay for the Executive Schedule promulgated by the United States Office of Personnel Management.” 
Translation: Executive compensation at any NFP in New York State will be capped at $199,000 per year, or the limit set forth by the US Office of Personnel Management, which currently maintains virtually the same figure.
These and forthcoming rules only apply to not-for-profits (NFPs) in New York State; however, they portend to similar restrictions that may be forthcoming in other states. Last year, the Governor of New Jersey put in place similar arbitrary limits on the amount of compensation that could be paid to certain NFP organizations, by limiting the amount of executive compensation that can be reimbursed using State funds.
There have been some highly publicized situations tied to possible executive compensation abuses that have served as the catalysts for the states to take these actions; however, in both instances, New York and New Jersey have utilized these compensation limits as a way of controlling their state reimbursement rates. The questions that are raised are the following:
- Do these limits restrict NFPs from attracting, rewarding, and retaining highly qualified executive talent?
- Are there legitimate ways in which the Boards can compensate their executives in excess of the limitations that will not run afoul of these regulations?
- What flexibility, if any, will the regulations contain to recognize actual competitive market realities or organizational size or performance situations?
- As compensation determination universally moves to a “Pay for Performance” concept, how will this arbitrary limitation impact the NFP Total Compensation package?
- Is this another example of the “Law of Unintended Consequences” in which arbitrary executive compensation limitations narrow the selection process of NFPs to less qualified managers?
Although this is intended as a cautionary note that currently affects only two of the 50 states, it is very likely that these types of rules will be more widely enacted, and will dramatically change the face of NFP executive compensation in the future. The regulations are currently not level among NFPs, publicly-traded companies, and the vast array of privately-owned for-profit companies, which may further increase the disparity among those organizations. This may also have the unfortunate result of discouraging very talented and highly effective executives, who want to make a different in the NFP world, from entertaining employment at these organizations because of the pay limitations.
 United States Office of Personnel Management, Salary Table No. 2012-EX.