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2002 California Foundation Compensation Study
Executive Summary
This is the Executive Summary of the Institute for Family Foundations’ (IFF) 2002 California Foundation Compensation Survey. Our results contain the most reliable and relevant information ever developed for helping California foundations make decisions in the complex – and increasingly risky – area of compensation and benefits. Our goal was to determine what was “industry standard” in California, so that boards will have better data from which to determine what was “fair and reasonable”. Failure to do so could cause penalties for self-dealing, private benefit, and private inurement. The Survey was specifically designed by IFF to help founders, boards and management of California foundations make sound executive decisions, and to comply with both Internal Revenue Service and State of California rules and regulations. A total of 228 California foundations participated in this Survey, making it the largest study of its kind, with information on compensation from nearly twice as many California foundations as reported in any previous survey. The Survey is the result of a five-month process, during which a specially designed questionnaire was sent to all registered California foundations. IFF contracted the Hay Group, a world provider of market compensation data, for the development and execution of this Survey. The report estimates are subject to the accuracy of the answers reported by the Participants. Accordingly, the estimates should be used as guidelines only. The results should not be automatically applied to confirm or contradict a specific foundation’s compensation plan for its executives. It is important to consider the factors that affect compensation, including:
Foundations were identified as “Family Foundations” or “Family-Controlled Foundations,” which meant that the founder and founder’s family controlled the Board and operations of the foundation, or as “Independent Foundations,” which meant that either the founder or family did not exercise such control, or there was no family or founder still involved. Most foundations were young. The average foundation was established 17 years ago, and the median (middle group) was established 10 years ago. This may be a bit misleading, since some of the older foundations may have been established earlier, but funded only recently, making them even younger than reported. Most of the Participants to the Survey were Family Foundations (78%), and the average age for these foundations was younger (15 years) than the Independent Foundations (23 years). This reflects the typical life span of many foundations, which begin with the founder and family, and often, but gradually, become less controlled and more independent. Most responses (63%) came from
the LA-Riverside-Orange Metropolitan Area and the Bay Area (23%). A substantial majority (77%) of the Participants were from foundations with assets up to $10 million, while 23% represent foundations with $10 million or more in assets, including 14% with more than $25 million. In addition to compensation issues, we examined certain characteristics regarding grant-making, and Board of Director matters, which we believe were interesting and important for all foundations. Compensation for Services of an Officer or Board Member
For the purpose of this Survey, we divided compensation into “Base Pay,” which included the employee or officer’s salary, honoraria, meeting fees, and any other cash compensation of a fixed amount paid for services, and other forms of compensation, including incentives, deferred compensation, health and welfare benefits. We also separately identified Director compensation, for services rendered as a Board member, and not as an officer or employee. One-third (33%) of the Participants reported that they provided Base Pay to one or more persons. There is a strong relationship of Base Pay to size – more than three out of four (78%) of the largest foundations pay compensation, while only 8-12% of small foundations do so. There is also a difference between Family Foundations, which pay compensation (68%), compared to Independent Foundations (90%), which also pay compensation. The highest paid person (the “Highest Paid Jobholder”) is also a Board member at 70% of the Paying Foundations and is the Chair of the Board at 30% of those foundations. Nearly one-half (46%) of Family Foundations have a family member as the Highest Paid Jobholder. The Highest Paid Jobholder’s responsibilities are heavily focused in two key areas – internal administration and grant making. In 55% of Participants, the Highest Paid Jobholder was also responsible for the foundation’s investment management. The characteristics of the Highest Paid Jobholder were interesting. The average Highest Paid Jobholder is 57 years old, has been with the foundation for 10 years, and has a graduate degree in 54% of the responses. He or she works 26.4 hours per week, although the workweek varies widely by size. For small to medium foundations (up to $10m in assets), the average is 19 hours and it increases to 36 hours per week for the largest foundations. Annual Base Pay is highly correlated with asset size. The Highest Paid Jobholder at a large foundation can be compensated as much as six times more ($115,600 in average) than the Highest Paid Jobholder at a small foundation ($19,100 in average). Variation in compensation is significant. One in ten of the large foundations pay as much as $169,400 in Base Pay and one in four of the foundations with less than a million in assets may pay as little as $6,000. For two asset levels ($1m to $10m and $25m and up), Family Foundations tend to pay at 10% or more than Independent. Estimated Base Pay per hour for the Highest Paid Jobholder presents a clear picture of the actual compensation per unit of time spent on the job. Although we see a wide variation in the average annual data, when it comes to estimates per hour the data fits a relatively small range. The estimates per hour are based on 68 full responses from the Survey. The Highest Paid Jobholders included in the analysis are generally not hourly employees, which limits the applicability of the results. On average, compensation per hour ranges between $53 - $67 (excluding the smallest Participants, where the hourly rate is $29). Very few Participants (3%) reported Incentive Compensation Payments (ICP) to the Highest Paid Jobholder, which may include bonuses and other variable cash payments. The average ICP for the last year was $5,850. Only 2.6% (or 6 out of 228) of all Participants provided Deferred Compensation (including 403(b) plans). Five of these six foundations have assets greater than $10m. The average Deferred Compensation contribution was $12,200 or 8.5% of the Base Pay. Paying Foundations sometimes provide non-cash programs to employees. 46% of the Paying Foundations provide health insurance to at least one employee, 45% provide Directors & Officers insurance, and 24% provide life insurance. One in ten of the Paying Foundations provide a car or an auto allowance and one in twenty-five (4%) has a severance policy. No Participants provided below market rate loans or forgave interest on a loan to an employee. Professional fees (including advisory fees, accounting, legal, and business services) were paid to the corresponding Highest Paid Jobholder by 7 respondents (3% of all Participants). Only 2 of these 7 (less than 1% of all) provided both professional fees and Base Pay. The amount paid fell in the range of $6,000 to $25,000 with the average of $15,526. In examining the total compensation of such employee in any particular foundation, it would be necessary to consider both the Base Pay provided, as well as professional fees, to determine the reasonableness of such compensation. Professional fees paid to family members, in lieu of Base Pay, requires particular attention, since this could be construed as an attempt to bypass state and federal rules. A total of 43 foundations also paid a second employee (“Second Highest Paid Employee”). The average compensation for this person was $45,700, which represents about 40 to 80% of the Highest Paid Jobholder’s Base Pay. Separate from compensation for officers and employees, many foundations pay Board members for attending meetings and for general Board service. We’ll describe this below, but we have observed that some of these foundations were compensating Board members for work that was more realistically for services as an officer or employee. Grant Making Activity and Grant Administration
We also learned much about California foundations grant making activities. A relatively small number (16%) of our Participants indicated that they actively solicit grant applications. Independent Foundations are more inclined to solicit (34%) compared to Family Foundations (11%), and the larger the size of the foundations, the greater the likelihood. This is true for both Family and Independent Foundations. In fact, more than one in five large Family Foundations ($25m or more) actively solicit grant applications. As might be expected, most
foundations (87%) made grants last year. Small foundations (under $1m)
were less compliant (74%), which may reflect the fact that some were just
formed or funded, and may be making their 2001 grants in 2002, or that
they have a carryover credit reflecting large grants made in prior years
that allow them to make little or no grants in following years. When the
small foundations are removed from the analysis, the percentage rises
to nearly 97%. From all respondents that made grants last year, one in every two gave at least 5% of year-end assets (which is the minimum required distribution). At the same time, the total average is 9%, which suggests that a number of foundations (25%) gave between 9 to 20% of year-end assets. At the other extreme, one in ten respondents gave significantly less than 5%, with smallest foundations (both Family and Independent Foundations) giving as little as 2%. Again, this likely reflects either the timing on formation and funding, or large carryover credit. Very few respondents use the help of a third party when it comes to Grant Administration. One in ten respondents choose to outsource this activity, with Family-controlled Foundations slightly more willing to do so. Half of those who outsource also have an employee focused on the function.
Family Foundations have smaller boards (average is 4 members) than Independent Foundations (5.5 average). The larger the foundation, the larger the board. Small to mid-size (up to $10m in assets) foundations have an average of 3.8 members, while foundations $10 to $25m in assets have an average of 5.4 members. Board composition was interesting, with almost 70% of Family Foundations having family-only Boards. But this ratio changes as the size of the foundation grows. Only 16% of Family Foundations under $1m have a non-family member on the board, while nearly half of all such foundations at $25m or more (47%) have a non-family member. Boards of most foundations met up to 3 times last year. Independent Foundations meet on average twice as often as Family Foundations (2.5 meetings versus 5 meetings). Larger foundations have twice as many Board meetings as smaller ones. One in ten of the largest Participants tend to have between 6 and 9 meetings per year. Analysis of Board meeting fees can provide important conclusions of how foundations function. Only 5% of all Family Foundations paid fees, while 24% of the Independent Foundations reported payment of meeting fees. The larger the foundation, the more likely it was to pay such fees. Nearly 28% of Family Foundations with $25m or more paid fees, while 50% of similar size Independent Foundations paid fees. It’s apparent that family members are “expected” to serve, while non-family members are compensated for such service. On the other hand, when Family Foundations do compensate, they pay more than twice as much as Independent Foundations. The average fee for Family Foundations is $1,585, while it is only $760 for Independent Foundations. Over one in three foundations reimburse their board members for expenses, although Independent Foundations do so in substantially greater percentage (52%) than Family Foundations (29%).
Participants in the Survey have been provided a full copy of the results. Other interested parties may obtain a copy, contact us. |
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