In trustees the sector expects

Trustees came under the spotlight last year because of their reluctance to defend the salaries of their chief executives. The sector has since offered trustees opportunities to learn from the experience. It is an opportunity they must take, argues Andrew Holt


LAST SUMMER, the issue of CEO pay at some of the sector’s leading charities made national headlines. The pay of chief executives of some of these top international charities, as revealed in The Daily Telegraph, was in excess of the Prime Minister’s pay of £142,500 a year. These numbers surprised many, and, for a time sent the sector into a tailspin. The situation was not helped by the stifled response from the sector and particularly charity trustees in defence of pay for their chief executives.

Trustees then became the point of focus for this lack of defence. John Low, chief executive of the Charities Aid Foundation, was the most vociferous sector leader to criticise trustees of these major charities for failing to defend the pay awards they make to their chief executives. Low made the valid point that trustees had been “deafeningly silent” when given the opportunity to defend their own charities in the face of media scrutiny. “I was surprised that no trustee who set the salaries spoke out,” he said. “They were deafeningly silent. There wasn’t a single voice. That’s wrong.” Strong, but fair words. It was left to the inimitable ACEVO chief Stephen Bubb to make a series of passionate pleas on TV and radio defending charity CEO pay.

Trustees clearly failed in their responsibility here. Trustees have a big duty to communicate value for money to their donors, beneficiaries and the wider public. And in the heat of media exposure they failed to do just that.

Trustee guidelines
ACEVO and NCVO stepped into the breach. NCVO launched the Executive Pay Inquiry to draw up guidelines for charity trustees when deciding on pay levels for senior executives. This worked as an effective PR ploy, taking the issue off the front pages. Whether the Inquiry has any long-term impact or sector benefit on the setting of pay we will see when its findings are made public, which will be anytime soon.

ACEVO then launched its Good Pay Guide for charities and social
enterprises, putting forward a range of recommendations and giving advice to trustees on how decisions on charity pay are taken. The guide highlighted transparency; proportionality; performance; recruitment and retention; and process as the five key principles that charity trustees and remuneration committees must follow to deliver value for money and retain public trust. “Applying the five principles of good pay contained in the guide will help ensure the sector retains the public trust and good-will that their good works have always merited,” says Bubb.

The aim is to also offer a wider focus on much needed trustee professionalism, exposed by the CEO pay debacle. Asheem Singh, director of Public Policy at ACEVO, adds: “ACEVO has always argued the case for a modern, professional charity sector that can help as many people as possible. But we also want to ensure that charities are on the right track to communicating their value for money to their donors, beneficiaries and the wider public. The guide has already received a great deal of positive feedback from charities. It is a means to inform their discussions and practices on senior executive pay.”

Pay: the numbers
Looking at CEO remuneration, the sector does not pay as much as the charities highlighted in the original Telegraph piece, as they are members of the Disasters and Emergency Committee (DEC) and twelve of the biggest charities going, and very international in scope. In short, they are not typical of the sector as a whole.

The ACEVO Pay Survey 2013/14 research showed that the median male charity CEO salary in 2013 has increased to £67,000, from £62,000 in 2012. A distance from the salaries of the publicised DEC members. What the survey does reveal, is a pay imbalance in terms of gender: female CEOs are paid £54,530. These figures are also more than the general public expect a charity CEO to be paid: £35,000. On the last number there is clearly a trustee/charity communication challenge in educating the public. Worse, is a lack of diversity on charity boards: 97 per cent of charity CEOs are of white ethnicity, a higher proportion than in both 2011 and 2012. Another problematic and big issue that charities and trustees need to tackle.

Third Sector Research Centre (TSRC) deputy director Professor John Mohan asks whether this figure is disproportionate. “Are salaries of £60,000 [the CEO sector median] really excessive for such responsibilities? Is the question one of income inequality? By comparison with the private sector very small proportions of the employed workforce in the charitable sector are paid £60,000 or more. Are critics worried about a loss of donor confidence? If so, it should be pointed out that over half of employees paid £60,000 or more are in organisations funded principally by individuals paying high fees for services [private schools and medical establishments], and not in organisations who draw the majority of their income from individual donors, or from government contracts.”

Mohan adds that senior staff salaries often account for a minuscule proportion of total expenditure. “If we conducted a thought experiment, and reduced every salary of someone in the charitable sector paid over £60,000 to the current salary paid to an MP, it would certainly save some money. But in practice the amount would be less than one third of one per cent of the total budget of the
organisations in the sample. For many organisations the savings would have a limited impact on their overall budget. If this is the target of criticism, the debate should be widened to look at other aspects of cost structures, such as the costs of maintaining central London offices.” A good point indeed.

Abundance of data
Important for trustees, there is a considerable amount of information available about salary levels in charities — in TSRC’s database it captured information for nearly 10,000 organisations — and there is ample scope for trustees to make relevant comparisons in order to inform their decisions about salary levels. “And there is also plenty of information for donors on the performance of charities. If you’re thinking about giving money to a charity, consider its impact and effectiveness in the round, and don’t focus on a single indicator such as how much it pays its chief executive,” argues Mohan.

Reinforcing arguments about the level of pay, Dan Corry CEO of think-tank NPC, says: “Let’s be clear, most charity chief executives are not paid a king’s ransom — as research by academics at the TSRC shows (see box overleaf) — and as you would expect those paid more tend to be in the bigger charities. Furthermore running a charity is often a complex, multi-faceted role, combining advocacy, leadership, fundraising and stakeholder skills that would stretch many a very highly paid commercial sector chief executive.”

That said, what it comes back to is trustees have to justify the pay they give to chief executives. Corry adds: “Expenditure on the chief executive’s salary is an important issue for any board and must be taken extremely seriously. Much of what should be done in setting pay, as outlined in the ACEVO Good Pay Guide, applies to organisations in any sector. Are you paying what you need to — and no more — to recruit the calibre of person you need to run your organisation, and to retain that talent? Not an easy question to answer in such a varied sector where true comparators are hard to pin down, but one that must be given proper attention.”

Mission driven
Challenging for trustees is there should also be a different approach taken by
trustees to that which exists in the private sector. “We are in a mission driven, not-for-profit world,” argues Corry. But there are still ways for trustees to measure pay in an appropriate way. “If you are going to link pay to performance, make sure it is not just about the amount of revenue you raise, or the growth of the organisation via contracts, or mergers. Make sure that improving your impact is core to any pay metrics. Additionally, the sector must surely be transparent about what it pays its chief executives — just as it should be transparent about so many other things,” says Corry.

And then, as trustees, when this pay level has been set it should be defended if it is attacked. “I have heard moans from charity staff who tell me that the chief executive just awarded themselves a salary increase. But the chief executive can never award themselves a pay rise — it is the trustees that determine pay and they should ensure they explain it,” adds Corry.

Cancer Research UK chairman, Michael Pragnell, notes that charities cannot compete with the private sector in setting pay: “We recognise that Cancer Research UK should not and does not compete directly with the private sector in remuneration.” However, he notes that as the largest fundraising charity in the UK, raising £460m in 2012/13, the charity and its trustees have a responsibility to its supporters, partners and employees to ensure strong and effective executive leadership: to deliver the best outcomes for the public, for cancer patients and for their families.

Pragnell adds: “The charity’s success in recruiting from the private sector is correlated to the breadth, interest and diversity attaching to its roles while recognising remuneration levels in academic, professional, medical and scientific fields. The recruitment process for senior roles includes assessments by both senior managers and trustees.”

TSRC’s Mohan says many organisations will conduct benchmarking exercises in which senior staff remuneration is compared with that of broadly similar entities operating in related spheres of activity. “The range and complex nature of activities undertaken by large charitable organisations, combined with the sensitive social challenges to which they respond, as well as the multiple demands for accountability from a range of stakeholders, mean that management and leadership in the charitable sector is demanding. Charities are operating in a competitive labour market in which executive talent is in short supply.”

Charities in England and Wales must report the numbers of staff to whom salaries of greater than £60,000 are paid. Taking this as a benchmark for comparison, survey evidence on individual incomes suggests that under 3 per cent of those who work in charitable or voluntary organisations are paid at that level or above. This compares to 4.5 per cent in the public sector and over 6 per cent in the private sector. From information provided in the annual reports of nearly 10,000 charities TSRC estimated that around 12,000 individuals were paid at least £60,000. This equates to at most 2 per cent of the sector workforce, although these figures do not include universities, some of which have several hundred people on such salaries (mostly professors
and senior managers), or housing associations.

“When we looked at which sorts of organisations were most likely to contain individuals receiving high salaries, the pattern is driven by the size of the charity: statistically, levels of expenditure explain most of the variance in the likelihood of paying someone at least £60,000. Certain types of organisations were much more likely than others to pay such salaries — private schools and hospitals, medical research charities, hospices and nursing homes, but also business and professional associations.

“Since many such organisations employ several individuals paid above this threshold value, they account for the majority of high-salary employees in the sector. However, the great majority of organisations in our sample had no more than two people paid £60,000 or above, and in most cases their salaries barely exceeded that threshold,” says Mohan.

The on-going analysis here is at variance with last year’s media coverage, which emphasised a small number of charities operating in particular spheres of activity — such as international development. “There needs to be an informed debate about what exactly the ‘problem’ is here. Is it the rewards to individuals that provokes criticism?” asks Mohan. “There are around 2,000 charities with an annual budget in excess of £10m, some 60 of which spend
over £100m a year, and those financial figures do not describe the complexity of the workload of charities.”

Ian Joseph, CEO, Trustees Unlimited adds that charity boards need not be apologetic for setting salaries that attract the best candidates. However, he adds: “These salaries need to be justified and thought should be given to issues such as pay ratios, benchmarking and the message that it sends out. Ultimately, the delivery of the charity’s objects are the things that are most important and if paying a very good salary will attract someone who can deliver this then that is the right thing to do.”

Within this whole process, Pragnell notes his charity focuses very clearly on an effective use of all money. “We strive for efficiency to ensure that supporters’ money is used as wisely as possible such that for every £1 donated, 80p is available to spend on beating cancer with the balance used to raise future funds. Some of the highest paid employees are world leading scientists who have contributed to major advances in cancer research and continue to do so. Others are senior leaders with the necessary skill and experience to manage a complex organisation which, like other international biomedical organisations, demands high quality professional management.”

Crucially, Pragnell says salaries are benchmarked against market rates to arrive at the appropriate salary ranges to attract and retain the best people, whilst ensuring appropriate levels of charity expenditure and always being mindful of the efficient use of donors’ funds. “We take seriously our responsibility to use donor funds wisely.”

Also important in the debate is the scale and size of the charity. Alex Swallow, chief executive of the Small Charities Coalition, says: “For the majority of small charities, chief executive pay is a non-issue. Most of the sector is made up of tiny charities. Some, if they are lucky, have just a single member of staff. Many others have no paid staff at all and are entirely run by volunteers.”

Though at a time when the sector faces both pressing challenges and new opportunities, the contribution of trustees to ensure excellent governance has never been more important. For example: safeguarding organisational independence and mission, protecting financial sustainability, assessing risk and setting an appropriate strategy. Asheem Singh says: “Excellent governance is not just a question of having good processes in place. It’s about people working effectively together, within the right framework, to fulfil a charity’s vital mission and uphold its values.”

Important for trustees to remember is that it’s not enough to forget about governance until a moment of crisis. At that stage, it’s usually too late to make the necessary improvements. “That’s why at ACEVO we’re working to support charities to ensure that their governance standards are robust and sustainable enough to meet any future challenges. We are working to ensure that the relationships between our senior execs and trustees can survive and thrive, whatever the challenge,” says Singh.

Help is now in abundance to assist trustees, with ACEVO offering its members a comprehensive governance review service, and a helpline service for organisations facing particularly intractable governance issues. Further to its guide, ACEVO also established a Commission on Governance which engages widely across the sector and outside to understand the practical challenges that trustees and staff encounter around day-to-day governance issues.

These are challenging but nevertheless exciting times for the sector. But the sector must face them with vigour and rigour and much of that responsibility sits with trustees. “We demand the highest standards of trustees and senior execs on the important issues facing the sector, and beneficiaries and donors demand it too,” warns Singh. Trustees must start demanding it of themselves as well.

Andrew Holt is editor of Charity Times

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