This is the second in a series of four columns looking at the differing financial structures of tax-exempt organizations in the United States.

Forbes garnered its share of headlines in November when its charity survey revealed that, despite a slowing economy and rising unemployment, "nonprofits" were raising the salaries of their employees by 8.5%, with the raises concentrated in the suites of top managers.  But Forbes' use of the term "nonprofit" is narrow, with its survey limited to 501-c-3 charities.  This is, as noted in the last column, far from the "nonprofit" universe.

How does compensation differ across tax-exempt categories?  And how do charities stack up relative to their non-c-3 tax-exempt counterparts?

An IRS study has produced comprehensive data on a 1998 sample of 216,514 tax-exempt organizations in categories 501-c-3 through c-9.  The data are from Form 990 returns, and hence the sample does not include organizations such as religious institutions that are not required to file.  Since the data are from the full 990s, and not the 990-EZ filed by small organizations, the profile portrays the structure of larger organizations.

In that sample, the compensation differences are striking.

Among charities (501-c-3), 45% of expenditures were taken up by compensation of staff and directors.  For the 161,525 organizations in the sample (about a quarter of the active charities in the country), the dollar total was $305.4 billion.  How big is that?  Well, for perspective, according to the World Bank the 2001 Gross Domestic Product of the Russian Federation was $310 billion.  The compensation tab alone for even a quarter of U.S. charities is almost as big as Russia's annual GDP!   And one year of just the payroll taxes of the sample would fund Costa Rica's whole economy!  With a billion dollars to spare, no less!

How does the 45% of expenses spent on charitable salaries compare to other tax-exempt organizations?   Not well.  The percentage of expenditures allocated to compensation by c-3 organizations is higher than in any other category, and four times that of civic leagues or fraternal organizations.  Even labor organizations spend a smaller portion on compensation.

Size does matter, to be sure.  If one looks exclusively at 990-EZ organizations, then the expenditure structure changes markedly.  Charities allocate only 20.6% of their expenditures to compensation, while labor falls from 40% to 27%.   Only voluntary employee beneficiary organizations see an inverse relationship between the compensation allocation within expenditures and organizational size.  The differing pattern suggests that small may not always be beautiful, but it is certainly cheaper.

The next time, should Forbes have nothing better to do (and with the current economy, we can hope they are busier than we suspect they are), perhaps its next survey should look at compensation trends across the entire non-profit spectrum.  It would be interesting to know if  'tis the season to be jolly for the entire sector.

Sources:

W. Barrett, "Charity Begins With the Boss," Forbes, November 21, 2002.

World Development Indicators, The World Bank, August 2002.

P. Arnsberger. "Charities and Other Tax-Exempt Organizations," Special Studies Special Projects Section, Internal Revenue Service.