Grammy Chief’s Pay: $1.5 Million

Breaking new ground in the nonprofit world, the Grammy organization last year awarded its chief executive, C. Michael Greene, an unusual bonus of $707,810--nearly doubling his annual compensation to $1.5 million.

Greene’s salary, benefits and bonus, which were approved by the 41-member board of trustees of the National Academy of Recording Arts and Sciences, or NARAS, appears to make him the highest-paid nonprofit organization executive in the country last year--with total compensation that handily outstripped that of the heads of the nation’s top universities, museums and entertainment industry trade groups.

The bonus came in a year in which MusiCares, one of the academy’s two public charities, spent roughly 12 cents of every dollar it earned in revenue on grants to needy individuals--its primary charitable purpose. Greene is the charity’s unpaid president.

Greene’s compensation raises new questions about the recording academy’s management. These include whether the board is sufficiently independent from Greene, who has dominated the academy’s management since he became its chief in 1988.

Tax and management experts say that given NARAS’ relatively small size and asset base, Greene’s compensation could run afoul of federal tax rules prohibiting excessive compensation of executives at nonprofit organizations.

NARAS took in $33 million in revenue in the year ended July 31, 1997, and reported assets of $23.8 million. By comparison, the Academy of Motion Picture Arts & Sciences, which sponsors the Oscars, reported $26.4 million in revenue and $62.1 million in assets for the same year--but its highest-paid executive received $200,000 in compensation.

Greene’s compensation outstripped that of the entertainment industry’s most prominent nonprofit organization executives--Jack Valenti, chairman of the Motion Picture Assn. of America, and Hilary Rosen, chairman of the Recording Industry Assn. of America, industry trade and lobbying arms. Both executives earned about $1.1 million last year.

Greene’s bonus is believed to be the largest ever paid to the head of a U.S. tax-exempt organization, according to professionals familiar with nonprofit accounting.

“As far as I know, a bonus of this size is unprecedented in the nonprofit world,” said Stacy Palmer, editor of the Chronicle of Philanthropy, which monitors the compensation of nonprofit executives.

Greene declined to discuss the formula used to calculate his compensation.

In written answers to a list of questions, the organization’s executive committee said details of Greene’s contract are confidential.

“The Board of Trustees is delighted with Mr. Greene’s performance,” the committee stated, “and his compensation reflects their strong support.”

But it said Greene’s pay package was not based on any study of performance bonuses granted to chief executives of other similar organizations--even though many tax experts recommend that nonprofit boards regularly survey salaries at comparable organizations to determine reasonable levels of pay for their own top officials.

“I think this board of trustees needs to take a hard look at the process by which they determined their CEO’s compensation arrangement,” said Judith O’Connor, president of the Washington-based National Center of Nonprofit Boards.

Federal law prohibits executives of tax-exempt organizations from receiving excessive compensation. More specifically, the tax code prohibits any action that could be interpreted as running such an organization for any individual’s personal benefit.

The potential penalties for abuses of the rules include revocation of an organization’s tax-exempt status. The Internal Revenue Service also has the authority to fine individuals and board members a significant percentage of the sum deemed excessive.

Defining when an executive’s compensation becomes “excessive,” however, has traditionally been tricky for the IRS. The agency is generally more tolerant of salaries and benefits at so-called business leagues, or trade groups such as NARAS, than at charitable organizations that raise money from the public. One reason is that individual contributions to the latter are tax-deductible, but funds donated to the former are not.

Still, IRS regulations prohibiting tax-exempt organization executives from unfairly benefiting from their positions apply equally to both categories.

Moreover, NARAS is the parent organization of two charities of which Greene is president. Greene receives no salary or benefits directly from the charities, the NARAS Foundation and MusiCares. The academy, however, does charge both charities for rent and office services at its Santa Monica headquarters building and, in the case of the foundation, an 18% fee for the use of the Grammy trademark.

The organization’s latest public filings, covering the year ended July 31, 1997, also reveal:

* MusiCares has continued its pattern of spending only about 10% of its annual revenue on actual grants to needy musicians and other individuals. In the year ended July 31, 1997, the charity recorded $1.73 million in income, according to its audited financial statements and public tax return. It spent $204,655, or 11.8%, on direct grants to needy individuals. The grants typically cover expenses ranging from utility bills and pawnshop loans to the costs of drug treatment and hospital care.

Among MusiCares’ other spending was $615,985 in expenses associated with the annual Person of the Year fund-raising dinner--about half the affair’s gross take of $1.29 million; $88,627 on other fund-raising; and $42,720 in grants to other charitable bodies.

* The NARAS Foundation, which sponsors concerts and music programs for disadvantaged youths, was charged $553,248 by the recording academy for use of the Grammy trademark--a licensing fee unusual in the charitable world. The academy contributed about $2.17 million to the foundation--most of it from the proceeds of an annual anthology album released by the academy.

In February, the California attorney general’s office notified the IRS of its concerns about the size of Greene’s compensation after a series of reports in The Times. Grammy officials told The Times this week that they have not been contacted by the government.

Despite the controversy surrounding Greene’s compensation, the board voted unanimously at its annual meeting in May to extend Greene’s contract two more years.

This summer, the academy issued fresh copies to board members of its book of “leadership principles,” which, among other things, bans them from having any contact with the media under threat of legal action. The principles say any trustee caught disseminating unauthorized information to the media can be terminated and sued for financial damages.

The executive committee this week said the conduct code was designed by their legal counsel, John Hazard, and ratified in 1997 by the board of trustees.

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