Thursday, September 23, 2010

Nonprofit Leadership: Money Isn’t Everything

Ken Berger and Robert M. Penna, Ph.D.1

We take serious issue with the absurd notion Dan Pallotta offered in the Toronto Globe & Mail2 in opposition to a Canadian Member of Parliament’s proposed legislation to allow the Minister of Revenue the discretion to act if a charity provides exorbitant salaries and payouts to its leadership.3 Pallotta declared that this action “would cripple Canada’s charities.”

Not quite.

A careful reading of the bill, C-470,4 reveals that it allows the Minister of National Revenue to revoke the registration (the nonprofit, tax exempt status) of a charity which “pays to a single executive or employee annual compensation exceeding $250,000 ($Can.),” compensation being defined as including, “salaries, wages, commissions, bonuses, fees and honoraria, plus the value of taxable and non-taxable benefits.” The bill neither sets a hard and fast cap on nonprofit salaries, not does it mandate that the Minister act to revoke the registration of a charity paying more than that. Rather it provides the authority for action in cases where the Minister determines that the public trust has been compromised or betrayed.

Mr. Pallotta either missed the context in which the bill was introduced or chose to ignore it, but it is an important piece of the total picture. What apparently prompted the legislation was the revelation that the former president of a Canadian foundation received 2.7 million dollars upon being dismissed by the organization,5 In defending the bill, its sponsor, M.P. Guarnieri, stated that its passage could “replace doubt and cynicism about the management of charities with the confidence that the personal financial sacrifice of donors is managed by people who are paid well but not so well as to make a mockery of the concept of charity.”6(emphasis added)

Ignoring the impact of the pay-out in question, reportedly unlike any in Canadian charity history,7 Mr. Pallotta argues that only by offering extremely high salaries can the charitable sector attract the “best and the brightest.” Pallotta writes, “When you increase the amount of money you are willing to pay, you can recruit from a better talent pool….” Now where have we heard that before?

Oh, yeah; that’s the same defense used by Wall Street leaders to justify their policy of obscene salaries and bonuses…offered right about the time of the meltdown, the collapses of some major financial houses, the bailouts, and the current recession.

So, How’s that “best and brightest” thing working out for you?8


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Mr. Pallotta seems to be positioning himself as the champion of mirroring corporate for-profit salaries, contracts, and “golden parachutes” in the non-profit charitable sector. We strongly believe that, as an approach to improving the work of charities, it is simply wrong. We have covered this ground with Mr. Pallotta before,9 and have profound disagreements with his perspective on compensation and the amount an executive or fundraiser ought to be allowed to make from donations made to charities. This time, however, Mr. Pallotta has gone beyond arguments in favor of a completely unfettered compensation marketplace.

In his Globe and Mail piece, Mr. Pallotta writes:


Do we wish to see the end of breast cancer in our lifetime? Would we like to see homelessness conquered in perhaps one of our major cities before we die? Would we like to see the day when no child has to worry about dying of leukemia? I know the perfect way to prevent any of these things from happening: Maintain our antiquated ideas about charity compensation.



To Mr. Pallotta’s implication that higher executive compensation will somehow lead to the solution of any of the problems he mentions, our answer is BALDERDASH! There is absolutely no credible evidence that nonprofits that pay outlandish compensation do any better job at bringing about positive changes for those they exist to serve than do programs that pay more modest amounts. It is not executive (or fundraiser) compensation that will lead to solutions, but rather an accent on effectiveness, so that those programs that can demonstrate meaningful, sustainable, and verifiable results can show the rest of the field what really works…and in doing so will garner the greatest amount of financial support. Where Mr. Pallotta advocates a sort of economic Darwinism for nonprofit executives (“Let those who can negotiate the most, get the most”), we advocate a survival of the fittest among nonprofits themselves…based upon effectiveness: Let those who can demonstrate the greatest results, get the greatest portion of financial support.

Mr. Pallotta correctly observes that, regarding many societal problems, we are “not moving the needle.” His diagnosis, however, that the economic “deprivation” of top nonprofit executives is to blame, is simply wrong. As we have written elsewhere, the problem is actually that too many nonprofits and governmental agencies are and have been trying things that simply don’t work.10 That, rather than constraints on executive compensation, is what really needs to change before we will start “moving” Mr. Pallotta’s needle. We know from some of his other comments that Mr. Pallotta does believe in the importance of focusing on effectiveness, however he is far less clear in how to go about it then he is about paying CEO’s more!

Elsewhere in his Canadian commentary, Mr. Pallotta thunders that any limit or control on executive compensation is “nothing less than economic apartheid,” an obstacle which he implies will drive all but the untalented and feeble-minded from the ranks of nonprofit leadership. The bankruptcy of this threadbare argument is not only illustrated by sorry history,11 but by the fact that even as the for-profit sector has been shedding jobs, nonprofits in many states were adding them.12 Presumably, not all the people who took those positions did so because they could not make it in the private sector. The law of averages alone suggests that at least some are talented individuals who can and will make their mark on the sector. In fact, there is mounting evidence that in their search for meaningful work, many people are willing to sacrifice the higher salaries they can garner elsewhere for a nonprofit career. We see it everyday in our interactions with countless professionals of every age.


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In dramatic fashion, Mr. Pallotta also asks whether “we [are] prepared to allow millions of people to go on suffering and dying because it offends our ethical sensibilities to pay people money to address these issues?” That is a misleading portrayal of the issue. Rather, the question should be posed as whether we will continue to let deep-seeded problems of poverty, ignorance, injustice, and environmental degradation to be inadequately addressed because we are putting our scarce resources into too many nonprofits that are inefficient, ineffective, or just plain fraudulent.13

We are not suggesting that those who work in the nonprofit sector do so for starvation wages; nor are we suggesting that talent not be compensated. Indeed, our annual Compensation Study indicates that mid to large sized US based charities on average provide a six figure incomes to their leadership.14 That is in the top 10% of wage earners in the US and quite a comfortable standard of living. But when nonprofits seek individual, institutional, and governmental dollars, when they speak of “need,” when some are even cutting or threatening to cut services, it does more than just give one pause when it is revealed that their leadership is paid sums (some in the millions of dollars) that defy both comprehension and logic, particularly in cases such as that cited by M.P. Guarnieri where the bulk of the pay-out was a golden parachute for a an executive who was being dismissed. The question is simple: if things are so tough, if you can barely afford to do what it is you exist to do, how can you justify exorbitant executive packages?

We believe that what needs to happen are several practical steps:



  1. We need a better definition of what constitutes a “charitable” organization, the current notion of “nonprofit” being way too broad and inclusive of too many disparate types of organizations, everything from nudist colonies and ghost hunters, to mega-churches15 and giant hospitals. Some should not be considered nonprofit at all because, other than getting a tax exemption, they are no different than their for profit competitors. The purpose of offering a nonprofit designation is because it is assumed that the for profit sector can not fulfill an important public need. If it can, why should a sacrifice of public tax revenue be offered? Furthermore, while many different organizations may be tax-exempt, and even “nonprofit,” they are not all charities and we need to make that further distinction more clear;

  2. We and many other experts have long advocated that best practice for the nonprofits is to base executive salaries and benefits upon an objective compensation analysis of similarly sized organizations within the geographical and cause area they occupy.16 For the CEO of an organization that serves local youth in a small city to look longingly at the million dollar salary earned by the head of a large “nonprofit” hospital in a large metropolis, and say “Why not me?” is ridiculous…irrespective of whether the hospital CEO ought to be paid that much. Organizations should conduct, and make public, objective (ideally third party consultant) comparative compensation surveys as the basis of what they provide in total compensation;

  3. The Boards of charities need to be better trained (not to mention selected), and coached in their fiduciary responsibilities. Board members are supposed to govern charities in trust for the organization’s stakeholders, on behalf of those the organization serves, and those who support it through donations. Responding to concerns voiced by M.P. Guarnieri, the sponsor of the Canadian legislation he attacked in his article, Mr. Pallotta cynically replied that “a person’s occasional sacrificial donation to charity does not entitle them to mandate a lifetime of economic sacrifice on the part of others.” Actually, a certain level of “economic sacrifice” (rather than millionaires in the top 1% of the population, our poor nonprofit leaders must settle for the top 10%!) is appropriate and those donating are due the consideration of fiscally responsible management. The net gain to those who make such a sacrifice is the satisfaction that is gained in helping others and fulfilling a very important social mission. If some of those working in the nonprofit sector, as Mr. Pallotta did, feel that they are being unfairly subjected to “a lifetime of economic sacrifice” they should feel free to seek gainful employment elsewhere. The duty of charitable Boards is not to make potential CEOs feel as though they have made an economically lucrative career choice; it is to ensure that donors’ support is doing the most good for those the organization exists to serve and that the leadership has a passion and drive to serve others rather than line their pockets. For-profit Boards answer (or should answer) to stockholders; and in the wake of the Wall Street bonus stories and accounts of egregious severance packages,17 they have their own houses to get in order. But charitable Boards should answer to stakeholders…not to maximizing the financial aspirations of executive leadership;

  4. The sector as a whole needs to finally move away from looking at the magnitude of problems, the commitment of those who say they are addressing those problems, and to the degree to which they are “trying” to solve them. Instead it need to finally move wholeheartedly toward looking at results, at effectiveness, as the primary measure of whether an organization deserves individual, institutional, or governmental financial support.18 In one of his closing statements Mr. Parrotta states that “we could replace our doubt and cynicism about charities by taking a look at how hard they work to keep society’s problems from getting any worse.” WRONG! It is not “how hard they work” or “how hard they try” that matters; rather, it is what they are accomplishing! In the end, that is the most critical thing that matters; for if the last seventy years of social investment have proven anything, it is that caring, trying, and even working matter little if the interventions themselves are ineffective.


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Of course, the irony of this discussion (and of Mr. Pallotta’s position) is that the greatest compensation challenge in the nonprofit sector is at the very opposite end of the spectrum from where he chooses to focus. In point of fact, it is the front line staff in many nonprofits that are most often grossly under-compensated, particularly in relation to their critical role in delivering vitally needed services.

Rather than worrying about how to increase executive compensation packages, nonprofit Boards and CEOs should focus upon retaining, promoting and rewarding those who perform and deliver vital direct services to people in need. It is an outrage that certain nonprofits pay their executives hundreds of thousands or more, while there is constant churn among their front-line staff, the people who directly interact with clients, because salaries in those positions are so low. Nonprofit organizations need to do a much better job of offering salaries and benefits that provide a decent quality of life for these individuals.


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Regarding the proposed Canadian legislation that prompted this chapter in the on-going debate, we too have questions. We are neither in favor of arbitrary caps on executive compensation; nor are we, given the danger that political considerations might come into play, particularly comfortable with a government official having the ability to sanction a charity for what he or she unilaterally determines is an unfounded compensation package. We believe that comparative analysis is the best course of action. We hope that M.P. Guarnieri, and her legislative colleagues will consider this bill carefully, amend it as necessary, and in the end do what is best for Canada. We also hope that in their wisdom, they begin to bring some sanity to executive compensation in their portion of the charitable sector. Here in the U.S. we too still have much to do on this issue. We believe that, in spite of Mr. Pallotta’s position, ultimately common sense will prevail on both sides of the border; and it will be recognized that for mission-driven, high performing, nonprofit leaders, money isn’t everything.



Endnotes

1 Ken Berger is the President and CEO of Charity Navigator. Dr. Penna is an independent outcomes consultant and advisor to Charity Navigator. He is the author of Outcome Frameworks and the forthcoming Nonprofit Outcomes Toolbox, to be published by Wiley and Sons in March of 2011.

2 Pallotta, Dan. “Salary Caps Would Cripple Canada’s Charities. Toronto Globe and Mail. September 6, 2010. http://www.theglobeandmail.com/news/opinions/salary-caps-would-cripple-canadas-charities/article1694263/


3 Bill # C-470, sponsored by The Honourable Albina Guarnieri, P.C., M.P.

4 Text available at http://www2.parl.gc.ca/HousePublications/Publication.aspx?Language=E&Parl=40&Ses=3&Mode=1&Pub=Bill&Doc=C-470_1&File=24, and an review available at http://www.carters.ca/pub/bulletin/charity/2010/chylb202.htm

5 House of Commons Debates, 009 (15 March 2010) at 1095 (Hon. Albina Guarnieri). Also see Donovan, Kevin. “Sick Kids charity boss gets $2.7m send-off.” Toronto Star. October 1, 2009. http://www.thestar.com/news/gta/article/703659--sick-kids-charity-boss-gets-2-7m-send-off

6 House of Commons Debates 009 at 1117.

7 Donovan

8 Significantly, the “best and the brightest” was also the term used to describe JFK’s team of advisors…the same individuals who got us mired in Viet-Nam!

9 Berger, Ken. “Is It A Sacrifice To Work For A Charity?” Ken’s Commentary. January 12, 2009. http://www.kenscommentary.org/2009/01/is-it-sacrifice-to-work-for-charity.html

10 Berger, Ken and Penna, Robert M. “Billy Beane and Outcomes.” Philadelphia Social Innovations Journal. August 2010. http://www.philasocialinnovations.org/site/index.php?option=com_content&view=article&id=199:billy-beane-and-outcomes-what-can-baseball-tell-the-nonprofit-world-about-measures-and-measurement&catid=20:what-works-and-what-doesnt&Itemid=31


11 Berger, Ken. “Tales of the Dark Side” Ken’s Commentary. January 5, 2009. http://www.kenscommentary.org/2009/01/tales-of-dark-side.html


12Philanthropy Journal Staff. “Nonprofit jobs in state grew in recession.” Philanthropy Journal. September 7, 2010. http://www.philanthropyjournal.org/nc/ncnews/nonprofit-jobs-state-grew-recession

13 Confessore, N. “FBI Raids Bronx Clinic Office Linked to Espada.” The New York Times. April 21, 2010. http://www.nytimes.com/2010/04/22/nyregion/22espada.html?_r=1&ref=nyregion; “Former CFO of New York Charity Admits Embezzling $324K.” Fraud Talk. http://fraudtalk.blogspot.com/2010/03/former-cfo-of-new-york-charity-admits.html; Walters, C. “Homeless Charity Revealed as a Fraud.” The Consumerist. November 24, 2009. http://consumerist.com/2009/11/homeless-charity-revealed-as-a-fraud.html

14 Charity Navigator Staff. “2010 CEO Compensation Study”. August 4, 2010. http://www.charitynavigator.org/index.cfm?bay=studies.ceo

15 Brooks, David. “The Gospel of Wealth.” New York Times. September 6, 2010. http://www.nytimes.com/2010/09/07/opinion/07brooks.html?src=me&ref=general

16 Panel on the Nonprofit Sector, Principles of Good Governance and Ethical Practices: A Guide for Charities and Foundations. October 2007.

17 Bonisteel, Sara. “Nardelli Gets $210M, Average Unemployed Joe Gets ...” Fox News. January 5, 2007. http://www.foxnews.com/story/0,2933,241680,00.html

18 And while we’re at it, we should also jettison considerations of how well a charity is known, who its celebrity sponsors are, or how politically connected it is!

4 comments:

Dan Pallotta said...

Hi Ken,

My comment wouldn't post as it was too long, so here is a link to it. Thanks.

http://danpallotta.posterous.com/response-to-ken-berger-and-robert-penna

Ken Berger said...

Dan,

My response to your comment is also too long! Here is a link to it -

http://www.kenscommentary.org/2010/10/nonprofit-leadership-money-isnt.html.

Regards,
Ken

Tanz said...

I just wanted to thank you for this.

Ken Berger said...

Tanz,

Thank YOU for your kind words!

Best,
Ken