Friday, October 1, 2010

Nonprofit Leadership: Money Isn’t Everything; Part II

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

Mr. Pallotta has written a lengthy response to our recent blog entry and chose to challenge almost every point in our response to his position on the Canadian legislative proposal. As a reminder, this proposal would allow that nation’s Minister of National Revenue to revoke the registration (i.e. tax exempt status) of a charity which “pays a single executive…annual compensation exceeding $250,000 ($Can.). We have decided to, for the most part; forego a line-by-line refutation of his rebuttal, choosing instead to make a more general response.

However, a few points of clarification are in order:

  1. We do not advocate for caps on salaries that are enacted by governmental fiat. We believe the nuances and complexity of these matters is not conducive to the blunt instrument of government regulation. However, we do believe that those who pay excessive and unjustifiable compensation should be called out by organization’s like ours and that the IRS review process that looks for objective comparative data on salaries makes good sense. We see no “contradiction” therefore in our views on the question of salary caps.

  2. Dan asked if either of us has ever run a nonprofit of 400 or more employees. Ken has run a number that had over 1,000 employees.

  3. Dan discusses Ken’s compensation at Charity Navigator in 2006. Ken did not begin work there until 2008.

  4. Dan calls us narcissistic in our thinking on wanting to “unilaterally impose our will”, when it comes to the idea that money isn’t everything. He says instead it is up to the “donors, clients and the leader” to decide. Well, donors who use Charity Navigator have RESOUNDINGLY indicated (more than any other feedback we get) their disgust with the obscenely high salaries of some nonprofit leaders. In addition, Ken has spent many, many years working with clients and integrating their feedback into his work. We know that they too are disgusted with the salaries Dan is talking about. As to “the leader” deciding on the salary, that should not be his or her decision to make, but rather a Board that uses best practices. The consensus among nonprofit compensation experts on best practice is precisely the same as what we advocate – mid-to-large sized nonprofits need to conduct an objective compensation survey to assure that the executive compensation conforms to other nonprofits of similar size, geography and cause. Where is the narcissism and unilateral imposition in our thinking here?

  5. On the matter of effectiveness of nonprofit performance being difficult to prove, we agree. However, that does not mean we should not be doing our best to measure what matters most. We have written quite a bit on this elsewhere and refer the reader there.2

  6. Of course we believe that people who work in the for profit sector “make a difference” and can provide a social good. However, to use that to justify very high nonprofit salaries makes apples to oranges comparison that we discuss in the first bullet of our next paragraph!

  7. Dan has a description of the dynamic in a nonprofit Board room that from our decades of experience seems other-worldly. He describes a wealthy Board member dictating strategy to the CEO, dictating how the CEO goes about executing it and demonizing the CEO at the annual meeting for wanting a $10,000 raise. Huh? To begin with, we often find the problem with Boards is that they are “asleep at the switch” and that CEO’s often have TREMENDOUS power when it comes to strategy. At the same time, most Board’s of mid-to-large nonprofits also understand they should not micro-manage the execution of policies (or are simply asleep at the switch anyway!). Furthermore, they often do not appreciate their fiduciary duty and liability as it relates to setting executive compensation based upon objective data. So we are puzzled by this upside down view of the nonprofit CEO’s dilemma.

The heart of Mr. Pallotta’s argument seems to be that by offering salaries competitive with those found in the corporate sector, the nonprofit world will be able to attract the best talent, and hence will be better able to tackle the social problems it exists to address. We take issue with this contention on a number of grounds. The fact, which Dan seems to forget, is that the two sectors, the for-profit and the nonprofit, are considerably different realms:

  1. To begin with, when Dan describes the proof of “economic history” to justify his views, he is mixing apples (for profits) and oranges (nonprofits and government service). The very profit motive that energizes the former and is reflected in Dan’s “economic history” is entirely lacking in the latter…as are the measures associated with measuring for-profit success. In the corporate world such things as sales figures, market share, stock prices, and dividends paid offer irrefutable proof as to whether or not a company is doing well. In theory, if a company’s stock prices, dividends, sales and market share go up, financial rewards are justified and/or the person(s) responsible can command higher salaries when they move on to their next position. In the nonprofit sector, by contrast, such measures are entirely lacking. In the absence of widely used, accepted, and understood performance measures (a concept, by the way, that Pallotta appears to oppose) the determination of which nonprofits are “successful” (however that is defined) is highly subjective, leaving quite open the question of what executive compensation is “justified.”

  2. In the for-profit world, profit margins, however derived, are the fodder of salaries. But where does the nonprofit world get its working capital? To a significant degree, the answer is from donations – both individual and institutional- and in many cases from taxpayer dollars. This seminal difference argues for parallel differentiation in the way those monies are disbursed. The mission of a for-profit entity is to make money; the mission of a nonprofit is to do good. If the Board of a for-profit corporation wishes, rightly or wrongly, to award an executive with an over-the-top compensation package, it is the company’s money (the Wall Street bailouts excepted) they are playing with. In a nonprofit, by contrast, it is not the charity’s money, but rather that of the countless individuals who, directly or indirectly, contributed those funds. That money was given for a purpose, usually in support of the social benefit aims the charity claims to be pursuing. If the shareholders of a for-profit firm believe that compensation is too high, they at least have the mechanism of stockholder meetings as an avenue to try and rectify the situation. In the nonprofit world, where are stakeholders (should they even be aware of a particular compensation package) to turn if they believe a Board has been unduly generous? The Board members of a for-profit are charged with the responsibility of maximizing stockholder gain. Nonprofit Boards, by contrast are supposed to be (the degree to which they actually do so being open to substantial question) acting in trust, to safeguard the interests of stakeholders and donors. We believe that these significant distinctions argue for a conservative approach to nonprofit executive compensation, to leave as much as possible for actually doing the work for which the organization exists.

  3. Mr. Pallotta rightly argues that using an arbitrary percentage of an organization’s budget as a guide to executive compensation is a flawed approach. Charity Navigator has listened to the critics, and has moved away from the position we once held that supported such a standard. We are in agreement that executive leadership needs to be compensated fairly and adequately; and, as Dan points out in citing our own situation, a given dollar amount that might represent a mere 3% of one organization’s total budget, very well could represent 14% or more of another’s. What we do argue for, however, is common sense. Does it make sense for an organization that is cutting services and laying off staff to be increasing its compensation package for its executive(s)? Does it make sense for the national head of an organization to be paid a million dollars or more when the local chapters of that same organization are going begging and cannot keep front line staff for want of decent wages? In the absence of hard proof that the leadership of a nonprofit is actually improving conditions in the community, how can high six figure and seven figure wages be justified? 3

  4. Mr. Pallotta in essence argues that high salaries, as awarded in the for-profit sector, are evidence of exceptional talent. But this is known not to be necessarily true. Leaving aside for the moment the excesses of Wall Street, an example Pallotta unfathomably calls a “straw man,” the fact is that numerous executives have made the headlines in recent memory specifically for having been fired in spite of the enormous salaries they commanded. We know that Dan is well aware that high-salary corporate executives do not get their position by answering an ad in the classifieds. Similarly, they do not negotiate their own compensation packages. Rather, they are often recruited by executive search firms, represented by lawyers and agents…all of whom have an interest in the compensation being as high as possible. As in sports, it is often not the quality of the person that determines the final agreement, but the shrewdness, tenacity, and even guile of his or her agents. A high price, as many an organization (and sports team) has learned, is not necessarily a guarantee of value. It is, rather, merely the earmark of a successful negotiation as seen from the perspective of the person being paid.

In closing, what we’re arguing for is common sense. Unlike Dan Pallotta, we do not believe that salaries approaching a million dollars or more are needed to attract bright, able, and committed candidates to positions of nonprofit leadership. Unlike Dan Pallotta we do not believe that the answer to either our social ills or to the ineffectiveness of many nonprofits is higher executive salaries. Unlike Dan Pallotta, we do not believe that virtually any proportion of donors’ or taxpayer dollars ought to go towards enriching nonprofit executives if that is the deal they successfully strike with an incompetent or irresponsible Board.4 We also apparently differ with Mr. Pallotta on the value of the impulses that inform individuals’ personal choices.

Yes, as he implies, there are people for whom money is the overriding value. There are people who go to medical school or law school because they want to make a lot of money…and then there are those who do it to cure disease and fight for the marginalized. Were money everyone’s primary motivating factor, as Dan implies it is, there would be far fewer teachers and nurses, and virtually no rabbis, priests, ministers, or religious sisters. There would be far fewer social workers, high school coaches, park rangers, artists or artisans. Vastly fewer people would be working in our libraries, for United Way, or the Boy Scouts.

And we would be a vastly poorer society indeed for that loss.

We agree with Dan’s observation that “We face social problems of massive scale”. However, we are not convinced that nonprofit “enterprises of massive scale” are the only solution (they have a place, but not the only or necessarily primary place). So we are not particularly concerned that “only” 144 nonprofits have gotten to over $50 million since 1970. Using Dan’s proclivity to for profit comparison, it is small business that is the driving force for job creation and economic growth in this country. In this instance, nonprofit history has a similar pedigree. It is local, community based initiatives, with passionate and involved volunteers and direct service staffs, which make miracles happen every day. The innovation, creativity and value of these smaller organizations are vital to our ability to solve social problems. Let us not have bigness of organizational size as a fetishism now too Dan!

What Dan Pallotta seems to fail to grasp is that some people do what they do out of a sheer love they have for that particular calling. They know they could make more by doing something else. Many struggle with that calculus on a regular basis.5 But most, and we owe them a debt of profound gratitude, continue day after day with the work at hand…creating beauty, growing our food, instructing our young, caring for the sick, protecting our environment, defending the indigent. Yes, they deserve a wage that recognizes their talents (at both the top and the bottom of the organizational pyramid); but that wage should never be considered or granted outside of the larger context of the work the tax exempt, nonprofit organizations exist to do; and the communities they exist to serve.

As we have stated before, if people want to make a million dollars or more, there are plenty of places where they can do so. We believe the nonprofit sector should not be that place.


1Ken 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 & Sons in March of 2011.

2 (especially see those entries on the topics – Charity Rating Issues and CN 2.0)

3Goldstein, J. et al. “Wealth of Friends” New York Post. September 12, 2010.

4Goldstein J. and Seifman, D. “Vito Lopez-backed charity led by the clueless.” New York Post. September 15, 2010.

5 Grondhal, Paul. “Feast or famine for dairy farmers.” Albany Times Union. September 26, 2010.


Madeline Puckette said...

Thanks for your detailed thoughts on this. I really believe you make a strong case in how a non-profit has a to use it's fiscal resource wisely, even if their is a surplus.

I have a question for you: In the case of a surplus (lets say that an organization receives a wealth of donations from the public), what are some solutions to the interesting problem of having excess money? Can a charity in turn select another organization to spread the wealth? This might be a stupid question, but what I am really wondering what kinds of problems charities run into when they are encountered with extra revenue. How can they grow, can they grow accordingly?

Ken Berger said...


Your question is far from stupid, it is an excellent one. This is a real problem for those lucky few nonprofits that get a surplus of donations of a significant amount, such as in the Haiti disaster. It is especially true when smaller organizations are flooded with donations that far outstrip their capacity to use them in a timely manner.

I believe that what usually happens is that the organization grows dramatically and suffers from a terribly difficult learning curve where many, many mistakes are made along the way. In other words, a lot of money can be wasted on the trial and error of growing too fast. Alternatively, some will squirrel the money away and build more slowly and thoughtfully. They then run the risk of donor wrath at not using the money as was expected.

Rarely if ever, do I see nonprofits spread the wealth. That is the sad state of things where most function in silos and organizational priorities trump mission. In their defense though, most smaller nonprofits are usually so resource starved that the influx of cash is vitally held on to to afford better capacity to fulfill the mission.

One other point of clarification, there is a certain amount of money that every charity should be squirreling away. We call it working capital reserves and recommend that most have enough money in reserve to operate for a full year, should their normal funding dry up. That is just sound financial practice and not trumping self preservation over mission in our opinion.

I think you get the idea. I hope this answers your question too!