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Paying For It

February 23, 2009

(Tony Pipa is a consultant whose twenty years of executive leadership span nonprofits, foundations, and global NGOs seeking to alleviate poverty. This is his first post for PhilanTopic.)

Leadership2 Compensation for nonprofit executives has been much in the news of late. Dan Pallotta has been attracting lots of attention with his book Uncharitable, which (among other things) asserts that the nonprofit sector could increase its impact if it did more to attract talent that now goes into the private sector by offering salaries that rival those offered by for-profit companies.

On the other side of the issue, public outcry in September regarding a $1.2 million compensation package for the chief executive of the United Way of Central Carolina forced her firing and the resignation of several board members. The IRS just released a report on nonprofit hospitals that prompted an aide to Sen. Charles Grassley to note that some of "those that provide very little charity are paying their executives the biggest salaries." And the caps on executive pay in the stimulus bill have prompted a few commentators to question whether nonprofits won't be next.

Whither the sector?

I don't agree with Pallotta that matching for-profit salaries is necessary or will necessarily result in an increase in impact by nonprofits. Indeed, there's a point at which higher and higher levels of compensation risk undercutting effectiveness by drawing attention away from the value- and mission-driven characteristics that give the sector its distinctive advantage in providing social benefit and driving social innovation. When you make it ALL about economics, you start making it ONLY about economics.

In fact, I have to admit that Pallotta's implicit assumption that "talent" is 100 percent transferable from the for-profit sector to the nonprofit sector raises my hackles (see the comments section on this post for how we disagree). While Pallotta bemoans the fact that the sector doesn't compete for graduates from elite MBA programs, I don't think more MBAs would necessarily mean better organizations or improve nonprofit management. Value-driven motivation and commitment to social change are key components of being a great leader in the nonprofit sector; they're not just valid reasons for wanting to be in the sector, they're a sort of skill. So it makes sense to me that nonprofit salaries are lower than salaries in the for-profit sector. After all, one element of nonprofit "compensation" is the fulfillment one reaps by helping to advance a social mission.

On the other hand, I agree that too many in the sector -- especially in small to mid-sized organizations -- are significantly underpaid. And the problem is not just compensation. Talent, no matter where it comes from, has to be developed to achieve its potential, and finding both the resources and breathing space -- the permission, really -- to properly invest in human capital and develop rational career paths are challenges that loom just as large as adequate compensation.

Pallotta is right when he points out that the attitudes of donors and the public are major barriers to changing the situation. The belief that donations should largely go toward "program" rather than "administrative" costs is a sort of sledgehammer that obliterates all reasonableness and flexibility, ignoring the complexities of an organization's situation and obstructing a more nuanced approach that leaves room for appropriate adjustments. Indeed, I have trouble imagining any move by policy makers to limit nonprofit executive compensation that wouldn't reinforce this tendency. Although nonprofit hospitals might be an example of what happens when financial considerations take too much precedence (and more research is needed to know), their size alone makes them an anomaly, and I wouldn't want policy affecting the entire sector being based on that very particular situation.

In the end, this should be about finding levels of compensation that maximize the impact of individual organizations (and the sector as a whole). That's a question of accountability, not legislation. It's stronger governance, rather than government prescriptions, that should be the safeguard.

-- Tony Pipa

Comments

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I wholeheartedly agree with your analysis of the issue Tony but wonder whether we're missing something in the prescriptions for the problem.

1) What should the sector do to address the issue of staff development, human capital, and rational career paths? One unusual consequence of all this is that many of philanthropy's leaders come from the business world (at a high cost to philanthropy) since those that started in the philanthropic world remain underdeveloped.

2) If the sector doesn't hold itself accountable, in the same way the banking sector didn't, then government through legislation and the rule of law might be what's necessary. Thoughts?

Also, if you're interested, a few of us (including Dan Pallotta) have been continuing the debate on a recent post titled "The Willingness to Work (for Less) in the Nonprofit Sector."

http://tonyjwang.wordpress.com/2009/02/22/the-willingness-to-work-for-less-in-the-nonprofit-sector/

Tony, thoughts re: #2: I agree that government intervention may be necessary in cases, I just don't think that legislation/regulations capping executive compensation are the way to do it. In the case of nonprofit hospitals, I think it's fair that that IRS is questioning the degree of charitable benefit and whether tax exemption is warranted. This has its own sticky issues, but I think the focus ought to be on whether charitable value is being created, rather than prescribing how an organization's internal organizations create that value.

Building up the IRS's capacity to oversee charitable organizations would be a start. Even a new rule capping pay would likely go mostly unenforced, given their thinness there. Perhaps the sector should have been advocating for that as an addition to the economic stimulus package!

Re: #1: This is not easy. The resource constraints that Dan highlights are very real. Unfortunately, training and professional development are seen as "administrative" by most donors, and it's sometimes hard for a nonprofit to show to donors a tangible, provable connection between better training and better outcomes. In resource-constrained times, as woeful as professional development budgets are in the field, my experience is that professional development is one of the first things to get shoved to the bottom of a nonprofit's budget priorities.

In my opinion, the sector needs much broader and deeper professional training, within organizations and within specific fields. I don't mean academic training. After a close relative got his MBA from a top program, for example, he went through a three-month training program before ever getting on the desk at the investment bank where he started. That's more in-house training than I've had in 20 years of executive leadership in the nonprofit sector. I gasp to think how much additional training he's received throughout his career in reaching managing director.

I think organizations have to start thinking in these terms and start looking for creative ways to develop training that is automatic and seen to be part of delivering their programs, rather than additive. Right now we leave it too much up to the individual (go back to school, get your degree) or individual professional development budgets (here's a little money, go get a little better). In the beginning there will be few funders who will understand the latent power here and be willing to make resources available, but if we create a couple of successful models, perhaps that will start some momentum.

Tony, good to see you in the public again - or maybe I have missed out?! You are right that this issue of compensation gets diverted by the national discussiosn that focus on nonprofit hospitals (which uniquely do compete for talent in a both a non-profit and for-profit environment)and the large national advocacy and service organizations which have a lot more similarities to the for-profit than the non-profit sector.

That being said, after being on all sides of the equation for many years, I am willing to say that, on average, the typical non-profit employee brings less to the table than their for-profit cousin. Some of its clearly self-selecting (non-profit environment seen as much more accommodating to work/life balance for example)but what I see is non-profits being attractive to indivduals who could never compete in the for-profit marketplace -- some of its personality; some its drive; some of its just sheer ability. Its not mostly the salary that keeps people out of the non-profit marketplace,its the unwillingness of very talented people( with some obvious exceptions) to enter a workplace that is relatively undemanding and often intellectually stunting. In most for-profit environments there is a motivating outcome, whether driven by greed, avarice,intellectual gain or ladder climbing. What motivates people in most non-profit environments???? Your point about training is a good one --radically different expectations with more risk --much easier to get yourself fired in a for-profit than a non-profit environment--isnt that worth more $$$?

So, why not make the sector more intellectually stimulating, more demanding, and compelling for the more talented individuals who have a commitment for social change? If the nonprofit sector is trying to solve the world's problems, shouldn't its employees bring the most to the table and not the least?

Pallotta’s book is encouraging the sector to rethink its model. If the for-profit sector is paying their employees more money, and those well-paid employees have a record for accomplishing more; why not employ the same model to finally find the cure for cancer and AIDS, and combat poverty once and for all?

Pallotta is suggesting putting nonprofit causes at the forefront of the way our country does business, not as an afterthought. That sounds about right to me.

The point about risk and responsibility is a good one - without expectations and preparations for taking on greater risk, and potentially making a greater impact, the environment can feel limiting. I don't think that's a function of low pay, as much as limited resources to experiment and be creative, plus the type of organizational culture that's created. There are good and bad nonprofits in this regard, just like there are good and bad for-profit ventures. In general, however, I would say that because the sector's woefully undercapitalized, its resources to do this are very limited.

The primary motivating outcome in a nonprofit is its mission. That's the hook. But if there isn't an environment that provides employees the space to grow in impact in a compelling way, that hook's not going to be enough to keep great talent.

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