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Wednesday, March 31, 2021

We’ve Been Asking the Wrong Question About Charity Compensation

All our lives we’ve been taught that one of the best questions you can ask in researching a charity is, “How much do they pay their CEO?” If the number’s low, that means they respect your donation. If the number’s high it means they don’t, and there’s something fishy going on. 

What if we’ve got it all wrong? 

Let’s say the issue is child hunger. I offer you three choices: A) I can give you a charity leader with a low salary, but they don’t produce any results, or, B) I can give you a charity leader with a medium-ish salary, but they produce mediocre child hunger reduction, or ,C) I can give you a charity leader with a very high salary and they’re actually reducing hunger in substantial numbers? Which would be the better investment for you?

“How much do you pay your CEO?” is the wrong question to ask. The correct question to ask is, “Is your CEO worth the money you pay them, and how do you know?” Just because a person earns a low salary doesn’t mean they are a good value. Imagine hiring someone for $60,000 and they actually take the organization backward. A real loafer. Good people underneath them get demoralized and leave—people that the charity spent years training. The person leaves a bad taste in a big donor’s mouth, so the big donor goes elsewhere. A $100,000 gift goes away as a result. Now all of a sudden, $60,000 for that person looks very expensive. Heck, a volunteer—working for free—can be very expensive if all they do is distract other workers. On the other hand, let’s say we hire someone for half a million dollars. Gulp. But they bring in ten million dollars in revenue in their first two years. They attract a great team because people want to work for them. They’re having a huge impact on the problem. Now all of a sudden, $500,000 looks cheap!

Did you ever buy the cheap winter coat instead of the more expensive one, only to find out it didn’t last the season? It would have been less expensive in the long run to buy the better coat? It’s like that.

“But I just don’t feel right about it.” People didn’t feel right about it when someone first told them that the Earth was round instead of flat, but eventually they got used to it and started feeling smart that they were no longer anxious about falling off the edge of the planet. You deserve to feel smart about your giving.

“People who want to make a lot of money don’t belong in charity.” If you think about it, that’s a little bit like biting off your nose to spite your face. Let’s say you’re a Red Sox fan and you say, “Pitchers who want to make a lot of money don’t belong in Boston,” so the pitcher goes to play for the New York Yankees. The Yankees go on to win the World Series and the Red Sox finish last. Who’s the victim of your standards? You, or the pitcher?

In the case of a charity, it’s worse, because when we say, “People who want to make money don’t belong in charity,” those people go elsewhere, probably into the for-profit sector, where their talents are appreciated and rewarded. In this case, it’s not only you as a donor that loses their talents, it’s the hungry children they could have helped. That’s a very expensive standard for hungry children.

We pay college football coaches—at nonprofit colleges—seven, eight, nine million dollars a year because we want those teams to win. And the colleges wouldn’t be paying that kind of money if it wasn’t getting them the best coaching talent in the world. As a donor, you want your team—so to speak—to win the battle against hunger, cancer, illiteracy, racism, and the rest. It’s time we started investing in the coaches who can win. Instead of the coaches who are simply cheap. Cheap coaches, more often than not, lose games and lose lives. And it’s time we applied the same standard to all of the other workers at the charity that the coach is going to work with.

In short, it’s time for you to feel smart about your giving. Asking the right question, instead of the old question, will make you feel pretty intelligent.

About the author: Dan Pallotta created the AIDSRides, Breast Cancer 3-Days and Out of the Darkness Suicide Prevention Walks, which raised over half a billion in nine years and were the subject of one of the first Harvard Business School case studies on social entrepreneurship. His TED talk on philanthropy has been viewed over five million times and is the 16th most-commented TED talk of all time. He has written over 100 blogs for the Harvard Business review online. The Stanford Social Innovation Review has said his seminal book about giving, “Uncharitable,” “deserves to become the nonprofit sector’s new manifesto.” https://www.danpallotta.com


37 comments:

Erik Dyson said...

While I generally agree with Dan around his points on unhealthy focus on administrative costs at NGOs, I think this point is far too narrow. It is not only the CEO'S pay that you would need to consider but all staff compensation.

If the CEO is paid according to worth, as Dan suggests, this would create the pressure to do the same for everyone in an organization and quickly would drive costs to a level not currently accepted by donors donors and rating agencies. So while an interesting concept entire space has to first change before you go down thus path.

Unknown said...

the author's point is well taken. i assume now that charity navigator will publish the results the charity has achieved under each ceo's leadership?? maybe even establish a numerical ceo rating score? i know i am unduly influenced when i feel the ceo's comp is out of line. additonal rating info would be welcome. sincerely, don zito

JFT said...

He misses the point. If the CEO requires more than the President of the U.S. he is in it for the money and not for the Charity's purpose and he has no business asking minimum wage people to donate . The whole nonprofit system is corrupt because meeting the Charity's payroll has become more important than the object of the charity and the fundraisers are massive polluters with their ever increasing mailings.

Gladys Lane said...

There is a fourth option that wasn't considered. Hiring the person who is totally dedicated to solving the problem of environmental damage--or affordable housing--or child hunger--and is willing and honored to work in the leadership position. Who finds deep personal satisfaction in seeing results from her/his dedication and talents applied to the problem. A high salary can't buy that kind of emotional gratification
Comparing sports figures with charitable leaders is apples and oranges.

P. Church said...

He has a point, but I also see no problem in comparing CEO salaries between charities that both seem to do well. Is $500K really necessary if another gets good results paying $275K?

Unknown said...

The article proposes three choices for CEO. What about a fourth choice: a CEO who does an excellent job, but also cares about the humanitarian cause of the charity enough to refuse to take the high salary she/he is offered? Also, the article does not help in how to evaluate the work of an excellent CEO who is making a top salary. How much is enough?

Unknown said...

The article proposes three choices for CEO. What about a fourth choice: a CEO who does an excellent job, but also cares about the humanitarian cause of the charity enough to refuse to take the high salary she/he is offered? Also, the article does not help in how to evaluate the work of an excellent CEO who is making a top salary. How much is enough?

Rev said...

I understand that to a point you pay well for talent. I understand if the organization is in D.C. you need to pay "better" because of the cost of living. But, when the salary "makes" the nonprofit CEO a millionaire in two to three years I personally say that organization doesn't need my $50 or $75 or even $100 donation. If you can create millionaire CEO's in a few years obviously you have either good long term investments or very wealthy supporters. My small contributions will look for other agencies where maybe some of my money supports more than salaries.- Rev Wayne

Unknown said...

Sorry, Dan. I am unconvinced. You imply (yes, you do) that the more highly compensated CEO brings in more money and better serves the charity’s target population. And you imply that I should feel guilty for my turning away from the charity that pays its CEO $500,000 per year, because I have adopted “a very expensive standard for hungry children.”

I am a retired pediatrician. I practiced in a suburban area where most of our patients were insured, their parents employed, and they could, by and large, pay our fees. I could have made an income 2-3 times what I did, and some of my partners were pulling in those bucks. Yet my income was comfortable, and I found rewards and purpose in my practice disproportionate to my paycheck. I often reduced or forgave fees for families that were struggling. Ask the parents and patients if they thought their medical care was of cut-rate quality.

I suggest that it is you who asks the wrong question. My question to the charity paying its CEO $500K per year is this: “You really can’t find a highly motivated and effective CEO who will work for half that or less? Really?”

My wife and I support a highly effective international organization that provides food, shelter, medical care, water, education, self-help programs, and care for orphans and emergency relief to the poorest of the poor around the world in the name of Christ. And it manages to fulfill its mission without paying its CEO a king’s ransom. If you need to make that kind of money, please start a hedge fund.

And thank you, Dan, for spurring the conversation.

Yours sincerely,
Robert D. Mauro, MD

Oskar said...

Thank you for addressing a difficult issue. Since I do not have the inclination to research the details about worthiness, I modify the CN rating as follows:
MyRating=CNrating-HighSalaryPercent*Weight.
For example: CNrating=4, HighSalaryPercent=3.2, Weight=0.1 (same for all charities)
4-3.2*0.1=3.68. So the charity drops way down on on my list.

JK&R said...

Mr. Pallotta may have demonstrated success and experience behind him but, as "CYA" investment firms like to say (and I paraphrase here) "Past results do not guarantee future returns." It's true that some of his comments in this piece have veracity and, in some circumstances, might help a potential donor to understand the compensation of a charity's upper echelon. However, the tone of his oeuvre is so one-sided, self-serving and skewed as to make it sound akin to a partisan politician seeing only the good in his party and the devil's presence and influence in the opposition.

According to this inequitable, misleading spittoon of reason, the low-paid charity CEO is worth no more than she/he is receiving, and the highly-paid CEO is worth every cent. There is nary an iota of space (for the possibility that occurs to the more thoughtful among donors) for even the possibility that a relatively poorly-compensated CEO may bring in great results, nor that a CEO being paid a bloated salary may simply be a rapacious opportunist who willingly takes upon herself/himself a commendable glory more correctly attributable to donors' generosity and the particular charity's societal worthiness.

My skeptical nature is no secret. I realize that there are CEO's out there getting paid what they may actually deserve, however one may choose to define that term. Nevertheless, I must wonder from what injudiciousness Mr. Pallotta suffers that makes him so vociferously unwilling to acknowledge that salary and success don't always match. Perhaps we have been asking the old question in a wrong way, or perhaps we've been asking the right question in an overly nihilistic manner, but that old question remains, in my opinion, entirely valid.

In his experience writing pieces for the Law Review, Mr. Pallotta has apparently lost sight of the difference between a balanced, reasoned presentation, and the jaundiced, partial stance more befitting a debate participant. Bias decimates integrity

Unknown said...

Good Point...I am more concrned about charities who spend an excessive amount on fundraising

Unknown said...

So how can we determine whether or not they are worth the higher salary?

Marti said...

The article makes a lot of sense so how do we determine if the high paid CEO is really worth all that money? I don't donate to St. Jude Children's Research Hospital because the CEO salary is obscene. I think it has doubled over the last ten years or maybe less.

Unknown said...

Seems like good elementary logic on the surface. However, I'm not an elementary child, and I refuse to believe that any one person is worth the kind of figures I see on all these charities on Facebook. Everybody gets 24 hours in a day, no more, no less. $900,000 of donations goes into the pocket of the CEO? Keeping it strategically dipped below a million? As if there are no perks that go along with this? Nope, not getting my money.

Unknown said...

Makes sense but who do you ask? Who do you ask if the CEO is worth the money? Does that person report to the CEO?

Bob said...

Interesting, but how do you judge the effectiveness of a CEO versus salary?

Pancreas said...

So how do you figure out if an individual is worth investing a higher salary with

Nancy said...

You wrote a very thought-provoking article about CEO's compensation. I never thought about it in that way. Checking out some of the compensation paid to CEO of charities, I wondered about the amounts paid. I'm a senior citizen, on SS, and tithe. During my working years, I tithed on my small salary. So truthfully, when i read how much the ceo's were making it irked me because I thought they were taking away from what should be given to the poor or needy out of the contributions of people, many like me, lower earning middle class people. But I guess if the higher paid CEO can draw in more contributions, I now see your point.

Unknown said...

This is all based on the dubious assumption that, in leadership, you get what you pay for. This is demonstrably false. Look no further than Bernie Ebbers or Ken Lay for examples of high-priced executives who led their companies to ruin. The most successful CEO of all, on the other hand-- Warren Buffett-- has an annual salary of only $100k. There are plenty of charities that have exceptional leaders who believe in what they're doing and take only nominal salaries-- you just have to look.

Lydia Fazio Theys said...

This is excellent. It has long driven me crazy to see people refuse to donate to particular charities because the CEO makes "too much." Somehow, though, the rational argument that a really well-paid CEO nets the charity more money often fails to resonate. I think it is part of the same mindset that prefers trashing social support systems to tolerating a small percentage of people misusing them.

Unknown said...

There must be a way to determine if the salary of the CEO of a 501(c)(3) charity is excessive or not. Example: one charity I USED to donate to has the goal of addressing the needs of Jewish victims of the Nazi Holocaust. I was astounded to see that the CEO (daughter of the original founder of the charity) receives a salary in excess of $700,000. My question is how many of these poor folks can still be around, and how does she justify that kind of salary? I wrote that particular organization a query regarding this: didn't get a reply. Gee, I wonder why.

Unknown said...

What came to mind is what was Christ's salary

Unknown said...

Point taken, I guess, but I find it hard to believe that all of the very expensive people are dynamos and all the moderately paid, slackers. How are we supposed to know which is which?

Unknown said...

The oldest, most successful non-profit is the Catholic Church. Did it get that way by paying high salaries to the popes?

Unknown said...

Love this, Dan! Keep spreading the word.

Wildlife Hospital Director said...

Thank you. In our field of the nonprofit world, most organizations have been run relying on volunteers. We have a professional staff and, as a result, were one of the few organizations that did not close or reduce services due to the impact of the pandemic.

Unknown said...

Thank you Dan Pallotta for continuing to change the conversation around how we measure nonprofit effectiveness. And thank you Charity Navigator for your help getting donors to focus on more meaningful measures than the evil "overhead" percentage.

-Jeff Wilklow, Chief Development Officer, Feed More, Richmond, VA

Unknown said...

This commentary is self-serving, factually slanted, and offensive. I happen to run a highly effective anti-hunger organization, and took a 40% pay cut to join the organization 20 years ago, when I left a senior position in the federal government. I have only asked my board for raises when I also asked for raises for all out staff. The claim that more highly paid leaders are automatically better leaders has not a whit of factual basis to it. In fact, many nonprofit leaders who earn more than the President of the U.S. have run their organizations into the ground. The author of the piece became famous by earning enough money off AIDS events to buy himself a Lexus, before being driven out of that charity https://money.cnn.com/magazines/fsb/fsb_archive/2002/03/01/319484/index.htm He also was sued:https://money.cnn.com/magazines/fsb/fsb_archive/2002/12/01/333874/index.htm
Why so many people treat his as an expert on profit management -- when he merely preaches that nonprofit exes should be paid as obscenely as top corporate execs -- is beyond me. Non-profit leaders should earn solid, upper-middle-class salaries, and all their staffs should be paid living wages. The implication that nonprofit are only truly effective in their jobs if they become filthy rich in them is off base on so many levels. -- Joel Berg, CEO, Hunger Free America

Unknown said...

This commentary is self-serving, factually slanted, and offensive. I happen to run a highly effective anti-hunger organization, and took a 40% pay cut to join the organization 20 years ago, when I left a senior position in the federal government. I have only asked my board for raises when I also asked for raises for all out staff. The claim that more highly paid leaders are automatically better leaders has not a whit of factual basis to it. In fact, many nonprofit leaders who earn more than the President of the U.S. have run their organizations into the ground. The author of the piece became famous by earning enough money off AIDS events to buy himself a Lexus, before being driven out of that charity https://money.cnn.com/magazines/fsb/fsb_archive/2002/03/01/319484/index.htm He also was sued:https://money.cnn.com/magazines/fsb/fsb_archive/2002/12/01/333874/index.htm
Why so many people treat his as an expert on profit management -- when he merely preaches that nonprofit exes should be paid as obscenely as top corporate execs -- is beyond me. Non-profit leaders should earn solid, upper-middle-class salaries, and all their staffs should be paid living wages. The implication that nonprofit are only truly effective in their jobs if they become filthy rich in them is off base on so many levels. -- Joel Berg, CEO, Hunger Free America

Unknown said...

The article misses and important point. I think that from an economic perspective, a winning, high-paid coach is an economic luxury good. A president of an aid organization is an economic and moral necessity and the cost of supply seriously impacts the cost of the "good" providing good. The article represents the typical microeconomic efficiency argument. One could argue that the focus on economic efficiency in society is in many ways the reason aid is needed in the first place due to income inequality and underuse of human resources. Aid organizations should be a light to the rest of the capitalistic economy. Aid organization management needs heart and commitment and reasonable compensation not superstar compensation. Even in the example, I'm sure there is even controversy over coaches. Clearly they build teams but does that building really ad to the educational mission of universities?

Unknown said...

The article misses and important point. I think that from an economic perspective, a winning, high-paid coach is an economic luxury good. A president of an aid organization is an economic and moral necessity and the cost of supply seriously impacts the cost of the "good" providing good. The article represents the typical microeconomic efficiency argument. One could argue that the focus on economic efficiency in society is in many ways the reason aid is needed in the first place due to income inequality and underuse of human resources. Aid organizations should be a light to the rest of the capitalistic economy. Aid organization management needs heart and commitment and reasonable compensation not superstar compensation. Even in the example, I'm sure there is even controversy over coaches. Clearly they build teams but does that building really ad to the educational mission of universities?

Dan McNaughton

Richard B said...

There are some reasonable points in this article - but the assumption is being made that you you get better performance from a high paid CEO and lower performance from a lower paid one. That's not necessarily true. Furthermore, if I'm being asked to sacrifice my resources to help people and support an organization, why shouldn't the CEO of a charitable organization make the sacrifice of perhaps making less then they might make according to the rules of economics? I'm fine with a CEO making up to half a million a year - but beyond that I begin to wonder whether I'd rather give my money to the Salvation Army whose top people make under $100,000 a year - but do incredibly important and good work for it.

Unknown said...

I strongly disagree. Look at two of the largest charities. Doctors without Borders" Executive Director makes $ 117,622. International Rescue Comm."s director makes $
967,236. Both are gigantic humanitarian agencies but one leader does not need to get almost a million dollars when his agency is trying to help people!
Mary Lou McColl

Joyful Rant said...

So should our goal be to refrain from paying people what they’re worth? I think our goal should be to educate donors on the need to do so.

Joyful Rant said...

Our goal shouldn’t be to refrain from paying people well in fear of donor ignorance, it should be to inform and educate donors.

Adam Bratton said...

I think many in the commentary are missing the point of the article, which is that we are focusing on the wrong things in evaluating CEO compensation. We should be assessing the value of the work performed and compensate accordingly—and competitively.

Obviously the examples in the article are simplistic but they all point to the fact that we should look at compensation in the sector, specifically for CEOs, as a way to motivate the best and brightest to assume leadership roles in helping to solve our society’s significant challenges.

People are stating that there are ‘factual’ issues with Dan’s presentation but then go on to largely discuss their own anecdotal situations or biases against highly paid nonprofit leaders. I personally sought a career in the sector with the understanding that I would need to make financial sacrifices. But I don’t expect others to embrace that sacrifice, nor do I think it is a healthy or productive way in which to build the sector. Just because I made the sacrifice doesn’t make it good or noble. In fact, I’m likely helping to perpetuate a historic abuse of the sector. If others want to make that sacrifice, good for them. But it is unreasonable to rely on that expectation of sacrifice as a way in which to create a sector that can impact our world in the way in which we need it to. The self-righteous cherry-picking of successful CEOs who are underpaid obscures the fact that compensation is a factor for most when choosing a career path and if we continue to underpay nonprofit CEOs and others, we will continue to limit the pool of talent that can advance the sector.

And what is missing from this whole argument, but is implied in Dan’s point about fair compensation, is that these historical biases unfairly harm all who work in the sector. The diminishing arguments against CEO compensation such as ‘they should work for a higher reward’ or ‘it takes away from people who they serve’ are translated to all staff in the sector. Most nonprofit CEOs make very little, sometimes barely earning a living wage, and the same goes for their subordinates.

Individuals who make these illogical statements also need to be aware that 73% of the nonprofit workforce is women. Implying that a mostly female workforce shouldn’t prioritize compensation ‘because they are doing good work’ only furthers the inequity that exists within the nonprofit workforce, and beyond.

It’s time to get beyond anecdotes, personal biases, and an unrealistic understanding of the world of work. If you want the most competent people, you need to pay for them.

--Adam Bratton