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Double Standards for Nonprofits?

Dan Pallotta has a thought-provoking post on "Executive compensation, charities and the curse of proximity" on his Harvard Business Review blog. He points out, among many other fascinating statistics, that "[t]he music director of the nonprofit New York Philharmonic had a $2.2 million compensation package for the 2006-2007 season" and "[i]n 2009, the nonprofit University of Southern California paid the head football coach $4.4 million".

He contrasts these numbers with scandals at the Charlotte, NC chapter of United Way, Food & Friends ("a Washington-based nonprofit that brings meals to people with HIV/AIDS and cancer") and the James Irvine Foundation in San Francisco (James Irvine being the agricultural pioneer who provided the initial land grant for the U.C. Irvine campus - his foundation is dedicated to "expanding opportunity for the people of California"). These scandals erupted because CEOs' compensation was deemed excessive, although it remained far below that of the music director of the NY Philharmonic or the head football coach at USC.

Pallotta writes: "What all this reveals is a curse of proximity... Indeed, there's a direct correlation between leaders' nearness to suffering and public outrage over their compensation. If you're conducting Mahler's 5th, no worries. But if you're trying to end poverty in Malawi, watch out. The situation is seen as a zero-sum game, in which any money going to the professional is money being taken away from those suffering." He adds: "In the name of charity, we place the leadership needs of the needy second to those of football teams, symphonies, and the entire world of commerce." His argument, it seems, is that high salaries will attract top executives, who will be able to raise more money for their institution.

The post generated an interesting discussion in the comments section, for instance about the fact that the NY Philharmonic and the like generating revenue through ticket sales and United Way or Food & Friends do not. A commenter writes: "I had to fight with a donor to give me $100 a month, the same donor who gave $1million to our local symphony. We provide basic health care for free, and the donor is also a board member!!!" I also found the comment by "Jared" (January 14, 2010 at 12:12pm) about the different donor populations - upper middle class for universities and symphonies, lower middle class for the United Way - very interesting.

Here are other posts by Pallotta that I have enjoyed reading:

  • Why charities should ask for intellect, not just funds: about comments the CEO of Charity Navigator made regarding what should be an appropriate compensation for the CEO of a nonprofit, and why the idea of tying compensation to a percentage of total expenses does not make sense.
  • Compensation should be aspirational: about the fact that "the test [by the IRS and the states' attorneys general] for whether an organization is paying someone too much is to look at other organizations of similar budget size and see if the compensation levels match up", which prevents nonprofits that want to grow from hiring executives positioned to help them (because those executives are likely to be already working in more successful, bigger nonprofits and thus paid a lot more than what the regulations would let them receive at the smaller organization.)
  • Letting non-profits act like businesses: one foundation's brave act of leadership: about the Boston Foundation shifting its emphasis to "unrestricted operating support", which means that the money will go toward "strengthening the capacity of good organizations" in addition to helping the people the nonprofits have set out to assist. Traditionally, foundations have wanted their money to go straight to people helped by nonprofits. Make sure you read the nonprofit analogy to the "teach a man how to fish" proverb (it is in the paragraph starting with "First, it is an important voice")
  • The "psychic benefits" of nonprofit work are overrated: when I saw the headline, I thought Pallotta's argument would be that the joy of making a difference doesn't pay the bills, but it turned out to be much better than that: (1) "Do these people really believe that no one makes a difference in the for-profit sector, and that there is no psychic benefit associated with careers there?" and (2) "Many people in the nonprofit sector never get to visit a village in Africa or treat a sick child. They work behind the scenes in cubicles, they file files, they beg donors for money, they sit in interminable departmental meetings — just like employees everywhere." The article also touches upon the issue of CEO compensation. In particular, the paragraph starting with "Instead, consider the enormous psychic benefits..." is a must-read.
  • The nonprofit sector's pilgrims - and heretics: about the president of Duke University's Center for Effective Philanthropy taking issue with the use of "tools of capitalism" advocated by Pallotta in nonprofit management, and "nonprofit" meaning "nonprogress", since "profit" apparently comes from the Latin profit: to make progress. (Wikipedia agrees, with the disclaimer "not to be confused with Prophet", which, in this age of New Age gurus building wealthy empires for themselves, I found highly amusing. But I digress.)
  • Charity Navigator fixes its compass: about the watchdog agency issuing a statement to the effect that "overhead ratios and executive salaries are useless for evaluating a nonprofit's impact." (This is a follow-up on the article I link to in the first bullet point.)
It should come as no surprise that Dan Pallotta is also the author of a book entitled Uncharitable: how restraints on nonprofits undermine their potential. I am looking forward to reading more blog posts of his.


Also, here is a recent New York Times about the compensation of university presidents.
"Many of the nation’s public universities eliminated courses and raised tuition last year, but the salaries and benefits of their presidents continued to rise, though at a slower rate than in years past, a new study has found."

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