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The only two questions that matter
delitzer     43 comments     October 1, 2010

It’s been a couple months since Full Contact Philanthropy has seen any new posts and I’d been thinking about writing one on the potential social impact of Huawei’s new $100 Android phone.  But then I saw this latest exchange in the ongoing battle over nonprofit compensation between Dan Pallotta and Charity Navigator’s Ken Berger (begun here and continued here and here) and got pretty burned up.  Then I thought, “Heck, what we do best here at FCP is rant anyway, so why not let that be how I break my writing drought?”

So here are my thoughts on the matter of whether higher compensation should be used to attract people to the nonprofit sector.  Rant on:

If I have a terrible accident, I don’t care whether my doctor got into his line of work because he wanted a six-figure income or because he felt a calling to heal the sick. All I care about is whether he is the most qualified to help me get better. If Dr. Feelgood is going to fix me up and get me in a wheelchair and Dr. Moneybags can get me into a cutting-edge program and help me walk again, I’m going to go with Dr. Moneybags. I don’t care how much of a cut either of them are taking from what I’m paying; I’m paying for the outcome, not the process. I also don’t care how much the doctor is making vs. the nurses or physical therapists or administrative staff or janitors.

In fact, let’s take this medical analogy a step further: I don’t care whether the hospital each doctor works at is for-profit or nonprofit. There are only two things I care about:

1) What is the outcome I can expect?
2) How much is it going to cost me?

I don’t care whether there are shareholders taking a percentage of my bill. I don’t care whether I learned about the hospital from billboards paid for by a large marketing budget or whether I learned about it from an unpaid listing in a service provider directory. I don’t care whether the people working at the hospital are well-paid or underpaid, as long as it doesn’t impact the quality of my service.

Sure, all things being equal, I’d rather patronize a hospital where margins subsidize services for the poor rather than lining shareholders pockets, where the marketing budget is small because word-of-mouth referrals are strong, and where all staff are compensated fairly and are working in vocations they feel “called” to do.  But when it’s my life on the line, those all go under the “nice to have” column. I’m going to go wherever my dollars are most likely to help me survive and have the highest quality of life in the future.  I’m sure you would do the same.

So why is it that we apply different standards when other people’s lives are on the line? Why do we ask whether executives are paid “too much,” whether marketing and overhead expenses are “too high,” and whether the employees who work there do so for the “right” reasons? Why, as a donor, do I care about anything other than:

1) What is the outcome I can expect?
2) How much is it going to cost me?

Sure, outcomes measurement is a pain in the ass and I may have to sift through many different stats and marketing spins to try to understand which organization does the best job at delivering the outcomes I want at the lowest cost.  And I will have to make my donation decision with less than perfect information, just as I can’t possibly know everything about a hospital before I choose it.  But all those other questions about compensation and overhead and employee motivation are, quite frankly, bullshit.  They’re questions we ask because it’s not our lives on the line and we have the privilege of being able to get all self-righteous and care about them.

Neither Ken nor Dan can definitively prove their assertions about whether or not current compensation levels within the nonprofit sector are ideal, because charities lack both legal and popular permission to experiment and find out what kind of outcome:cost ratio they can produce if they deviate from “acceptable” levels of compensation relative to current norms. So let’s give nonprofits and their boards room to tinker around and do things a bit differently without having everyone jump down their throats.  And if the outcomes they produce with each dollar are qualitatively or quantitatively better or worse than their peers, we can all hop on the bandwagon or pile on the blame.

Until then, let’s focus our energies on doing the best we can to save lives and make things better for those who aren’t fortunate enough to be able to care about this silliness.

Rant over.

(Photo by José Goulão)

  • Raha

    I broadly agree with this, Dan. However, one thing that's missing in your piece, I think, is a discussion of the distribution of goods and services in the aggregate, versus the cost and quality of the product or service in a particular, individual case. The healthcare context is actually a good example to illustrate here this too. It's broadly understood that at least for certain high-end procedures, American-style healthcare actually gets you the best service for the price. In other words, for these procedures, we might have good things to say in response to your two questions. What we can't say is whether these services are distributed in a just manner – in a manner that allows people in need of potentially life-saving treatment to access them.

    However, I take your point to be that with market-driven solutions, universal access is an implicit goal; if we drive down prices – or promote innovation to allow better outcomes at the same price point – more people will be able to access these products and services. That makes a lot of sense to me, and perhaps then there is no real tension in your position here. I also note your agnostic tone; you're not taking a hard position here, but just advocating for more tinkering. I fully support that, and I too believe that the non-profit world tends to be too self-righteous about these things sometimes.

    On a separate but related topic, one thing that I think maybe you should blog about is the likelihood that market-driven solutions could be effective in solving these kinds of social problems. One of the issues in healthcare provision is that pharmaceutical companies have little incentive to develop drugs to address, for example, diseases like malaria, because most people affected by malaria and related illnesses just can't pay what's needed to sustain the heavy R&D costs and profit requirements of the pharmaceutical industry. Thomas Pogge, one of my favorite philosophers, proposes that we establish a health impact fund to pay companies for developing drugs that allow people to live longer, healthier lives. That is to say, that pay is tied to performance goals that matter, rather than simply what people are willing to pay for in the private market. The fund would be financed by a % of each country's GDP, and would be distributed to companies if they agree to sell there products at cost to low-income communities. Check it out:
    http://www.yale.edu/macmillan/igh/

  • http://www.fullcontactphilanthropy.com Dan Elitzer

    Thanks for the comment, Raha. I think whether or not market-driven approaches distribute products/services in a just manner is a separate issue. Universal access is not necessarily an implicit goal of market-driven solutions, though I would argue that it is an aspirational goal for many nonprofit organizations. My argument is more that if what we really want is to reach that goal of universal access to life-saving solutions (or even move closer to it), we shouldn't get distracted by how money is spent to get us there, only that the end result is what we want. Again, as donors/philanthropists/do-gooders, all we should really care about is the outcome, not whether or not someone is making a buck helping produce that outcome.

    As for your separate note on pharmaceutical companies and how to create incentives for them to develop drugs to address diseases like malaria, there's a lot of great innovation going on in that space right now, with the most prominent being something called an Advance Market Commitment (AMC). A pilot AMC of $1.5 billion was launched by the Gates Foundation in 2007 to develop a late-stage pneumococcal vaccine. You can read more about that effort and other innovative incentive mechanisms here: http://www.ghtcoalition.org/files/GHTC_Incentive_…

  • http://www.ceffect.com Gayle L. Gifford

    I think I'd be worried if Dr. Moneybags made his money because he was getting direct kickbacks from the medical supply products company to use their stuff rather than a competitors' which happened to be both cheaper and better, or to send you to a particular lab or other medical supplier that he had part ownership in and thus the more tests he ran on you (and more risk he put you at), the more money he made. I'd have to question throughout whether the care I was getting was actually the best, or whether my "treatment" was all about filling those Moneybags.
    Take universities. Is there any evidence anywhere that paying someone over $1million dollars to be university president mean more kids graduate? Or more diseases cured? Or communities healed? Or does it simply mean that Million dollar president compensation is based on his ability to be Mr. multi-millions fundraiser. For which society gets opulent dormitories and sports facilities, more properties taken off local community tax rolls, and students who graduate with crushing debt they may never pay back in their lifetimes?

    This compensation battle seems such a distraction to me to the really wonderful work that is going on all around us every day, where nonprofit leaders are simply asking for decent pay, and don't need excessive pay to motivate them (see Dan Pink's book Drive). This conversation seems to come from a small group of people who believe/promote the idea that there is some white knight out there who, if only recruited with the right amount of compensation, is going to arrive to save the world, nonprofit or not. But the truth of this sector, more than any, is that it is a collaborative model, where stuff happens because many people work together to make it happen, and where most of the true wisdom is located in the experiences of the people we serve. What compensation are we suggesting for them?

    • http://www.fullcontactphilanthropy.com Dan Elitzer

      Gayle, I agree that all the scenarios you mention positively would be good and all the ones you mention negatively would be bad. However, I believe that your assumptions about what drives these scenarios are faulty.

      I, too, would be worried about a doctor getting direct kickbacks, etc, etc, but these are issues of ethics and the doctor in question not acting in his patients' best interests, which can happen in either a for-profit or nonprofit hospital. The doctor's salary also has no bearing on whether or not he acts ethically. There is always the potential for conflicts of interest to arise in any profession, but just because someone determines his or her own personal income needs are higher than someone else's, it does not follow that he or she is more likely to behave unethically.

      In the case of a university, the president is usually hired by the board of directors with fundraising being among the top (usually, the top) priorities for that position. So yes, higher compensation for someone who can bring in more money certainly makes sense in that situation. Whether that money is then spent on nicer dorms and sports facilities or providing more financial aid and better instruction for students is another issue entirely. There's no reason a university president couldn't be paid for performance based on graduation rates or research advances, but until the stakeholders in the community speak up and make understood that they consider those to be higher priorities, it's not going to happen. And if that does happen, I'm sure a president who has the skills to build a university that generates research that leads to cures for more diseases will command higher compensation than one who lacks those skills.

      I am not suggesting that offering higher salaries will magically attract white knights to the nonprofit sector who can save the world. However, I am confident that it would bring in at least some individuals who do have valuable contributions to make, and shaking our heads and saying that they are not welcome to help if they require some arbitrarily declared "excessive" pay, is not acting in the best interest of the people we are trying to help. If the compensation required to bring them in ends up taking money away from other areas and their talents do not enable the organization to produce better outcomes, then obviously that shouldn't be done. But if I a nonprofit I support spends a little more to bring in someone who can help the organization be more successful at accomplishing the mission it is pursuing, it makes me more confident in continuing to support them, not less.

      And yes, there are many benefits to a collaborative model. But as I'm sure you are well aware, deeply collaborative models are rare and difficult to build. Under-compensating people at any level makes effective collaborations much more difficult to sustain. I suggest that people be compensated in whatever form is necessary to get the best team together to be successful, whether that compensation takes the form of health care, gifts, developmental opportunities, public recognition, "psychic income", or, yes, direct monetary payment. Everyone brings something different to the table and everyone wants to get something different from it. Let's not let our personal judgments as to which forms of compensation are more humble or righteous get in the way of doing what it takes to assemble an organization with the best person in each role.

      • http://www.ceffect.com Gayle L. Gifford

        You misunderstood my comments about collaboration. I wasn't talking about formal structures.

        The point I was making is that in this community benefit world (aka nonprofit sector) it is really difficult to say that any one person effected the desired community change all by themselves. Change builds on the experience of other organizations, in the inherent wisdom of the communities in which we work, on interactions with our colleagues in other organizations to compliment the work we are doing so that piece of the jigsaw puzzle we hold has more impact. Thus, it is very hard to pinpoint one leader, one player, and say they were the ones who deserve to be compensated at wickedly higher levels for producing community change, which in this sector, is THE objective, right?

        This understanding of cumulative impact even transfers to fundraising. The Association of Fundraising Professionals considers it unethical to compensate fundraisers on a percentage formula for exactly this reason. You can find their discussion at http://tinyurl.com/2uxuu9c

        And yes, I do think believe when the primary or sole motivator for action depends on seeking vastly ever higher levels of wealth then the arc turns to self-needs over community needs… I think we just experienced that on an international scale with the housing and financial systems, don't you? I think that is why there is this movement even in the for-profit world move to create new business structures that codify a dual bottom line.

        As I said before, I'm not holding my breath believing that some incredible world problem will be solved if only the sector paid extremely higher salaries so that some white knight of the business world would cross over to the nonprofit sector. (I'm still waiting for one of the supporters of high salaries to name what amount they are talking about) What will have that kind of change is a new understanding of what we owe to each other, a movement away from "how much can I get" to asking "how much do I really need" or "How much is enough"

        • http://www.fullcontactphilanthropy.com Dan Elitzer

          I'm not talking exclusively about formal structures for collaboration either. I agree that deep collaboration, of the type you describe, does usually have a large informal component and is hard/impossible to implement in a top-down fashion. That said, I do not think it is as hard as you imply to pinpoint individuals or group of individuals who should (not necessarily "deserve," but "should" in order to have all the pieces in place) be compensated at different levels, both higher and lower. In fact, if this weren't possible, everybody who worked at an organization would receive identical compensation. So clearly what we're talking about here is your objection to the potential degree of disparity in compensation levels, not that whether some people have already been identified as more valuable to the functioning of the whole than others.

          What do you believe constitutes "vastly" or "wickedly" higher salaries? Your desire to have everyone stop asking "how much can I get" and start asking "how much do I really need" is noble but missing the point. I agree with you that humanity in general needs to shift towards this thinking if we are going to survive the mounting environmental and economic challenges facing our planet and our global economy. But while we wait for that to happen, we sacrifice the meaningful impact that could have been created by the people who did not get engaged in the interim because of self-righteous accusations that there is something wrong with their character for seeking higher compensation than watchdogs like yourself have deemed "sufficient". Let's not let our own personal judgments stand in the way of meeting more important goals. And if you really don't think that higher salaries would attract more capable individuals into the sector, try cutting current salaries by 20% or 50% and see how the talent pool dries up. Assuming you do agree that that would cost the sector significant amounts of talent, the only reason not to believe raising salaries wouldn't increase the talent pool is if you think that we have somehow already managed to hit on the exact compensation point beyond which increasing salary yields no further marginal return in talent.

          The AFP case against using a percentage formula to compensate fundraisers is interesting and warrants a separate discussion (thanks for the link, by the way). However, in brief, I think the application of cumulative impact here is less a matter of ethics and more of it being a poor decision for nonprofits to enter into a contract with a fundraiser without taking into account such cumulative impact effects when committing to compensation. The only way I see this particular point potentially being an ethical issue is that nonprofit leaders may frequently fail to take it into account, so making an outright prohibition on percentage-based compensation is the easiest way to prevent less scrupulous fundraisers from taking advantage of cumulative impact effects to extract compensation disproportionate to their value from less sophisticated nonprofits.

  • Adam Selzer

    this was fun to read :)

  • http://Www.smallworld.nu Josh

    You know my thoughts… Pay substandard wages, attract substandard talent, get substandard results.

    Maybe it is time to launch a for-profit charity?

  • Beth Elitzer

    Dan,
    How great to see your byline in my daily e-Jewish Philanthropy newsletter. Some interesting and thought-provoking points of view.

  • Laura K

    Here’s a question for you: My dad owns his own business. He provides a service to people, people pay for that service, he pays all of his overhead and capital costs and employees, and whatever is left over, the “profit”, he splits with his fellow “CEO”. He always has to make decisions about how much money he is going to reinvest in his business, because every dollar comes out of his own “salary”.

    So I always had this wonderful idea where I’d make myself the CEO of a “non-profit”, rake in small amounts of money by providing a service, rake in large amounts of money from my philanthropists, and then increase my salary to eat up all of the “profit” that we would otherwise be making, thus sustaining my status as a non-profit, with all the benefits that go along with it, while still living just as well as I would have been if I was running a for-profit company.

    Do they let you do that?

  • GLC

    Dan, thank you for your piece. There is a definite misunderstanding that people who work in the third sector (non-profits) are doing so to be martyrs and that compensation does not matter. However, that is not true.

    When one chooses to work in the third sector, specifically in fundraising and development it is because they believe that financial investment is what it takes to make a stronger civil society. Development takes more than just asking for a gift but involves strategic planning to build a structure that is going to create a return on investment and allow for sustainable financial and programmatic growth. The 80/20 model (80% programs/20% fundraising & administration) is one that all organizations should abide by to ensure that a donor can feel confident that they are making an impact on the mission of an organization. The goal needs to be that the 20% can provide fair compensation that wil not make the work feel like indentured servitude but feel valued for their professional skills and strengths. Without compensation that is equal to the amount of work and energy that these individuals put in the organizations will not be able to retain the talent they would like.

  • http://www.fullcontactphilanthropy.com Dan Elitzer

    The 80/20 model or any arbitrary "acceptable" overhead ratio is deeply flawed. Please see these columns by Dan Pallotta as a starting point about why using overhead as a measure of efficiency or effectiveness is so misleading: http://blogs.hbr.org/pallotta/2009/06/efficiency-… and http://blogs.hbr.org/pallotta/2009/12/charity-nav…. The latter piece actually praises Ken Berger and Charity Navigator for moving away from this problematic practice.

  • http://www.elmezzi.org Chris C

    Great Post. I have personally left two positions behind in non-profit program directing and management because the compensation appreciation was below what I was willing to afford. My need to focus on income has much to do with my top-tier education leading to high student debt. In short, I must pass on investing my well-trained mind into non-profit programming to pay back the debt incurred from learning how to do so. My colleagues and former classmates attest to similar situations. Outside anecdote, I imagine there are excellent examples in other sectors of better-talent leaving for better-salary in a systematically measurable way, which would prove your point cleanly as a parallel.

    • http://www.fullcontactphilanthropy.com Dan Elitzer

      Chris, you make a great point about the anecdotal evidence from your experience, which probably makes the case much more succinctly than the abstract/theoretical back-and-forth that Gayle and I have been having in the comments. All of us in the social sector have experienced talented friends and colleagues leaving the sector or not entering it in the first place due to the low compensation. Does anyone truly believe the loss of talent and knowledge due to their absence from the social sector is in the best interest of the missions we hope to achieve?

  • http://www.draimanconsulting.com arnie draiman

    oh, and third (was never good at math) – i base this on traditional jewish sources from the Bible and the Talmud. there is a great line in the book of Proverbs (22:22) that says 'do not steal from a poor person because s/he is poor'. now, what the heck can that mean????? the Talmud (written about 2000 years ago) explains that it means do not take from a poor person what is RIGHTFULLY his.

    what is 'rightfully' his? everything the Torah teaches: leaving the corner of the field, forgotten fruits and vegies unpicked, no interest on loans, etc. this can easily be applied that if you want to give a donation and organization 'x' (with outcome ranking of 95%), uses 22% for overhead, salaries, etc., while at the same time organization 'y' (with outcome ranking of 95%) uses 14% for overhead, etc. – then by giving to 'x', you are STEALING from the poor person what is rightfully his (the other 8%).

    ok, enough for now…..thanks for listening and happy to continue this disucssion.

    arnie draiman

    • http://www.fullcontactphilanthropy.com Dan Elitzer

      That's an interesting perspective, Arnie. First, due to the difficulty of measuring outcomes at all, let alone with such a high degree of accuracy, it would be hard to state definitively two nonprofits both have IDENTICAL outcomes. Second, I'm not sure "stealing" is a fair or helpful way of thinking of the factors that might be at play here. Perhaps the nonprofit with higher overhead does not have access to suppliers at lower costs or is serving a population that is more difficult to reach. Would you say that organization is "stealing"? Or would you say the donor, who may not have been aware of the other organization to whom his/her money could have been given, was "stealing"?

      "Rightfully" again gets into the territory of absolute moral judgement, which I think is the main cause of the problem those who object to higher compensation have with this issue. But then, you are talking about biblical sources, so it's to be expected in this case. There is certainly much wisdom to be had from both books you cite, but I find that applying absolutes to this discussion, whatever their source, tends to not be very helpful on this issue.

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