Kicking off a pay audit for the information technology arm of a nonprofit early in my consulting career, my charge was laid out for me as follows by the Vice President heading up the unit: "We know that we (the IT staff) pay a price for working here. We simply want to make sure that our sacrifice is in line with that of the rest of the organization - that we aren't "more behind" than the other employee groups."
I recall being caught off guard by his candid appraisal of the situation. And my work with nonprofits in the intervening years has served to strengthen my belief in the absolute wrong-headedness of this.
Dan Pallotta, who authors the Harvard Business blog Free the NonProfits, wrote a post this week discussing this phenomenon and its repercussions. From Dan's post:
We say to students who choose charity, You must watch your classmates who chose the for-profit sector pass you by on the economic highway — buy homes in better neighborhoods, send their kids to better schools, drive safer cars, take better care of their aging parents, indeed serve on the boards of and direct the very charities that employ you — but you, because you have chosen to help the indigent, you must sacrifice — you can have none of this power, none of this security.
Dan further delineates just what that sacrifice might entail, for the best and brightest ...
A few years ago Business Week did a survey of Harvard MBAs ten years out of business school, at an average age of 38. Their median annual compensation was $380,000. The average compensation for the CEO of a hunger charity in America at the same time was $84,000. We're not going to get many people with a $380,000 annual earning potential to make a $296,000 annual sacrifice to run a hunger charity. It's cheaper for them to donate $100,000 a year to the hunger charity, get a $50,000 tax savings, still be ahead by $246,000 a year, and have a lifetime of huge earning potential still awaiting them. They can realize their economic dreams and get the psychic benefit of making a difference, but the hungry lose their full-time talents forever. Do we really think it is of comfort to the mother whose child just died of starvation to know that at least no one was making any money in the failed effort to save her son?
And draws our attention to the crux of the problem ...
Yes, we can change the world. Yes, we must. But to do it we must right the injustice that allows a baseball player to be paid $5 million a year and have it celebrated in Forbes, but cries "foul!" when the guy running the charity trying to cure cancer makes $400,000.
As I've noted in earlier vents on this subject, I see little sound reason for and ultimately little to be gained by setting the expectation that pay at nonprofits should be at below-market levels for comparable opportunities. Not just because it is wrong and because it forces a terrible choice on talented people who might be able to make a real difference in solving important problems, but also because paying people less than they are worth can create a host of hidden and unintended consequences that ultimately hurt the organization and lower the return on our charitable investments. These can range from a reluctance to set and hold people to tough performance standards (because it seems unfair to do when we are underpaying them so) to poor staffing decisions (such as hiring the cheapest talent available rather than the right talent for the need).
Naturally, as I've said before, administrative costs should be carefully managed. But to scrimp where we should be investing - in tools, in technology and (most importantly) in talent - is to miss the opportunity to drive real results for the constituents our nonprofit institutions serve.
And that is neither good business sense nor a smart use of our charitable dollars.
Ann Bares is the Editor of Compensation Café, Author of Compensation Force and Managing Partner of Altura Consulting Group LLC, where she provides compensation consulting services to a wide range of client organizations. She earned her M.B.A. at Northwestern University’s Kellogg School, enjoys reading in her spare time and is currently trying to decide whether to follow her daughter to China this summer. Follow her on Twitter at @annbares.
This is a very big topic fraught with contradictory aspects. We survey all nonprofits, publishing a literal census of management compensation at every tax-exempt entity who files a federal Form 990, EZ or PF where they are required to report total compensation in detail, plus doing other independent surveys and collating even more surveys that cover nonprofits. My outfit, ERI Economic Research Institute, even snagged Linda Lampkin, former head of the Urban Institute's Center for Charitable Statistics, to be Director of Research in our DC office. We know nonprofit pay practices.
Yes, most work at a pay discount due to intrinsic reward of the task, benevolence, lack of need, tight budgets, warped Boards and many other reasons. But some few make more than their peers at for-profits, for very good reasons: (a) their employers must remain fully competitive with all rivals in the Talent Wars, with health care as the prime example; (b) disproportionate value factors, such as the ExecDir of a symphony orchestra, for example, who heads a tiny staff and is THE source of 95% of all entity revenues when they are solely funded by the ExecDir's personal lobbying and constant 24/7 donation-seeking. The head of a small charity can be paid much more than the head of an equal-sized for-profit, partly because they tend to be the key rainmaker and doer of all important tasks at the amateur/volunteer-heavy nonprofit.
That said, I agree that nonprofits should give a lot more attention to the reality that their employees have to eat, too. http://www.erieri.com/index.cfm?FuseAction=NewsRoom.Dsp_Release&PressReleaseID=112 is an extensive article on "Public Sector Pay Compression" exploring and deploring the dynamics, causes and effects of public pay patterns. The issues can be much more serious at charities and foundations and educational institutions which operate with far less oversight and under fewer controls.
Even the IRS recognizes that non-profits have a right to competitive pay, because IRC 4958 (the Intermediate Sanctions law about unreasonable compensation or excess benefits transactions at charities and foundations) gives safe harbor protection to those who properly compare their pay to for-profit "competitors". Here is a detailed discussion about it: http://www.nonprofit-
compensation.com/index.cfm?FuseAction=Home.intermediatesanctions.
The Board Directors of tax-exempts are frequently key culprits of chaos who make everything dysfunctional from the start. Often elected because they're the big donors, they work for free (usually rich, occasionally have never worked at all), and expect all the employees to work for substantially nothing "as they do" and failure of others to accept the work as its own reward (in lieu of money) can be considered a betrayal of the "spirit of the charity" or whatever. Being volunteers themselves, they feel unconstrained by business protocols and mess with the organization in ways that would make hardened corporate directors blanch. Ironically, many of the most responsible corporate executives themselves seem to go nuts when they land on a tax-exempt's board and proceed to treat the entity like a personal playground. And that's just board behaviors I've observed at a few score non-profits. The bigger picture is worse.
We thought executive comp at closely held private firms was "the wild wild West," until we dug into tax-exempt entities. That's the real frontier. Having collected and analyzed pay data on over 500,000 now, we've seen stuff that makes you cry and stuff that makes you scream.
Key talent at a nonprofit is typically disproportionately more valuable and more critical for unit survival but inversely paid compared to their for-profit peer.
Enough already. Let others speak.
Posted by: E James (Jim) Brennan | 05/23/2009 at 11:07 PM