ESSA

ESSA

Myths of the third sector: executive pay


Cynthia Huang

By

April 30th, 2014


Can you make a fortune running a charity? Cynthia Huang examines the intricacies behind non-profit executive remuneration.


Executive remuneration is always a topic of controversy, but remuneration within charitable organisations is especially scrutinised with articles like “10 Insanely Overpaid Nonprofit Execs” sparking heated debates over compensation within the charitable sector. Upon reading these articles you might react with shock and perhaps anger, then go on to justify your reluctance to donate with the belief that the money is not going to the needy but rather into the hands of greedy, dishonest con-artists who undeservingly pocket your hard-earned donations, rather than simply acknowledging the fact that you want to buy tickets to see Captain America more than you care about saving the world. However, is achieving social impact as simple as collecting money and then distributing it to the needy?

Implicit in our condemnation of these salaries, and more broadly charity overheads or administrative spending, is the belief that the work being paid for is trivial, or easily replicated. However, consider the fight against Malaria, HIV/AIDs or any other widespread disease; this is arguably a much more complex and difficult problem than deciding which new iPhone colours to produce in order to maximise Apple’s profits, and we have no issues against Apple paying their employees enough to retain their talents. Obviously, it is not enough for victims of the disease to be given the spare change you offloaded into some charity tin on the way to work. Instead, what patients need are vaccines, treatments, and most importantly there need to be coordinated preventative measures and a systematic approach to the eradication of diseases across national borders – none of which could be achieved without paying researchers, administrative staff, and of course executives to oversee all of these operations. Clearly, the task of achieving meaningful and lasting social change requires the time and knowledge of skilled professionals, including skilled management, not just your everyday generic volunteer.

The first and seemingly obvious solution to securing professional services and skills for non-profit organisations is through donations, and accompanying this culture of donating time is the belief that anything done for charity should be done for free, or at least at a discounted rate – including running a multi-national charity. In a recent survey by UK research consultancy, nfpSynergy, it was found that 31 percent of respondents believed charity CEOs should not be paid. However, issues of famine, poverty and disease are not issues we can solve in our spare time. In fact, these issues require our best and brightest minds; people who like everyone else have wants and needs, and also must pay taxes and household bills.

As a society, we seem to operate on the assumption that for-profit and charity organisations shop for inputs in different markets; that ‘good’ people join the labour market for non-profits, whilst the rest of us join the other ‘capitalist’ market and compete fairly for better jobs, promotions and bonuses. We place our hopes of social change in the hands of good people who are able to accept limited rewards and compensation, in exchange for the intangible utility of contributing to the ‘great good’, ignoring the fact that amateur passion does not always equal skill or competency. Meanwhile, the rest of us comfort ourselves with the idea that later on, should we have the funds, we can contribute to the ‘great good’ as celebrated philanthropists. Philanthropists whose contributions are strangely more respectable than those of the not-for-profit CEO who choses to not only donate from his executive salary, but also actively work within a charitable organisation, rather than earning a similar or higher salary in the private sector and philanthropically donating the same funds with much more fanfare.

Charity Navigator, a self-proclaimed guide for intelligent giving, states that ‘reasonable pay’ should be evaluated in comparison to similar sized organisations with similar missions. However, in reality people are not choosing between salaries at similar charity organisations, but can move freely between working for charities and private firms, according to the compensation offered. It follows then that charities must offer salaries and incentives comparable to the private sector if they are to secure the resources they need, when competing in a common labour market. A more realistic comparison is to benchmark pay against all other candidates with similar skill sets. As such, without any meaningful justification for punishing people for choosing to work on charitable issues, it might be concluded that, contrary to popular belief, many not-for-profit organisations actually underpay their executives and employees.

As Dan Palotta discusses in his 2013 Tedtalk, “The Way We Think About Charity Is Dead Wrong”, if we want charities to achieve real, measurable social impact, we have to empower them to employ the resources that they need – beginning with allowing them to compete fairly against private firms for the best people to solve the most complex problems. Moreover, if we really want to sort the good charities from the ‘bad’ ones, we need to reward charities for revealing information about their operations and management, rather than jumping to conclusions and passing judgement on things like executive pay without giving charities any opportunities to explain how they determine salaries and wages, which unfortunately incentivises them to hide this, often misinterpreted, information.

So before you decide that a six-figure salary is unreasonable, consider the context of that salary, what exactly your metrics for ‘overpay’ are, and whether ‘feeling good about yourself’ or ‘loving your job’ is actually a legitimate form of pay.

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

  • Ben

    That was a great read!
    Well written and argued.

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