The word “profit” comes from the Latin noun profectus for “progress”. Thus the term “nonprofit” literally means “no progress”.
When I changed jobs from working for an investment bank to working for a non-profit foundation, one friend in the philanthropic world, who knew me well, and whom I respect, highly recommended that I read this book -- Uncharitable -- before I started the new job.

A few nights ago, a heated discussion at the dinner table with friends prompted me to write about this book. An acquaintance of mine was telling the table of how he would love to buy this specific $10,000 Rolex. I suggested that he instead donate the money to help fund disadvantaged girls in Vietnam to finish middle school. We talked about the (im)possibility of giving up the watch for charity. But seriously, it costs only $250 to send one girl to middle school in Vietnam for a full year.

Don’t get me wrong. I understand the importance of luxury goods and the role they play in society and in the business world. I am not so naïve and stubborn as to think that we should give up all material goods and donate all possessions to the third world. But the advantages that for-profit businesses such as Rolex have for everyone’s disposable income over charities is unfair (just look at the above advertisement). Why is it that the not-for-profits are not given the tools and capital to convince people to donate to worthy causes?

Uncharitable discusses these issues, and delves further by pointing out how certain restraints on nonprofits actually undermine, and even destroys their potential. One restraint that I feel strongly about is the compensation structure.

Two years ago, I was hired by an investment bank with a large sign-on bonus, half a year before I graduated from business school. The company wanted to make sure I wouldn’t take their competitor’s offer and I would not leave the firm until I have worked for them for at least one year. During the time I was there, I was reminded, every month, in writing, how much money the firm has spent on me, and how much revenue I have produced for our shareholders.

Four months ago, when I interviewed for my current job at a non-profit foundation, the HR manager told me that there is no sign-on bonus, and I can leave whenever I want to. When I was negotiating for the salary, I knew very well that I would not get paid more than the value-add I can bring to the organization, so I asked if there was a performance-tied pay structure. To my surprise, the HR manager told me it is considered “unethical” to pay someone based on the funds he/she raises in the non-profit world. I then tried to be creative and suggested to negotiate for a higher salary, but to donate 1/5 of it back to the foundation. The HR person looked at me as if I was crazy.

My personal experience and belief lead me to agree with the author, Dan Pallotta, in the compensation structure argument. He has asked the questions that we need to be asking, and delivered the answers that very few had the courage to say.

Do you think that all those working at nonprofits need to sacrifice financially and rather do it out of the goodness of their heart?
Do you think it is wrong to pay high salaries to attract talent in the nonprofit sector?

If financial sacrifice* is the price of the choice, we have to ask – how many talented people chose not to sacrifice? At the end of the day, the recipients of the charities do not care about the salary structure of employees, but rather they care about survival, clean water, food, basic education, etc. By denying higher-quality candidates, those that could have been further helped are the ones being sacrificed.

Goodness of heart is only one of the many things that motivate people. When we demand that it be the only one, we are actually hurting the people who need help. I think after a careful cost-benefit analysis, paying competitive salaries to hire the right people is definitely the right thing to do.

As a donor, observer, worker, or beneficiaries of the charitable world, if you still say yes to those two questions. Read this book and think again.

* The book provides a study to show what kind of financial sacrifice we are talking about. Here is what I roughly remember -- In 2006, the average annual salary plus bonus of the MBAs from the top 30 schools was about $100,000. Their average age upon graduation was 28. The study also sampled about 1500 MBAs who graduated 10 years ago from the top schools and their average annual salary was about $300,000. (at age 38)
In 2004, the average salary of the non-profit senior executives in America was about $110,000 and the average age was well over 38.


david said...

yes, i definitely think the federer photo is a significant upgrade, too =)

Wonderland Alice said...

Thanks, David. I got the inspiration from his rolex ad in the Economist last weekend. Quite different from your inspiration, I know. :P

The foundation that I work at thought about buying an ad in the economist in the past, but the price tag was just way too high.

Robert said...

Not a fair or valid comparison. Although there is a certain truth in your observation about MBA remuneration, the risks and responsibilities of the two job categories are different.

Fundamentally, not-for-profits have end goals that differ from businesses. But, if it had worked out your way, the distinctions would have become less defined, and I suspect it would detract from the goodwill not-for-profits receive.

An ad in the Economist is open to the market. Who is to say who should have preferential treatment? I think it's all about risk and return... pay up and win big time, or not.

Wonderland Alice said...

Robert, you brought up some good points.

First of all, the salary gap is just an observation. It is certainly not a fair or valid comparison. The hours people put in, the level of stress to handle, the level of enjoyment from work, the types of people to interact with, the things to learn and to overcome, etc, are all quite different between for-profit and non-profit jobs. Before the job switch, I barely had any time outside of work, and the level of stress was what I was paid to handle.

Yes, non-profits and for-profits have fundamentally different missions. (read the book to see the author’s view on some hybrids such as microfinance and the social enterprise.) In general, aside from remuneration, the culture of the organization would attract and keep the right people to stay. I can see how the goodwill of nonprofits would be destroyed if all the staff are money-hungry people who do not really care about the causes or missions.

I just do not want “the restraint on nonprofit about limiting compensation” to be the reason why nonprofits cannot attract good talent. It is very common that people need to make one choice, between making changes in the non-profit world, and securing their own financial obligation. Think about someone who has been well educated and ready to contribute what he/she learned, with the student loans to pay, the “goodness of heart” just cannot make up the huge financial difference.

Of course the Economist doesn’t need to give preferential treatment to non-profit advertisement buyers. But the nonprofits normally operate under the restraint that they cannot buy expensive advertisements or they cannot pay for something that is not directly related to helping the needy. (overhead has to stay low, which discourage long-term investments) I just hope, when people see that some nonprofit buys an expensive ad, they don’t criticize too fast, and think about the benefit of that ad, and know that it might be a great investment and a smart decision to help more and inspire more.

Robert, thank you for reading and the very good comments. Do I know you?

Robert said...

Organizations like yours tread a tightrope on managing donor expectations and maximizing results, although these need not be contrary objectives. I have been close to people involved in similar struggles on the extreme end of this spectrum, and have noted that appearing to do good is often easier and more rewarding than doing so.

Sales targets, A-list celebrity telethons, luxury cars, business-class travel, gold-plated taps... you get the picture. I'm not making judgments; wanted you to know my angle. Somewhere in there, it ceased being a charity and became an agency problem, which is fine if they were not misleading donors to solicit funds, in my view.

I'm of the opinion that the lack of leadership--not funds--is the biggest hurdle to attracting and keeping good talent. Like in any organization, corporate culture comes from the top (our first lesson in MO), and the vision, determination and executional expertise needed to drive forward in the face of apathy, overwhelming odds and nebulous goals is beyond most people. Does that mean we give up? No. It means you have a hard job ahead, one that requires a truly exceptional person to do well.

Eric said...

Hi Old Friend!

As a purveyor of the very goods you are denouncing on your blog, I would completely disagree with you. =)

Something like that Rolex in your ad is a symbol of personal achievement, and while not everyone who can buy such a thing would buy such a thing, many do choose to do that. I don't think that there is anything wrong with buying something expensive to reward yourself for a job well done. Its human nature. That does not mean that you will not donate something to the less fortunate...

Besides the fact, would it change your mind at all if I told you that Rolex is run and held by a non-profit trust as a foundation, with ALL of its profits going into re-investment and charity? Rolex runs the Rolex Foundation, which not only is one of the biggest worldwide supporter of the arts, but also makes several very generous grants to people who are "Making the world a better place". Many have gone on to wine Nobel prices and represent the forefront of their particular fields of expertise.

Anonymous said...

My first reaction to your friend's decision to buy a Rolex watch is that it stimulates the economy especially through the entire value chain of creating this watch. A robust economy as a whole benefits the rich and the poor. While a poor person may have just a small slice of the entire pie, as the pie gets biggger in terms of income per capita, productivity, or human capital the poor also benefits. Donations are in general a bad idea unless its intended purpose is in the form of an investment or for children ONLY. Humans are inherently lazy and getting free money doesn't fuel their ambitions.

Wonderland Alice said...

Eric, my dear old friend,

(I am only allowing you to publically call me old, okay?!!)

First of all, thank you so much for reading my blog and leaving your comment here.

I was actually thinking about your when I typed "Rolex" in this entry. I knew you'd some day say something about this posting.

Actually, I wasn't telling people to not buy nice things, (you know I just spent a lot of money on a vacation.... -- hey that went to stimulate Greece's tourism) I was just trying to question why non-profits are very likely to be blamed when they spend money on marketing, that's all.

If you read the book, you'll understand. I just can't post the whole book here.

Lastly, it wasn't Rolex in the real conversation. They talked about a watch brand that I have never heard of and couldn't spell. It's actually "Patek Philippe".