This is what happens when we confuse morality with frugality. We’ve all been taught that the bake sale with five percent overhead is morally superior to the professional fundraising enterprise with 40 percent overhead, but we’re missing the most important piece of information, which is, what is the actual size of these pies? Who cares if the bake sale only has five percent overhead if it’s tiny? What if the bake sale only netted 71 dollars for charity because it made no investment in its scale and the professional fundraising enterprise netted 71 million dollars because it did?
For this week, I watched Dan Pallotta’s talk called “The way we think about charity is dead wrong” which was under the Business section’s “Social Good, Inc.” playlist. I was very fortunate to hear Dan Pallotta speak at a nonprofit client symposium at the wealth management firm that I worked for this summer; although I have heard Dan Pallotta speak before, I had not seen his Ted Talk and I think that his ideas are definitely worth sharing with the class.
In his talk, Pallotta explains that the double-standard that expects nonprofits to spend little yet achieve a lot is what’s keeping nonprofits from being able to grow. To promote growth, we need to stop equating frugality with morality, and reward charities for their big goals and big accomplishments and recognize that these big goals have big expenses. Pallotta says that there are five ways that we discriminate against nonprofits: compensation, advertising and marketing, taking of risk in pursuit of new ideas for generating revenue, time, and profit. I think that one of the most important pieces to focus on is compensation: when we expect that every penny we donate go directly to the cause of a charity, we don’t leave room for the charity to grow. The following quote from the video is long, but what it conveys is important:
Businessweek did a survey, looked at the compensation packages for MBAs 10 years of business school, and the median compensation for a Stanford MBA, with bonus, at the age of 38, was 400,000 dollars. Meanwhile, for the same year, the average salary for the CEO of a $5 million-plus medical charity in the U.S. was 232,000 dollars, and for a hunger charity, 84,000 dollars. Now, there’s no way you’re going to get a lot of people with $400,000 talent to make a $316,000 sacrifice every year to become the CEO of a hunger charity.
Some people say, “Well, that’s just because those MBA types are greedy.” Not necessarily. They might be smart. It’s cheaper for that person to donate 100,000 dollars every year to the hunger charity, save 50,000 dollars on their taxes, so still be roughly 270,000 dollars a year ahead of the game, now be called a philanthropist because they donated 100,000 dollars to charity, probably sit on the board of the hunger charity, indeed, probably supervise the poor SOB who decided to become the CEO of the hunger charity,and have a lifetime of this kind of power and influence and popular praise still ahead of them.
In terms of our class, I think that this idea that nonprofits shouldn’t have overhead because they are expected to cycle every penny into the “actual cause” is similar to the idea that corporate social responsibility detracts from the value given to shareholders. Both of these ideas fail to see the big picture, and neither will help our society progress.