Nonprofits need to help their donors understand that charitable organizations have a lot in common with businesses, Dan Pallotta, a prominent nonprofit expert, told a group of charity fund raisers in New York.
“We don’t like to see a lot of people making a lot of money in charities,” says Mr. Pallotta, the keynote speaker at this week’s Direct Marketing Association’s New York Nonprofit Conference. People have a “visceral reaction” to the notion.
But nonprofit compensation should match or at least correspond to the salaries in the for-profit world, he says. For one thing, nonprofit salaries at the moment don’t attract the best and brightest. Why work as a chief executive for a medical charity at $230,000, he says, when others with the same MBA have salaries of $400,000 or greater?
Mr. Pallotta, the inventor of multiday AIDS Rides and Breast Cancer 3-Day events, says other items of neglect in the nonprofit world are marketing (there’s limited advertising), risk taking (fear of big fund-raising efforts), time (investment in long-term revenue growth), and expansion (since 1970, only 144 nonprofit organizations have crossed the $50-million revenue barrier; in the for-profit world, some 46,000 companies have.)
In addition, he considers this question from donors a “sinister” one: “What percentage of my donation goes to the cause versus overhead?”
Donors need to learn why that question is problematic, he said. First, it divorces “overhead” from “the cause.” It also forces charities to forgo what they need to solve problems, such as hiring an innovative new leader or tripling the fund-raising staff to increase long-term giving. Most important, this gives donors bad information. The high quality and service of a local soup kitchen, for instance, may be because of its investment in staff and equipment, not because of how it reports low-overhead costs.
Mr. Pallotta told fund raisers to stop using the word “overhead.” Instead, he told them to train donors and board members to ask how effective the organization has been in accomplishing its mission and goal for the cause.
Mr. Pallotta also suggested setting up an organization for nonprofits to defend their practices, create public awareness, spur a legislative force. and establish legal strategies against municipalities that require charities to meet a low overhead standard. The name he proposed for such an entity: the International Charity Defense Council.
0 Responses to Teaching Donors Why High Overhead Can Be Good
mattzarcufsky - August 26, 2010 at 1:06 pm
I agree with Mr. Pallotta – there needs to be more education out there for donors. I do think however there are plenty of organizations that already exist in the industry that need to rethink their work and step up and do more for the sector i.e. Association of Fundraising Professionals, CFRE International, BBB Wise Giving Alliance, and we need to see more involvement from academia – schools with centers on philanthropy should do more than just analyze and educate certain groups, they should have tremendous outreach into their entire communities of influence.
danielpallotta - August 26, 2010 at 2:47 pm
Raymund,Thanks for the article. You’d lost a lot of the nuance, which is everything. For example, you wrote that, I asked, “Why work as a chief executive for a medical charity at $230,000, he says, when others with the same MBA have salaries of $400,000 or greater?” That’s not quite the question. The question is, how many people do we lose to the for-profit sector because they are unwilling to make that economic sacrifice. The answer to the question you suggested will be different from person to person.Thanks again!
bink614 - August 26, 2010 at 3:37 pm
Corporate “sharp pencils” populate these boards and like to ask questions like “What’s your ROI?” “What is your cost to raise a dollar?” “Why are you not lower than such-and-such organization?” “I sit on this/that board and they are $0.XX on a dollar…” “You aren’t giving away enough money.” Yes — everyone agrees educating board members comes with the territory, but it sure would be nice if philanthropy had a definitive publication/white paper on various calculations and factors in developing the #’s. I have seen the Gerrity report and similar roadmaps but it sure would be nice to draw upon a standard calculation.
81209502 - August 26, 2010 at 3:46 pm
As long as the watchdog organizations, such as Charity Navigator, rate nonprofits on their overhead percentages, this will never change. Nonprofits are too scared of receiving a low rate, but to do the work necessary to really rate how “successful” a charity is requires much more work than the watchdog orgs are willing to do.
dcspacone - August 26, 2010 at 4:18 pm
Hallelujah Mr. Pallotta, saying what needs to be said about running a non profit. It is a business and needs to be run as such. The comment is often made about what a joke the pay is in a non profit.And the non revenue generating support positions (which I find myself in when I am employed) that are the bullseye for cuts as soon as a dark cloud appears is a knee jerk reaction that punishes the employee and also the donors.
nfgmarketing - August 26, 2010 at 4:19 pm
I blogged on this yesterday, and I did want to point out that all the watchdogs cited ARE doing work to reflect more than overhead in their ratings. As BBB, Charity Navigator, Great Nonprofits and others who commented on my post note, they are creating a more holistic picture of nonprofit performance but that may not be largely known yet. http://www.nonprofitmarketingblog.com/comments/dma_crowd_slams_watchdogs_and_donors_who_like_stars_-_but_whats_the_solutio
chayadina - August 26, 2010 at 5:54 pm
This is the same issue we had in certain areas of higher education, especially in a religious institution. Donors prefer to give to student scholarships, especially those in honor/memory of beloved teachers and friends, than to the annual fund. There was a perception that the annual fund was an amorphous catch-all to spend with some frivolity rather than demonstrating an understanding that everything happening at the school is for the benefit of the students…classes, programs, services, faculty, etc. Perhaps if the annual fund were named for a person, it would have a different cache.
pamelamorton - August 26, 2010 at 5:55 pm
Are you aware that Charity Navigator will no longer be evaluating non-profits with budgets less than $1,000,000. They say they don’t have the resources, but if we want to get a third party to pay a $250 fee then they’d be happy to keep us on their website. Were does that leave the smaller non-profits? There are thousands of us with small budget and when a donor looks for us on Charity Navigator we will have disappeared! So much for the watchdog groups!
bobbyvassallo - August 26, 2010 at 10:02 pm
Mr. Flandez,While I agree on some level that it is necessary to have good leaders, I must say that many lowly Peace Corps volunteers are just that; volunteers. Many are quite resourceful, despite minimal pay. Likewise, some of the best Non-profit leaders are underpaid and do it for the love of the job.I can give you case and point, in fact. Probably the most unsung hero of the non-profit world has to be Operation USA’s Richard Walden. A Wharton School grad and Penn Law degreed, Walden has run Operation USA for decades, being paid very little. Similarly, he is a freak about overhead. He is to be emulated. In addition to OPUSA’s Four Star rating, Operation USA was recently named the “#1 Exclusively Privately Funded Charity” by watchdog group Charity Navigator. Why? Partly because of an extreme lack of overhead, and a miniscule lack of money spent on fundraising.Non-profits which run under your scenario won’t get my money. Dan Pallota, according to the writer, “is a prominent non-profit expert,” but must work for Red Cross or some other Mega-Charity where cost of funds raised closes in on 50%. I am astounded at his casual comments at a time when charities are closing their doors?http://bobbyvassallo.org explains why (with Pallota’s ideas) charities are broke in this economy. http://www.OPUSA.ORG? That is where smart money goes…
alexisdanzig - August 27, 2010 at 9:55 am
This article conflates overhead, generally, with executive compensation, and assumes that “business practices” are good for nonprofits. With 20 years experience in nfp management I believe that people trained to run for-profit businesses don’t have the necessary skills or the stamina to run nfps effectively, and while, yes, organizations should be held accountable for the money they spend, nfps are not businesses. Most nfps function as part of the safety net our society doesn’t provide to the most vulnerable citizens. Too many nfps that handsomely compensate their executives do not pay their frontline people a living wage. This is bad for morale, organizational stability, and service ratings. When I read the headline, I thought the article would be about educating funders about why they should give grants for operations, including staff salaries — rather than insisting that organizations that do good work should stop, change, and start new, discrete projects to assuage the egos of funders. These are bad nfp practices. We should not be saving money on the backs of frontline or junior staff; we should not presume that business people know how to run nfps — either as board members or executives; we must stop pretending that business culture is good for direct service delivery. It’s time to stop treating the folks who receive nfp services as consumers, and remember that luck is not the same as merit.
bill__huddleston - August 27, 2010 at 1:40 pm
Two points:One, I absolutely echo the point made by Alexisdanzig that non-profits are not businesses. In addition to articles I’ve written about that topic, here is the link to my blog post about that topic:cfctreasures [dot] wordpress [dot] com/2009/11/12/give-while-you-live-give-without-strings/Secondly,Because non-profits are not businesses, some of the measures that make perfectly rational sense in the business world, e.g. including many financial ratios and calculations — do not make sense in the non-profit world, and indeed are IRRATIONAL! Case in point, trying to use ROI to calculate workplace giving will never work, becasue A: The non-profit does not control 100% of the “I”, and “B” the return would not exist unless the sponsoring organization chose to have a workplace giving campaign in the first place!Workplace giving is the only type of non-profit fundraising that is Subsidized, Low-Risk and High Leverage. I challenge anyone in the non-profit world to refute those particular aspects of workplace giving. It should not be any non-profit’s sole source of revenue generation, but it shouldn’t be ignored either.Regards,Bill HuddlestonThe CFC Coachcfcfundraising dot com703 . 560. 1825 new email billhuddleston1 at gmail dot com.