The nonprofit sector is the only sector
in society that is defined by what it does not do. Nonprofit organizations do not make a profit. But nowhere does their name suggest
that nonprofits—unlike their for-profit counterparts— exist to provide a social
good to some segment of society. In
part, it is this very term nonprofit that
contributes to the low regard in which this sector is often held.
It is easy to simply not make a profit—just ask
any failing business owner. Not making a profit does not require any definable
skills. But if we were instead to
define nonprofit organizations by what it is that they do provide—a social
benefit—it would be obvious that leading these organizations requires a specific
skill set that is different but no less impressive than the skills required for
running a for-profit corporation.
These skills include the ability to maintain a viable and sustainable
organization; provide a social benefit while also being a responsible steward
of funds provided by others; and, convincing others to invest in an organization
even though they do not receive a direct benefit for their investment.
It has been asserted that if nonprofit leaders
had a stronger skill set they would be in the for-profit world earning a real
living. In fact, this fiction goes
so far as to suggest that nonprofit leaders are being paid far more than they
are worth. In state houses across
the country, legislators and governors are attempting to place limits on
nonprofit executive compensation.
An executive order by Governor Cuomo in New York limits such
compensation in nonprofit organizations that receive 30% or more of their revenue
from the state. In Florida, the
benchmark for regulating these salaries is set at two-thirds or more of organizational
revenues received from state sources. However, in these same states, there has
been no effort to limit the salaries of for-profit CEOs whose companies earn
large portions of their revenue from government contracts.
When it comes to oversight of government
dollars going to private organizations, only nonprofit executive salaries seem
to receive scrutiny. Dan Pallotta,
author of two books on the subject—“Charity Case” and “Uncharitable”—refers to
this as a double standard that exists between the for-profit and the
humanitarian sectors. He states
that this “is not a zero-sum game.
The money paid to a valuable nonprofit CEO is not money taken away from
the cause. It is an investment in
the cause.”
In 2010, four U.S. senators attempted to
block federal funding to the Boys and Girls Clubs of America based upon the
most recent compensation of its CEO, which these senators deemed to be too high. Senator Chuck Grassley (R-Iowa)
requested that the Treasury Secretary review regulations on nonprofit salaries,
stating they are “not tough enough in policing pay in the nonprofit sector and
that regulations governing compensation are too weak.” Grassley, his Senate colleagues and the
media reports all ignored the fact that in her eight-year tenure at the Boys
and Girls Club, the CEO tripled revenues and more than doubled the number of
children served. Her compensation package, while large for the nonprofit sector,
did not take away from the needs of those being served. Instead, it helped retain
a highly qualified and skilled CEO and allowed the organization to serve more
children with expanded programming.
In the same year that the Senate was scrutinizing
nonprofit executive compensation, Lockheed Martin received 83 % of its $45.2
billion in revenues from US government contracts and its CEO earned $14.6
million. That represents a
compensation package more than 14 times that of the Boys and Girls Club CEO. But there was no
mention of this in the Senate, despite the fact that the federal government
supported 83% of the Lockheed CEOs salary. Another example is Booz Allen Hamilton, the management and technology
consulting contractor that receives 100% of its revenue from the federal government.
Senator Grassley had no quarrel with the fact that Booz Allen’s CEO earned
$4.228 million, more than 10 times the salary of the President of the US and
more than 24 times Grassley’s annual salary as a Senator.
Social sector organizations measure
success not in dollars and cents, but by intangibles such as whether or not they
are making progress toward the mission.
It is easier to impact the bottom line of an organization than it is to affect
people’s lives. If you produce a
product or service, your costs are predictable. If those costs increase, you
have the option to increase the selling price, reduce the quality, or cut back
on your labor force. However, for the social sector executive providing services
to individuals—each with their own individual needs, abilities, and challenges—the
cost can vary widely.
In the social sector, organizations rely
on the generosity of government, foundations, corporate contributors, and
individuals for support. By contrast,
for-profit corporations generate their income from the people that they
serve. As such, corporate managers
have two constituencies to satisfy: their customers and their investors. Both of
these are direct beneficiaries of the work of the corporation. Social sector organizations have the
same two main constituencies, however the fundamental difference here is that
in the social sector the customers usually do not pay the full cost of the
services and the investors do not benefit directly from their investment.
According to
a 2012 study by the Center for Civil Society, the nonprofit sector employs 10.7
million workers in the US, which is 10.1% of total employment. It is the third largest sector in the US
economy, behind retail and manufacturing.
However, as public mistrust of the nonprofit sector grows, more services
traditionally provided by this sector are being taken over by for-profit
ventures. In the decade from 2000
to 2010, for-profit employment increased more rapidly than nonprofit employment
in education, health care, and social services. These facts portend poorly for the sector as more of these
services are provided by for-profit enterprises with their eye on the bottom
line and the profit margin.
While
nonprofits have a social mission, in the words of Nobel Prize-winning economist
Milton Friedman, "there
is one and only one social responsibility of business—to use its resources and
engage in activities designed to increase its profits.” By contrast, nonprofit
leaders have a very different purpose and measures of success that are often
much harder to attain than simply maximizing
profits. Ask anyone who has worked in both the for-profit and nonprofit fields;
they will tell you how much more difficult it is to run a nonprofit. They will
also tell you that there is a different, not lesser, skill set needed to run a
nonprofit organization—especially in these difficult times when nonprofits are continuously
being pressured to “do more with
less.”
