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.”