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Rethinking salaries and social change in the nonprofit sector: Interview with Dan Pallotta

Earlier this year Dan Pallotta gave a TED Talk based on his book Uncharitable in which he argues that our focus on costs and low overhead hinders the ability of nonprofits to truly address social problems.

Since his talk in March, the video has gotten over 2.3 million views, is the 15th most commented video in TED history, and has become part of a large, ongoing conversation about how the nonprofit sector should evolve to better address pressing social issues (read a few responses to his talk here).

We talked to Dan about why he gave the talk and what changes he hopes to see in the nonprofit sector.

You’ve written on the subject of nonprofit compensation and innovation, but why a TED Talk? What were you hoping would happen?

Well that’s such a powerful platform for anyone with a new idea or movement. It’s coveted. I sent an email to Chris Anderson on the subject of Uncharitable. I wanted to upend the way people think about charity, and he said, “Done, you’ve got 18 minutes.”

At the same time, it’s kind of like having a child; it’s impossible to say what you want the end result to be because you just don’t know. But I’ll tell you that I was the last speaker at the conference. I got to sit there for four days and listen to those talks and listen to my insecurities grow. At the end, I thought a talk on the economics of the nonprofit sector was going to go over like a lead balloon.

So I was flabbergasted by the response to it. But it just points out how ready people are for this conversation.

Why do you think people were so ready to talk about this?

People want to make a difference. The desire to live a life of meaning and purpose has accelerated in the last decade and I think that people are beginning to see that there are a set of rules written four hundred years ago by Puritans that are holding the sector back.

The response reminds of the quote by Victor Hugo, “Nothing is as powerful as an idea whose time has come.”

You advocate a more business-like approach to various aspects of nonprofit work including hiring, retaining staff, long-term investing, and marketing. However, many argue that just because businesses do it, doesn’t make it ethically right. And that a business-like approach might erode public trust in nonprofits. What are your thoughts on that?

I think we should try things before we start theorizing about what bad things will happen. Stakes are too high to worry about hypothetical things that might happen. And the distance between what for-profits and nonprofits are allowed to do is so vast that the transformation we would have to make to become more like them is huge.

I’d be happy if we can get five or 10 percent closer to the permissions business has.

I’ve heard people say things in abstract; that we’re fighting for soul of civil society. I didn’t know that we were fighting for the soul of civil society. I thought we were fighting for people dying of malaria. If the soul of civil society is at odds with those people then I can’t be part of it. And what business practice is it that you are afraid of? What evidence is there that it will destroy civil society?

In the nonprofit sector there is a demand for data before we try things. For-profits don’t do that. You can’t generate data in a vacuum; you have to take risks. Disney World was a massive risk. Hollywood takes risks. They learn on steep learning curves. Meanwhile we have these social issues we aren’t moving the needle on; just small progress at the pace of molasses. Poverty has been at 12% of US population for four decades. Do we want to solve these problems?

The other concern I’ve heard is that this approach is going to introduce competition into the nonprofit sector. There is no place with greater competition than the nonprofit sector because nonprofits tend to believe they are playing a zero-sum game, while for-profits believe that the sky is the limit.

If you want to see things stay same, we have a great system for doing that.

Your talk has definitely had more of us talking about pay: better pay, fairer pay, competitive pay. How should nonprofits determine salaries in the face of concerns regarding overhead and potential donor and community shock?

It’s very simple: determine salaries based on value. What value is the person producing and what is that value worth? We never look at the outcome, we only look at the cost. We are saying $200,000 is too much, but based on what?

For example, the CEO of The Boys and Girls Club was criticized in 2011 because her pay package approached one million dollars, which included salary, bonus, and retirement pay. People kept saying that that amount of money should have gone to the kids.

Now, she tripled budget from $500 million to $1.5 billion in five years and doubled number of kids served.  If you had hired someone for $200,000, yes, you saved your self  $800,000 but you might cost yourself one billion.

Where can nonprofits begin in terms of working towards better salaries for employees?

They need to start with results. What results do they want to produce and start hiring people to produce those results. All we talk about is cost to the complete exclusion of what the results are. All anyone wants to talk about is cost.

What are some larger scale changes the sector can make to address some of the issues you’ve raised in your talk?

We need to create change in how the public thinks about these things. If we can shift the view from a focus on costs to a focus on outcomes, that will change everything. We’re starting with Charity Defense Council, which will advocate for the sector.

Learn more about Dan at danpallotta.com.