PHILADELPHIA, Pennsylvania – “Are we unhappy with the pace of change?” Author Dan Pallotta opened his talk by sharing statistics that illuminate progress made in a variety of high-profile issues. For example, between 1992 and 2011, AIDS deaths throughout the world rose from 1.1 million to 1.7 million each year, despite antiretroviral drugs and increased awareness. The number of individuals in Africa who are malnourished rose from 175 million in 1990 to 239 million in 2010. Pallotta acknowledged that these figures do not reflect the decrease over the years as a percentage of the overall population. The point remained: change has been slow.
At the William Penn Charter School in Philadelphia, Pennsylvania, Pallotta addressed the topic of his 2008 book, “Uncharitable: How Restraints on Nonprofits Undermine Their Potential.” Pallotta highlighted five problematic double standards between the nonprofit and for-profit industries.
First up was compensation. Working for a nonprofit is generally considered a lifelong economic sacrifice. Organizations are expected to minimize their overhead, thus salaries are often meager. This is often a repellent for individuals since family, retirement, and emergency concerns loom greatly. There are notable instances where meager salaries are not the case. The heads of the top five health-related nonprofits (such as Susan G. Komen and the American Lung Association) received between $300,000 and $800,000 in 2012. However, this was juxtaposed with the salaries of the top five health-related companies including Cigna and Aetna. Collectively speaking, the for-profit individuals made 41 times more than the nonprofit individuals.
The second discrepancy was that of advertising and marketing expectations. Despite the proven fact that advertisements can exponentially increase a company or organization’s revenue, charities are once again supposed to minimize their expenditure on fundraising overheads. Evidence of this stigma can be seen each day; for every one nonprofit advertisement, there are 479 for-profit ones. Furthermore, charitable giving has remained stagnant at 2 percent of GDP since it started being recorded in the 1970s.
The third highlighted issue was nonprofits’ inability to take risks, specifically regarding fundraising. Pallotta described how Disney could make a $200 million movie that failed to make a profit without serious consequences. Yet, in part due to the lack of overhead available, nonprofits are held to a strict standard with little space for failure. Pallotta stated, “When you prohibit failure, you kill innovation.”
Similarly, the fourth double standard was time, or a long-term objective bias. Amazon hardly registered on any financial or public radar for its first six years. In addition, it recently had three consecutive quarters of significant losses. For most nonprofits, neither of those scenarios is viable. The damage either would bring to their reputation would be detrimental, not to mention the decreased quality of services.
Lastly, Pallotta discussed the issue of profit itself. With donations as their only means of income, nonprofits are starved for capital that could provide growth and allow risk-taking. The leeway that profit gives for innovation and incentive is coveted by for-profit companies and has led to immense developments. Nonprofits, on the other hand, find any development hindered by the very definition of their organizations. This stagnation is clear from the fact that between 1970 and 2009, there were 46,136 for-profit companies that crossed the $50 million per year barrier. During that same period, only 144 nonprofits have been able to reach such magnitude.
Pallotta expounded on how the ingrained notions of overhead are at the core of these disparities. Not only is it commonly perceived that a nonprofit should spend as little of donations as possible on overhead costs, but charity watchdogs have reinforced this by declaring the most trustworthy and notable charities as those with the smallest percentage of overhead costs. When asked what information was most important to them as donors, 79 percent of survey participants said how much of their donation went to actual programs, while only 6 percent wanted to know if the charity actually had a positive impact.
Pallotta concluded by stressing that overhead was misunderstood. Overhead costs are essential for the continuation of the programs provided by a nonprofit. Without overhead costs there would not be any staff, development, or fundraising. Fundraising is an especially misunderstood aspect of overhead costs. It is an integral part of a nonprofit’s ability to achieve, or at least work towards, its goal. Additionally, overhead costs do not reflect an organization’s level of performance or effectiveness; administrative costs do not reveal how many people a soup kitchen feeds. This was acknowledged in a joint press release by the very watchdogs that based their stamps of approval in large part on overhead costs. Charity Navigator, the Better Business Bureau, and Guidestar stated, “People and communities served by charities don’t need low overhead, they need high performance.”
– Katey Baker-Smith