How our idea of charity stops us from solving our biggest problems

This article originally appeared in the 2010 Philanthropy Issue of Door County Living magazine.

In 2008 Muhtar Kent, Chief Executive Officer of Coca Cola Company, made nearly $14 million in salary, bonuses and other compensation. That same year Louis Camilleri, CEO of Philip Morris, took home $36.9 million, and Robert Iger, CEO of the Walt Disney Company, filled his pockets with $51.1 million.

Directors of companies that sell soda, tobacco, and entertainment were three of the most well compensated people on the planet, as most of us would expect them to be.

From 1994 to 2002 Pallotta Teamworks raised $556 million to fight AIDS and breast cancer – more money raised more quickly for those two causes than ever before. But Pallotta Teamworks and its founder, Dan Pallotta, came under fire for what was viewed as excessive overhead and executive compensation. Pallotta Teamworks employed professional staff, used Madison Avenue marketing techniques, and, at the company’s peak in 2001, Pallotta himself took home $425,000. Though Pallotta’s work had raised enormous sums for charity, he was vilified for making six figures in the process, and the company closed up shop amid a storm of bad publicity.

Is something amiss here? In his book, Uncharitable: How Restraints On Nonprofits Undermine Their Potential, Pallotta argues persuasively that there is. He has written hundreds of thousands of words on the topic, but in a telephone interview he got to the heart of the problem with one sentence.

“We allow people to make tremendous money doing things that hurt a lot of people,” he told me, “but if someone makes money trying to help cure cancer or feed the hungry, they are crucified.”

Pallotta Teamworks hit its stride in the mid-1990s, when universities were not yet offering degrees in non-profit management or social entrepreneurship – many didn’t even offer classes on the topics.

“When we started, the idea of an entrepreneur doing well and doing good was considered heresy,” Pallotta recalled. “If nobody can ever make money doing good, then the people making money will never do good. To lose people in their young, most energetic years to the for-profit sector, when we could be using them to solve our greatest social problems, is a great missed opportunity.”

Pallotta said his youth and salary made him a seductive target for the media, which focused on the cost to put on his events rather than the tremendous sums of money those events were bringing in for the cause.

“Our approach to marketing was to mimic the strategies of the large consumer products,” Pallotta explained. “We bought full-page ads in the New York Times and 60-second spots on drive time radio. This was expensive, but to build demand we had to let people know about our events. Some in the media said we spent too much on marketing, on slick brochures, or on professional staff. But marketing is not a zero-sum game. $100,000 spent on an ad in the New York Times is not money that could have gone to the cause. It’s money that brought us $2 million for the cause that never would have been there if not for the ad.”

Amy Kohnle, Executive Director of the United Way of Door County, said those same double standards come into play even for Door County non-profits a fraction of the size of Pallotta Teamworks.

“The public wants the overhead to be so low, because they want the money going to the cause,” Kohnle said. “But the result is that the organizations are understaffed, sometimes poorly run, and the staff is overworked and often feels unappreciated. You have situations where an organization is operated out of the director’s basement.”

The January 2010 earthquake that devastated Haiti is a dramatic demonstration of the power of publicity. The destruction and human toll was on the news 24 hours a day and hundreds of millions of dollars in donations poured in.

“People give to the cause, and they give because they hear about it,” Pallotta said. “That doesn’t happen without the stories, the images, and the news being put in their face all day.”

Kohnle, who works with many organizations throughout Door County, said public perception is a factor in even the most basic of marketing decisions. Even something as simple as the paper a flier is printed on is a potential image problem.

“People see four-color glossy fliers or mailings and assume it costs a fortune and we shouldn’t do that,” she said. “People want to see non-profits on black ink, or maybe colored paper. So you see non-profits printing on the loudest color paper trying to stick out.”

Kohnle recalled a discussion she had with one non-profit director looking at advertising an event on a billboard. They debated how they could design the ad so people would know that a sponsor, not the organization, paid for it.

“You worry that people will see it and have that gut reaction that says ‘is that my donated money going to that?’”

Limiting Horizons, Limiting Visions

The best businesses pay well for the best leaders and top young talent. They do it because it’s good for business. But in the non-profit world a high-paid CEO or employee is seen as an extravagance or a waste of donor dollars. Rarely is consideration given to what level of return that investment in quality people could bring back to the organization. As a result, the best and brightest at best dabble in the non-profit world.

“You can dedicate yourself to charity or you can work for your own financial security, but in the current paradigm, you can’t do both,” Pallotta said.

Though Kohnle loves her job, she admitted that Pallotta is right when it comes to the financial aspirations of those in her line of work.

“There’s definitely a low ceiling,” she says. “After 10 years, I’m pretty much maxed out. Maybe there will be small raises, but if you want to make more money you have to leave the area or join the corporate world, and if you want to make more in that world you may have to leave Door County as well. Fortunately, I have passion for this and love what I’m doing.”

Many non-profits operate on a grant-to-grant basis, or on fundraising cycles, able to offer positions only as such cycles permit. This leaves the people in those positions on tenuous footing and doesn’t bode well for long-term planning.

Peter Kerwin, Chief Financial Officer of Marine Travelift, is beginning his sixth year on the United Way’s Board of Directors. He spent two of those years as board president, and is also president of the Sturgeon Bay Visitor Center.

“Just like in a business, if you’re worried about opening the doors each day, your decision-making is going to be a lot different and less effective,” Kerwin said. “As an employee, you have to be confident that your job and your organization is going to be there in the long run.”

The United Way came up short in its fundraising effort last year, and the board of directors ultimately decided to cut some staff hours. Kerwin was the lone dissenter.

“There’s some merit to the decision, but it’s not like the small staff we have sit in a back room doing nothing all day,” he said. “They’re out raising money, talking to people about our organization and goals, and building our organization.”

Kerwin said he believes strongly in the United Way model, which he considers more businesslike than many in the non-profit world, and hopes the short-term cuts don’t hurt the organization.

“I’ve always been of the opinion that it takes money to make money. That doesn’t mean you build elaborate offices or throw money around, but you do invest in your people,” he said. “You can’t just rely on board members and volunteers.”

Kerwin recognizes how much non-profits handcuff themselves by constraining their organizations only to those willing to accept a smaller paycheck to work for them.

“It’s very rare to find someone so passionate who can take less money to do something as well as someone who would get paid to do it,” he said.

No Room For Error

People believe that the staff of a charity should work at a discount, that marketing budgets should be minimal. Yet most of us still believe that charities should perform more efficiently than for-profit enterprises and never make mistakes.

“Our culture wants charity to bat a thousand all the time,” Pallotta says. “Now, Paramount Pictures spends $200 million on a movie that flops. But we don’t allow a charity to spend $1 million on a fundraiser that fails. Well, if we don’t allow them to do that, how do we ever expect them to run a million-dollar fundraiser that succeeds? Paramount gets good at knowing how to make successful $200 million movies by making a lot that aren’t successful.”

In 2009, the United Way decided not to host its annual golf outing. Instead it put on a cooking demonstration featuring a high-profile chef. Kerwin said ticket sales were disappointing.

“It didn’t work,” Kerwin says. “But it wasn’t catastrophic. You have to be able to do that, to try different ideas. Most non-profits don’t have a big margin of error. People will be quick to criticize if an event is anything less then a resounding success because, as a non-profit, you’re in the spotlight. ”

Such risk avoidance is another factor that keeps visions focused on day-to-day survival rather than growth.

“When you operate on a shoestring, you make short-term decisions,” Kerwin says. “You won’t take chances or calculated risks that you would in the context of a long-term plan. But just like in business, you have to have room for mistakes. As long as they aren’t mistakes of integrity, you learn from them and move on.”

Changing Perceptions

When Pallotta speaks, he doesn’t plead. He is not earnest and he hardly even seems to be arguing his case. It’s as though he were stating the plainly obvious, like he’s pointing out that snow is white or rocks are hard. You wonder, if the idea that people should be able to make a good living doing the most important things is so easy to grasp, why hasn’t society figured it out already?

“You probably aren’t old enough to remember,” Pallotta says to me, “but when I was younger you used to go into airports and see all these people lugging around these heavy bags of luggage. Then somebody decided to put wheels on luggage. It’s not a difficult idea, but for 50 years nobody had done it. In our culture, when people decide on a way of looking at something it’s hard to change. They stop looking for better solutions.”

But stances are beginning to shift, in part thanks to Pallotta’s book. Charity Navigator, the largest of the charity rating Web sites, recently announced that they will no longer measure charities by overhead or CEO salaries because those percentages don’t actually tell you anything about the effectiveness of the charity. Pallotta said such ratings hurt the non-profit sector.

“When you buy an iPhone you get to hold it and use it and see how you like it,” he says. “You are the judge. With charity, you donate $100 to cancer research. You don’t have it in your hand. You don’t know what the doctor is doing with the money. So people scurry for simple measures, like what percent of the donation goes to the cause.”

Pallotta said such measurements are destructive, and I suggested that they ultimately hurt charities themselves. He quickly corrected me.

“No,” he said. “It hurts the people you’re trying to help. It hurts the homeless, the people fighting cancer, the children who are hungry. When a charity advertises that they’re giving 100 percent to the cause, it is reinforcing a dangerous artificial expectation that every non-profit should be able to do so.”

Pallotta said the non-profit world must learn a new language to combat the established value system.

“If you’re running a children’s charity, and a donor asks if 100 percent of their donation will go to helping kids, we have to be able to say to them, ‘No, we’re not giving 100 percent to kids. We’re putting 100 percent toward building scale to build an impactful organization to help many more kids,” he says. “Overhead is organizational strength. The most effective non-profits are actually those with the highest overhead.“

If we’re unwilling to step outside the established boundaries of what charity and doing good should be, we’ll find Pallotta’s ideas ridiculous.

We use the ideals of capitalism to drive our economy, to spur innovation, and create new products for us to waste money on, Pallotta laments. But we forbid the use of those same capitalist ideals in the non-profit sector.

But imagine who might join the fight if you could get rich by ending poverty, or homelessness, or cancer?