Ethics, Charity and Overhead

Curing the Charitable Curse

Curing the Charitable Curse (Photo credit: jurvetson)

While heading home after a race, I caught a segment on the radio discussing Dan Pallotta’s view of the moral assessment of charities and the notion that our moral intuitions regarding charities are erroneous. Pallotta’s main criticism is that people err in regarding frugality as being equivalent to being moral. So, for example, a charitable event with 5% overhead is regarded as morally superior to one with 70% overhead. This is an error, as he sees it, because what should be focused on is the accomplishments. If, for example, the event with the 5% overhead only raised $100 for charity and the event with 70% overhead raised a million dollars, then the second event would obviously have accomplished a great deal more. Naturally, it is being assumed that the overhead is for legitimate expenses such as salaries, advertising and such.

While I lack Pallotta’s experience and expertise in regards to running charities, I do think it is well worth while to consider some of the ethical issues that his discussion raised.

One interesting aspect of this matter, as noted by Pallotta, is that there do seem to be two sets of standards in regards to non-profits and for-profits. In the case of for-profit entities, generous compensation for top talent is often regarded as acceptable and even necessary. In the case on non-profits, generous compensation for the top talent is often regarded as wrong—those people should be willing to accept less compensation because they are supposed to be working for charity. In the case of for-profits, it is recognized that running a business involves considerable overhead and hence even relatively small profit margins are regarded as acceptable. In the case of non-profits overhead costs are generally regarded as being automatically bad and are only grudgingly accepted. As such, while a for-profit business is assessed by how well it does in accomplishing goals (how much profit is generated) a non-profit is often assessed in terms of the percentage of overhead.

Following Pallotta, it can be argued that this model is mistaken. If, one might say, charitable non-profits are going to be as successful as the top businesses, then this view must be abandoned. A key part of this, and one that Pallotta stresses, is that non-profits need to switch to the compensation philosophy of the for-profits. That is, they need to generously compensate the top talent. Another part of this is that non-profits and those who support them must change their views of overhead costs—these costs must not be regarded as being automatically bad but rather seen as necessary expenditures in order to accomplish the goals in question.

While this approach does have appeal, the rather large compensation for top talent in the for-profit sector is itself subject to moral criticism.  So, it is worth noting that while the idea of large compensation for the top talent at charitable non-profits is seen as morally wrong, the high compensation of talent in the for-profit sector is regarded by some as merely being less bad.

There is, of course the stock argument that high compensation is needed to actually get the top talent. After all, if charitable non-profits want to get the best people, then they will need to get closer to the compensation offered in the for-profit realm. If, for example, Sally can get $5 million in compensation as a top executive for a corporation and only $80,000 in compensation as an executive for a charity, then it is obvious where Sally should go.

While this does have appeal, there is still the question of whether the compensation is actually just or not. If the top compensation in the for-profit realm is unjustly large, then making the top compensation in the charitable realm comparably unjust would hardly seem to be an ethical thing to do.

That said, a reasonable rejoinder is that is does make sense to offer better pay in order to attract top talent to work on charitable causes. That is, our money should back our professed moral values.  It also does make sense to use the market to address certain problems, but it is obviously not going to help with problems that the market system creates itself—which could be one of the important ironies of this approach to charitable organizations.

An obvious point of concern is that the arguments in favor of accepting high overhead for charitable non-profits could be used as a clever sort of moral cover. That is, they could be sued to allow alleged charities to monetize charitable causes as for-profit companies now monetize natural resources and human labor. The obvious counter to this concern is that this approach could yield more effective results than the existing model. So, one might argue, if the price of a charity finally finding a cure for a disease is that the charity operate like a for-profit business, then it is worth the price.

This is a point well worth considering. As Pallotta has argued, charitable organizations often fail to address the problems they were created to solve. If changing our moral assessment of how charitable non-profits should operate could play a significant role in solving some of these problems, then this approach could be the correct approach. However, if this approach is actually a mere moral cloak to allow profiteering off charitable causes, then this approach would seem to be wrong.

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  1. It depends on what one wants to achieve through charity events.

    Let’s say that one of the main purposes of a charity and any charity event is to promote a culture where each gives what they can freely and generously. One way to promote that culture is through the power of the example. So if a great artist, for example, the pianist, Daniel Barenboim, is willing to play for charity without charging, thus donating his talent and his time, I, who admire Barenboim, may be moved to give what I can in terms of money, since I have no comparable talent to give.

    On the other hand, if the purpose of a charity event is to maximize donations at any specific moment, then it is good to hire those artists or performers who maximize donations, even those who charge huge fees, as long as their fees are compensated by increased donations.

    In the second case, the example of the artists will not move me to be more charitable, but I may be willing to pay more money to see artists whose show I enjoy.

  2. Swallerstein,

    Good point. Much would hinge on the objective.

  3. Ah… may I ask a point to make clear? Is a university endowment not-for-profit or for-profit?

    Are we talking ‘Getting or giving?’

    When it comes to getting, charities can be as profit-driven as anyone. Granted: charities and other do-good entities do not appear to maximize future profit by reinvesting their harvests of cash-flow.

    But we must admit that we are near-sighted in time. Think of the endowment fund as behaving like a farmer of a forest: many undergraduates are planted but it takes only a few Berg Bloomers to grow the really big endowment tree-farm.

  4. Boreas,

    It depends on how one distinguishes between for-profit and non-profit.

    Roughly put, for-profits are in the business of making money (for example, selling courses or pizza with jthe end of getting money). Non-profits are supposed to be in the business of achieving some non-monetary end, usually claimed to be of some be of some be of some benefit to the community (for example, selling courses to educate people or selling pizza to find diabetes research).

  5. “If, for example, Sally can get $5 million in compensation as a top executive for a corporation and only $80,000 in compensation as an executive for a charity, then it is obvious where Sally should go.”

    Obvious, if your only motivation, or sine qua non, is to make money. The more money the better, the less money the worse. With that logic, why give any money to a charity in the first place, as it would mean having less money in your own stash.

    The five million dollar executives have been corrupting charities for years. Not to tar all charities with the same brush, but they can be used and abused, and used for the purposes of executive enrichment. I like to give directly to the needy. If hand a few coins to a drug addict, I know the 100% of my money will be spent on heroin. If I give indirectly, the CEO has to get their slice of the action before the drug dealer. The CEO gets his ranch in Montana, and the addict gets less heroin.

    But there’s a similar argument in regard to universities. Should universities have three to four administrators for every teacher? Are they running some kind of shakedown or something?

  6. The larger question here ‘Is any economy rational?’ While economists are able to analyze or predict at least on shallow curves, economic behavior, much about economic forces is irrational. E.g. why do we shower money on professional sportsmen, a few female tennis players, entertainers, university administrators, lawyers, et al? What good does such massive spending bring?

    In other words, is ‘Nothing too much’ a fundamental virtue?

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