Dear Ken and Mr. Penna,

Thank you for your thoughtful and passionate response to my opinion piece on Canadian MP Guarnieri’s proposed legislation to restrict nonprofit executive compensation in Canada to a maximum of $250,000.

I do appreciate your commitment to integrity and accountability. I am, as I’m sure you would admit, just as committed to these things, and to serious social change as well. That said, we could not disagree more profoundly on the merits of your case. Beyond that, you make a number of misrepresentations and micharacterizations of my arguments. I will address both here.

Beginning with the misrepresentations:

• You repeatedly state my argument backwards. You continually make it sound as if all I care about is increasing nonprofit leader compensation for the sake of the compensation levels, or the leaders, themselves. I don’t. I don’t give a damn about the level of executive compensation as a primary matter. What I care about is social transformation, and the only reason I am interested in the executive compensation issue is simple: I believe that we need to use money to attract talent, the way the rest of the economic world does. Nowhere did I write that,”only by offering extremely high salaries can the charitable sector attract the ‘best and the brightest.’” as you wrote. Nor do I believe, in particular, that “the CEO of an organization that serves local youth in a small city” ought to be expecting, “the million dollar salary earned by the head of a large ‘nonprofit’ hospital in a large metropolis.” My argument is not that we ought to start paying everyone more money and this will suddenly make them brighter and more talented. My argument is quite simply stated in the article - we need to allow the sector to use money to attract the best talent it possibly can. I am not saying it is the “only” weapon in an organization’s recruitment quiver. I am saying that right now it is pretty much a nonexistent weapon in their quiver, and certainly would be in Canada if that bill passed, because of the prejudices of the culture and people like you who regard compensation, beyond some threshold, to be some kind of a sin, rather than an incentive, and who regard incentives as some kind of dereliction of fiduciary duty, rather than the fulfillment of it.

• You state that I don’t focus on front line staff, and imply that I don’t care about them or recognize their significance to an organization’s power. This is simply not true. Ken, I know you’ve read my book and therefore you know that I am concerned about compensation at all levels. Ironically, it is because of watchdogs like Charity Navigator that many organizations restrain compensation across the board. They are afraid of the zero-sum game analogy that the watchdogs promote, in which any investment in anything other than program services is seen as a detriment to programs and a dereliction of duty. And, of course, they are afraid that even line staff salary increases will raise their overhead ratios and cost them stars in rating systems.A 2007 article in the Stanford Social Innovation Review observed the behavior of nonprofit organizations with respect to simply providing their own employees with a living wage; in other words, the article focused not on the issue of more lucrative executive compensation, but on the issue of the sheer ability of the line staff to survive: “And what happens when local folks come together to campaign for a living wage, as they have in dozens of cities all across America? Guess who’s often on the front lines of the opposition? You’ve got it—nonprofit organizations. In 2002 The Chronicle of Philanthropy reported that ‘The Salvation Army of Eastern Michigan argued against a living wage referendum that raised the hourly wages for employees’ in 1998. The Salvation Army official quoted in the article said, ‘Conforming to the law would drain cash and require cutting services to homeless people.’ The Montgomery (Maryland) County Council witnessed similar nonprofit recalcitrance in the face of living wage legislation, continued the Chronicle article. ‘A wage bill that included charities lost in the council in 1998 largely because nonprofit groups refused to back it,’ Council Member Phil Andrews was quoted as saying. This is your logic at work in the real world.

• You write that, “We are neither in favor of arbitrary caps on executive compensation;” This is disingenuous. Last year an Orlando news reporter asked you, "Do you think these [nonprofit] CEOs deserve these big salaries?” You replied, “...if you're talking about big, like $150,000 — then I would say yes. If you're talking about half a million dollars, a million dollars, no! no...If you want to make that kind of money there's something called the for-profit sector and you should feel free to go and work there." In a 2009 critique of my book you wrote that, "...the average charity CEO makes $150,000 in this country. That's plenty." Clearly, you set arbitrary caps in your rhetoric, and you set them pretty low. It would be like me setting compensation minimums. I don’t, because I believe in freedom - free enterprise.

Ironically, this setting of caps is at odds with what the Charity Navigator website said itself at the time. It clearly tied compensation to the size of the enterprise: "...we encourage you to look at CEO compensation as a percentage of total expenses. A charity CEO compensation of $200,000 for an organization spending $20 million per year (1%) probably seems much more reasonable than the same salary for a $1 million organization (20% of expenses for one person)."

More ironic still, Charity Navigator’s tax returns report that in 2006, you earned 14% of expenses. The head of another watchdog, the Better Business Bureau Wise Giving Alliance, earned $180,104 against $1.5 million in expenses, or 11.5%. The head of another, the American Institute of Philanthropy, earned $104,829 against just $372,563 in expenses, or 28%. If each of you were paid 1% of expenses, as the Charity Navigator site suggested is reasonable, these salaries should have been $10,000, $15,000 and $4,000 respectively.

In 2006 Gail McGovern, CEO of the American Red Cross, earned $565,000 against $3.4 billion in expenses or 0.02% of expenses. According to you, she should go into the for-profit sector and the Red Cross should find someone for around $150,000 per year to run their $3 billion operation. And yet you would lecture me about fiduciary duty.
Ken, there is a tendency toward contradiction in your rhetoric overall. You were on Youtube in 2009 telling people that, "We want to help you make sure that your giving is as effective as possible, so that you can give the most money you can to the best charities out there...The best charities out there, from our research have 75% or more of every dollar that you give going to program services.." Yet at the same time your website stated that, ‘At this time, evaluating the effectiveness of a charity's programs is out of our scope.’”

Now on to the merits.

• You write that, “There is absolutely no credible evidence that nonprofits that pay outlandish compensation do any better job at bringing about positive changes for those they exist to serve than do programs that pay more modest amounts.” First of all, “outlandish” implies not-correlated-to-value, which is not at all what I advocate. But that aside, actually, the whole of economic history speaks to the fact that, anomalies aside, people who can command higher compensation generally do so because they produce greater value than others. They are less transferrable, less replaceable, and less fungible. You actually refute your own argument in your blog by stating, as I mentioned above, that, “for the CEO of an organization that serves local youth in a small city to look longingly at the million dollar salary earned by the head of a large “nonprofit” hospital in a large metropolis, and say “Why not me?” is ridiculous.” It is ridiculous because one is worth more money than the other, and one is worth more money because he is providing more value; running a larger organization, growing a larger organization, etc. Indeed, the evidence against your argument is rampant - across the board, larger nonprofits pay their leaders more than smaller nonprofits. They have to in order to find talent capable of running them. You offer no evidence on why that value equation stops working at a certain compensation level.

Has either of you ever run an organization with 400 full-time employees, as I have? Have you sat there and filtered through the type of talent that is available at the $300,000 - $400,000 ranger, versus the $100,000 - $200,000 range? The differences are startling. And do you really believe that “greedy” corporations, that are only interested in profit-making, are wontonly throwing profits down the drain across the board by paying people salaries much higher than the value they produce?

You use Wall Street executives as straw men. It’s weak argument. For every overpaid Wall Street executive, there are a a thousand for-profit CEOs earning their keep, and governed by boards that make sure they do, in everything industry from technology to agriculture to pharmaceuticals to manufacturing.

Forbes just released their list of the wealthiest Americans. Bill Gates is worth $54 billion. Michael Bloomberg, $18 billion. Jeff Bezos, $12 billion. Larry Page, $15 billion, Steve Jobs, $6 billion. Eli Broad, $6 billion. Do you not think that any one of these geniuses could transform a humanitarian organization? And do you think for a moment any one of them would consign their economic horizon to a $500,000 annual limit in perpetuity? And yet you would ban them all from the work of social change, without asking a single soul who is actually in need of the social change for their opinion on the matter? Your opinion is enough?

• You write that, “the problem is actually that too many nonprofits and governmental agencies are and have been trying things that simply don’t work.” Might that not be because they don’t have the right leaders? That’s certainly where I would start looking if things aren’t working.

• You have entitled your blog, “Money Isn’t Everything.” If money isn't everything to you gentlemen, that's fine, don't ask for any more of it. But don't impose your views on those people for whom money might have more importance. And don't deny the organizations that might benefit from them their talents. And don't let the clients whose suffering might be alleviated by their leadership and ideas continue to suffer. It's not up to you. it's up to the donor, the client, and the leader to decide if the value proposition makes sense. To believe you should unilaterally impose your will on a million unknowable situations is narcissistic. I don't mean that as any personal attack.

• You write that, “We and many other experts have long advocated that best practice for the nonprofits is to base executive salaries and benefits upon an objective compensation analysis of similarly sized organizations within the geographical and cause area they occupy.” This is fundamentally flawed thinking.

What if an organization has decided to hire a leader at a much higher level of compensation because it no longer wants to match up? What if the organization wants to pay enough to get a leader that could help it grow dramatically? What if its people actually have some aspirations? Leadership compensation levels should be set in alignment with our aspirations, not in alignment with the absence of them.

To this I imagine that you might argue that potential leaders should have some skin in the game — that their compensation should not go up until they have proven themselves. The problem with that argument is most of the people we would want already have proven themselves (indeed that is the reason we would be interested in them in the first place) and are already earning, in the positions in which they have proven themselves, at least the compensation we would need to hire them away. They don't need to put any skin in the game. At some point, they already did.

When a business wants to acquire a leader it offers a compensation package higher than what its competitor is paying to lure the person away. When a humanitarian organization wants to attract that same person, under your logic, the candidate should accept a lower salary and work his or her way back up. Never mind that the person will never accept this proposal.

For-profit businesses set their sights on who they want and pay to acquire them. You would have nonprofits sets their sights on a pay range designed to ensure that they attract no one worth any more money than any of their same-size peers and then sort through the available candidates.

• You write, with respect to nonprofit effectiveness, “WRONG! It is not ‘how hard they work’ or ‘how hard they try’ that matters; rather, it is what they are accomplishing!” Again , this is fundamentally flawed thinking. If all we measure is effectiveness we will create a market of organizations working on the problems that are easiest to solve, because that’s where effectiveness is easiest to achieve, as Sean Stannard-Stockton has pointed out. There’s enormous subtlety here, and, Ken, as the head of the largest of the watchdogs, I really encourage you to wade into it. It’s important stuff. On this point I will quote Sean here at length, from his piece in response to the Corporation for National & Community Service’s Draft Notice of Funds Available (NOFA) for the Social Innovation Fund:

“The draft NOFA seriously overestimates the availability of conclusive evidence [of effectiveness]...The model subgrantee should not be an organization that has rigorous evidence of program effectiveness. The model subgrantee should be an organization that actively collects information about the results of its programs, systematically analyzes this information, adjusts its activities in response to new information, and has an absolute focus on producing outcomes...Just this week, the CEO of the Edna McConnell Clark Foundation, one of the premier evidence-based grantmakers, wrote that ‘Most nonprofits, including a majority of the Clark Foundation’s grantees, do not yet have convincing quantitative evidence of their programs’ effectiveness.’ We must not pretend that the nation is filled with nonprofits whose programs have been proven effective. The lack of evidence that the NOFA mentions as an exception is in fact the rule. The opportunities to make investments in proven effective organizations are few and far between.”

• You write with respect to compensation that, “Actually, a certain level of ‘economic sacrifice’ (rather than millionaires in the top 1% of the population, our poor nonprofit leaders must settle for the top 10%!) is appropriate and those donating are due the consideration of fiscally responsible management. The net gain to those who make such a sacrifice is the satisfaction that is gained in helping others and fulfilling a very important social mission.

You’re talking about what I call “psychic benefit.”

Do you really believe that no one makes a difference in the for-profit sector, and that there is no psychic benefit associated with careers there? What about the people at drug companies working on cures for disease or the people who build the Toyota Prius and the Smart Car? What about the people who publish The Grapes of Wrath, distribute the cell phones that are revolutionizing Africa, or build the iTunes University software that brings Ivy League lectures to people at all socio-economic levels all over the world? Not to mention the less sexy industries that make it possible for us to heat our homes (and our charities), power our lives and eat.

Many people in the nonprofit sector never get to visit a village in Africa or treat a sick child. They work behind the scenes in cubicles, they file files, they beg donors for money, they sit in interminable departmental meetings — just like employees everywhere. They're far removed from the psychic benefit that's supposed to substitute for half of their paycheck.

Most nonprofits are small and starved for capital, preventing employees from fully capitalizing on their personal potential. Nearly every good idea is met with a dearth of resources, a prohibition on taking risk, or a broken donated computer. Whatever psychic benefit that theoretically might have accrued from putting those good ideas into action is outweighed by the grind of shoestring budgets and overstretched systems that is the reality.

In 2003 BusinessWeek surveyed the compensation packages of MBAs 10 years out of b-school. The median compensation package with bonus was $400,000. By contrast, the average 2004 salary of the CEO of a $5 million-plus health charity was $232,000 and of a hunger charity, $84,000. There's no way you're going to get people with a $400,000 annual pay package to take a $316,000 annual pay cut on the basis of the psychic benefits that await them.

Instead, consider the enormous psychic benefits that people in the for-profit world enjoy as philanthropists. Think about this: It's cheaper for the MBA to donate $100,000 a year to the hunger charity than to go work for it. She gets $50,000 in federal and state tax savings, which leaves her $266,000 ahead of the game. On top of that, she gets a seat on the board of the hunger charity; indeed, probably chairs the board. She now gets to supervise the poor bastard who's running the hunger charity. She gets to dictate his strategy and how he goes about executing it. And if that weren't enough, the MBA is now elevated to the status of respected philanthropist in the community (while the hunger charity CEO gets demonized at the annual board meeting for wanting a $10,000 salary increase — "shame on you, that money could be going to the needy," they tell him). And, with a $100,000 annual contribution to the hunger charity, at some point the "philanthropist" gets her name on the top of the charity's headquarters. And maybe she loves her for-profit job on top it. Sounds like an awful lot of psychic benefit to me.

• You write that, “our annual Compensation Study indicates that mid to large sized US based charities on average provide a six figure incomes to their leadership.That is in the top 10% of wage earners in the US and quite a comfortable standard of living.” The Steve Jobs of the world are in the top .0001% and those are the kind of people we need to start attracting if we’re going to achieve the big dreams we would all love to see become real in our lifetime. It’s not about what constitutes, in your opinion, “a comfortable living.” It’s about competing with the for-profit sector for the cream of the crop.

We face social problems of massive scale. We need enterprises of massive scale to confront them, and on that front, I tend to agree with you that there are too many nonprofits. More sophisticated leadership might achieve the kind of merger and acquisition market we currently lack that could address some of that problem.
That aside, let me close with this stat from George Overholser and Sean that is at the crux of the matter of scale - the number of nonprofits that have crossed the $50 million annual revenue barrier in the four decades since 1970 is 144, while the number of for-profits that have done so is 46,136. Anyone who believes that the caliber of leadership doesn’t have anything to do with that statistic has some serious shortcomings with respect to their knowledge about the role that leadership plays in organization. And anyone who believes that there is no correlation between the compensation a leader can command and the value that that leader produces has some serious shortcomings with respect to economics.