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Apr 17, 2013

Dan Pallotta misses the point

Dan Pallotta is causing quite a stir in the YouTube world.  His TED talk “The Way We Think About Charity Is Dead Wrong” has received over a million views.  He articulates five ways in which society’s attitudes about nonprofits undermine their social entrepreneurship and thereby their success and effectiveness.  I think he is correct on three and off the mark on two.   For a good discussion of the legal issues related to Pallotta’s five points see Gene Takagi’s Nonprofit Law Blog.

I agree with his concerns with advertising, risk-taking, and patient investing.  But he needs a bit more education on the ways in which private investors can support nonprofit profitable activities.  He also needs to understand the dual nonprofit business model and the role of profit-making activities in nonprofit sustainability.

Where I depart from Pallotta’s views is his putting excessive overhead and excessive personnel compensation into the same bucket.  Pallotta is correct that overhead can be too low.  Overly many government contracts and foundation grants refuse to pay overhead so that nonprofits’ effectiveness is compromised by insufficient investment in facilities, training, and controls, among other essential administrative services.

But he is overly sensitive to the intense criticism he received for the salaries he paid to operate the highly successful walkathons and bikeathons for cancer research.  In his book Uncharitable, he suggests that top talent will work only for top salaries.  He also fails to distinguish between the world of fundraising, which was the sole focus of his efforts, and the world of delivering nonprofit services.  Indeed the competition for effective fundraising professionals can lead to a bidding war.  That bidding war is most visible in higher education.

Pallotta misses the point that the nonprofit sector is a world of blended returns, where financial return is no more important than the social return.  An investor in a social enterprise accepts a lower financial return because the investment will also produce a measurable social benefit such as alleviating poverty, reducing government welfare rolls, bringing the arts to the deprived, providing jobs to people who are difficult to employ.  Investing in a software company or a manufacturer provides minor social benefit so the investor insists on a much higher financial return.

The same expectation of blended return attracts people to work in the nonprofit sector.  Contrary to Pallotta’s notion that top talent requires its compensation to be high salaries, the reality for most nonprofit talent is that they are willing to take lower financial compensation because they demand that a very high social benefit result from their work.  To understand this strong attraction for talented professionals, watch my TEDx video, the New Definition of a Successful Nonprofit.

The question I pose for talented professionals who want for-profit sector salaries in order to work in the nonprofit sector is what is their motivation for taking a nonprofit job?  If a person wanted the same salary working for a real estate developer as working for Habitat for Humanity, I would want to know how much that person values the social benefit provided by Habitat for Humanity compared with that of a commercial developer.  If the person believes the social benefit is the same, then I would conclude that he or she does not understand Habitat’s mission and therefore does not bring the full set of talents and values that Habitat needs for success.  If a job candidate wants the financial benefit of a for-profit salary and the social benefit of the nonprofit, then the job searcher is rejecting the concept of blended return, wanting it all, and asking for more than even the for-profit sector is willing to provide.

Let me talk to your group about ways you can influence donor’s attitudes away from the problems Pallotta describes.  Or let me talk about the successful nonprofit business model and how you can bring it to your nonprofit.