Why is the non-profit sector hamstrung?

Yesterday’s post “Does your non-proft organization make a difference? Americans don’t think so!” introduced one of the main points in Dan Pallotta’s book Uncharitable, which is that non-profit organizations are under-resourced thus have a difficult time driving results and change. Pallotta argues that the reasons for too few resources are cultural, attitudinal and legal. Today, I’ll share with you what this author believes is at the heart of the non-profit sector’s dilemma.

Executive Compensation

If you are a capitalist, then you understand that people are motivated by their self-interests (unless they are Mother Theresa). Money considerations are at the heart of many of these decisions, which hamstrings the non-profit sector because it operates on a completely different wage standard.

For-profit corporations are allowed to pay handsome sums of money for performance, but non-profit employees are expected to work for sacrificial wages. When a non-profit organization is seen by its donors and supporters as paying its executive director too much money, there is almost always a backlash because of this cultural belief that people should not benefit from their “good works”.

This is, of course, hypocrisy and Pallotta does a nice job of calling it out by pointing at the Campbell Soup Company. This food company profits from the sale of its product to soup kitchens and homeless shelters, but those same non-profit organizations cannot pay a competitive wage to its employes. Yes, hypocrisy!

The end result is simple, the for-profit sector cleans the non-profit sector’s clock when it comes to attracting the best and brightest talent and labor. These people go on to amazing jobs in banking, investments, sales, and business. They don’t put their talents to work trying to solve homelessness, cancer or the academic achievement gap.

Marketing & Advertising

For-profit companies invest heavily in advertising. Why? Because it works! It creates demand for products where there was once no demand. In fact, most for-profit corporations will continue to buy advertising until the incremental benefit is zero.

Non-profit organizations rarely buy advertising to build their brand and create demand for donors to invest in their case for support. Typically, when you see non-profit advertising, it is a public service announcement which means it was donated by the cable company or newspaper. It also usually means that you’re up way too late at night because many of those freebie ads are buried during times of low viewership.

Yes, there are exceptions to this rule. I assume that organizations like St. Jude Children’s Research Hospital and the American Society for the Prevention of Cruelty to Animals (ASPCA) pay for some of their amazing advertising. However, most organizations don’t and won’t because donors see it as a waste of their dollars. They generally won’t support it because they want to see their contributions go directly into mission-related activities rather than capital acquisition.

Severe risk aversion

For-profit companies can and do take risks. Sometimes, they take amazingly crazy risks and come close to taking down the entire global economy. Non-profits on the other hand rarely, if ever, take risks.

Economists tell us that “risk” is a necessary ingredient to generating profits and capital, which means it will always be difficult for non-profits to generate the necessary money to fund their mission.

For example, many non-profit organizations would shy away from starting a new special event fundraiser if they were told that the ROI in the first few years will be under 50 percent. Many for-profit corporations would jump at such an opportunity, but charity watchdog groups and donors frown upon this practice and call it wasteful.

Now versus later

Non-profit organizations spend much of their money in the same year they receive it. It is very much a “hand-to-mouth” approach. Why? Donors don’t want to see their contribution squirreled away for a rainy day or used to leverage future capital. Donors want to see their donations put to immediate use by feeding someone who is hungry now or helping a child with their homework today.

Sure, there are agencies who build endowments and have healthy reserve funds, but this is the exception and not the rule.

Return on investment

When you give your money to the bank or buy stock from a company, you expect a monetary return in the form of interest or hopefully a capital gain. However, no such return exists when you give money to a non-profit organization. In addition to laws forbidding key stakeholders from profiting, the idea of making money on a charity is frowned upon by out society.

For-profit companies have the stock market where they can access capital. Non-profits have no such mechanism.

According to Dan Pallotta, these cultural and structural obstacles are what plague the non-profit sector and contribute to its ineffectiveness. I was only able to scratch the surface of his arguments in this limited space, which is why I encourage you to buy his book. While I don’t necessarily agree with all of Dan’s arguments, I do appreciate that he challenges my belief system and causes me to think a little deeper on these issues.

Tomorrow, I will review a few of the ideas that Dan puts out there as solutions.

So, what do you think about the foundational arguments that I outlined today from Dan’s book? Agree? Disagree? Are you angered? Whatever you are thinking or feeling, please scroll down and share with the rest of us by using the comment box below.

Here’s to you health!

Erik Anderson
Founder & President, The Healthy Non-Profit LLC


  1. Erik:

    You have often commented that a non profit must be a good steward of the donors money. How do you reconcile this with non profits taking risks?

    1. John . . . you are very correct, and I am having a difficult time reconciling my strong belief in donor stewardship with some of Dan Pallotta’s points in his book.

      Stewardship is a very broad and oftentimes misunderstood term both inside and outside of fundraising circles. While demonstrating ROI on a donor’s gift is at the heart of this idea, steward also includes things like gift acknowledgement, donation management, donor relations, reporting, recognition, and has even be construed as including organization development, sustainability, and capacity building.

      When stewardship is broadly defined, many of Pallotta’s ideas fall into place. For example, committing the resources to hire a very talented non-profit CEO has a capacity building effect according to all studies. Increased capacity relates to improved ability to achieve outcomes and impact which increases the ROI on a donor’s contribution.

      Pallotta also does a nice job of drawing a line between charitable contributions and investments in his book. Donors who make charitable gifts get stewarded and investors get a monetary ROI and their “stewardship” (if it can be called that) looks very different. There is not enough space here to get into this distinction and I suspect this idea is even still evolving in Pallotta’s mind. I suggest you read the book for a deeper understanding.

      When it comes to RISK, you are right on the money (pardon the pun) with regards to stewardship, but then again Pallotta would argue that there is a difference between charitable donors and what he hopes will be non-profit investers.

      I’m sure this response isn’t totally satisfactory. So, again . . . I encourage you to read the book.


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