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Humanitarian organizations and corporations alike should let the talent drive the compensation, says Dan Pallotta
Posted on Harvard Business Review: January 21, 2010 2:42 PM
The typical humanitarian organization sets executive (and staff) compensation by sampling other organizations of similar size (as measured by annual budget) and then matching what they find. It wouldn't occur to most of them to do it any other way. This is a terrific practice if you have no significant growth aspirations for the organization. It's also is a terrific paradigm for keeping social conditions the same for a very long time. If we want social change to occur at the pace of molasses, we needn't change a thing. We have a system that runs at that precise speed. It reinforces stasis.
The IRS and the states attorneys general enforce the practices of this system. Their test for whether an organization is paying someone too much is to look at other organizations of similar budget size and see if the compensation levels match up. There's only one problem with this. 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?
Nonprofits have compensation-setting practice backwards, and it's time we put our practice in reverse. We must begin setting leadership compensation levels in alignment with our aspirations, not in alignment with the absence of them.
Critics will say 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.
Notice again how different the humanitarian sector's approach is from the for-profit sector's. 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, the arrogant and clueless argument is made that 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. By contrast, it wouldn't occur to the humanitarian organizations to set their sights on the kind of leaders they would want if they gave themselves permission to dream a little bit—superstars with breathtaking track records who could quadruple their size in five years. Rather, nonprofits sets their sights on a pay range designed to ensure that it attracts no one worth any more money than any of its peers and then sorts through the available candidates. And this practice has gone on for decades.
Is it any wonder then that 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?
It's time to stop asking what's permissible and start asking what's possible. It's time we let the talent drive the compensation, not the compensation drive the talent. We must rewire our thinking for a new age with new challenges. Compensating to social norms is a betrayal of our missions. To be true to our missions is to hire to our highest aspirations, and offer whatever compensation their fulfillment requires.