Q. Many executives at non-profit organizations are getting gigantic salaries. Is that ethical?
A. In a previous column we wrote about excessive salaries for executives. The truth is that regarding virtually all questions of excessive compensation we should ask the same question: is this person being paid to create value or to divert value? In business, if a manager is getting paid a high salary because he is able to run the business more effectively and get the most out of the company’s resources, there is nothing shameful about it. There are a few talented individuals who have truly remarkable abilities to nurture new products, motivate workers, instill deserved trust in customers and suppliers, and so on. These people deserve a large salary for their sought-after abilities, just as star athletes do.
The problem arises if a person’s remuneration is based on his ability to obtain money for one party by depriving another. For example, if the executive’s compensation is dependent on his ability to dominate the board and subvert the best interests of owners, then he is diverting value — from the owners to himself. Likewise, if he gets paid a fat salary because of success in cheating workers, or suppliers, or customers, or the government, he is only diverting value, not creating it.
Value creation in tzedakah is exactly parallel to value creation in business. Product development in business creates value when it conceives new ways to fill customer needs; project development in charity creates value when it conceives new ways to fill the needs of the needy or the community. Marketing in business creates value when it convinces customers that their money is better spent on their product rather than on some competing use; in charity, the donor (or an appropriate agency) is convinced that the needy person or the wider community really can make best use of the funds. And charity executives, just like business executives, can have a talent for organizing and motivating workers and creating fruitful partnerships with other individuals and organizations.
However, traditionally administrators of public charities in the Jewish world obtained very modest salaries. The reason is clear: any organization tends to attract people of ability who identify with its aims. Those business organizations that are primarily directed at making money tend to attract executives who share this aim and are trying to maximize their own income, just as they work on the job to maximize the firm’s income. Non-profit organizations which are devoted to helping others tend to attract leaders whose main goal is to help others – though of course these leaders also need to earn a decent living and deserve a respectable recompense.
This is not just an expedient result, whereby the organizations “exploit” idealistic employees. An idealistic administrator has an inherent advantage over a for-profit one: the donor can see that he (or she) is practicing the spirit of self sacrifice he preaches. This creates a sense of confidence and trust which is perhaps the most important asset of a charitable organization.
That doesn’t mean there is anything wrong with hiring professional administrators. If the directors of the organization feel that the unique organizational skills of a highly-trained professional who demands a competitive salary are worth the extra money as well as the slight difference in image, this is a perfectly valid consideration. At all times the practical mission of the organization must be foremost, and if one administrator can do a better job then he should be favored.
Fund-raising also is a crucial part of an organization, and it’s not a dirty word. A fund-raiser for a respected organization is not a schnorrer (a beggar); he is a salesman for a very prestigious product. There is nothing wrong with paying fund-raisers a competitive salary either.
However, there is one crucial consideration: transparency. Transparency in remuneration is appropriate for all leading executives, but it is absolutely critical in non-profit organizations. If an administrator is getting a mid-six-figure salary, donors should be aware of this. Likewise, if fund-raisers are getting a percentage, this must be made crystal clear to all donors. Otherwise they are being materially misled as to the use of their donations. In my experience there are major problems with giving fund-raisers a percentage if it is more than a minor fraction (around 20%), but it is not important for me to dictate policy. What is important is that donors have full knowledge of any such percentage relationship, so they know how much of their money is going to finance fund-raising, as opposed to other aspects of the organization’s activities which they may esteem more.
Traditionally, non-profit organizations in the Jewish world have been run by idealistic individuals, who demand a modest salary and for that very reason tend to communicate a sense of dedication and belief. However, there is nothing wrong with hiring professional administrators who demand a competitive salary, if the directors conclude that on balance this will be most helpful in promoting the charitable aims of the organization. The same principle applies for fund-raisers. However, it is critically important that compensation packages for administrators, and even more so for fund-raisers, be made known to donors so that they know what value they are getting for their money.