Debunking Charity Salary Myths - Canadian charities and compensation

October 07, 2010 | By: .(JavaScript must be enabled to view this email address) Mark Blumberg
Topics: News, Canadian Charity Law, Ethics and Canadian Charities

Here is an excerpt from an article entitled “Debunking Charity Salary Myths” from the American Institute of Philanthropy.  This article is particularly relevant to the discussions in Canada about what is appropriate compensation for non-profit employees and Bill C-470.  The American Institute of Philanthropy is a tough US charity watchdog.  Also I have placed an excerpt from an Imagine Canada document dealing with upcoming human resource issues in the voluntary sector.

Debunking Charity Salary Myths

- published in the December 2008 issue of the Charity Rating Guide & Watchdog Report

High salaries should not signal a red light to not give just as low salaries should not signal a green light to give. Charity salary levels ought to be based on the skill, experience and education necessary to forward the work of the organization. Charities compete with businesses and the government for employees and must therefore offer reasonable wages in order to attract, hire and retain competent people. Many charity employees are willing to sacrifice the higher pay in the private sector for the psychological rewards of working for a good cause. But underpaying employees could sabotage a charity’s programs if the only people willing to accept such low wages are unqualified to do the job. Underpaying lower level employees may be more damaging to an organization than paying top level executives too much. Charities that pay so little that they can’t retain their staff waste a lot of money by repeatedly recruiting and training new crops of employees, and losing valuable institutional knowledge in the process.

Knowing that many donors are highly focused on salaries, the decision makers at some poorly performing charities take advantage of this narrow view by keeping staff salaries low, and instead paying millions of dollars to outside professional fundraising companies or expensive consultants. In this way a charity can report certain overhead costs in a lump sum on its tax form rather than tying these expenditures to a specific employee as they would if the same fundraising or management functions were performed by its staff. Donors that are overly impressed with low salaries ought to be aware that F rated charities tend to pay far lower salaries than A rated ones.

Excessive compensation should certainly be avoided. But if a charity official runs a vitally important organization with thousands of employees and a budget of hundreds of millions of dollars, it may be worth it to pay the official hundreds of thousands of dollars. Even smaller charities may run programs that require skilled professionals – such as medical doctors, engineers, lawyers or accountants – and they therefore need to pay large salaries that may appear high to donors in absolute terms and as a percentage of an organization’s budget.

Higher Salary May Save Money

Paying a higher salary to a talented fund-raising employee with pre-existing donor contacts could pay for itself. For example, a charity would be better off paying twice as much ($150,000 vs. $75,000) for an in-person fundraising employee, if the higher paid employee could bring in six times as much as the lower paid one ($600,000 vs. $100,000). The higher paid fundraiser would have a 300% return and the lower paid only a 25% return. This is good for donors because a much smaller share of contributions would need to be spent on paying a fundraiser.

A good question to ask a charity that might appear to pay an excessive salary is whether or not it could hire a qualified worker for less, and show you a list of what people in similar positions are paid at other organizations. According to IRS rules, charities are supposed to consider the pay levels at similar sized and located organizations, either nonprofit or for-profit, when setting pay scales. When comparing nonprofit and government pay, don’t forget to take into account the generous health, retirement and vacation packages offered to government workers that are not often available to nonprofit personnel.

Salaries Are Not Always Overhead

A common misconception about charities is that money spent on employee compensation and benefits is not a program service expense and is not fulfilling a group’s mission. This is absurd since most paid charity workers spend the majority of their time operating programs that directly fulfill their organization’s mission.

This misconception is often perpetuated in the media, as in the following comment from a nonprofit consultant in an August 2008 article in The Atlanta Journal-Constitution:

Donors don’t want to contribute to salaries—they want to contribute to the fulfillment of the [nonprofit’s] mission.”

This consultant is not speaking on behalf of informed donors who understand that charities fulfill their missions primarily through workers that deserve to be paid a reasonable salary. How can nonprofit service organizations care for the sick, educate children or dispense aid in the aftermath of a disaster without employing nurses, teachers or relief workers? Volunteers may not require a salary but they usually require guidance, training and oversight by paid nonprofit employees.

Another false belief about charity finances is that administration
expenses are always overhead rather than program expenses. The following are two examples that dispel this myth: 1) Grant making organizations would not be fulfilling their mission if they just threw money randomly at individuals or groups. An essential part of a grant making program is the paid employees who conduct research, and recruit and screen potential recipients. 2) The compensation of a nursing supervisor is a program expense because she manages the nurses who provide medical care, which makes her an essential part of the program.

“You’re spending 50 percent of my money not toward programs and that’s what I’m giving you money for.” In the above-cited article, this was the consultant’s response to the Atlanta Police Foundation for spending about half of its 2007 budget on employees’ compensation and benefits.

The consultant is wrong again. He is implying that all of the money spent on compensation is not going toward programs. Charities typically allocate their compensation expenses based on how employees utilize their time among program service, management and general, and fundraising functions. This charity, according to its 2007 tax form, is counting 58% of the funds spent on compensation as program services and overall is spending 72% of its budget on programs.
...
Charities have a tough balancing act when it comes to setting employee salaries and benefits. On the one hand they have to worry about offending donors by paying salaries that may be viewed as excessive, and on the other hand they need to pay enough to attract the talented and dedicated people that will allow charities to accomplish their important missions.

“Copyright © 2010 American Institute of Philanthropy.  All rights reserved. Reprinted with permission from the American Institute of Philanthropy.”

The original article is at: http://www.charitywatch.org/articles/salaries.html


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http://www.imaginecanada.ca/files/www/en/publicpolicy/framework_for_action.pdf

Driver 3: Shortage of talent to strengthen and lead charitable and nonprofit organizations

Many of today’s employees and leaders of charities and nonprofits, motivated by a sense of mission, accepted positions with their respective organizations recognizing that the individual monetary rewards, job security or professional development opportunities that they might enjoy in government or in business, might be less certain in the nonprofit sector.

While the next generation of staff and leaders of charitable and nonprofit organizations likely share their predecessors’ strong sense of mission and desire to bring about positive change, they may be less inclined to sacrifice their individual well-being or that of the families they support, to remain within the sector.

Anecdotal evidence suggests that they rightly expect to be fairly compensated for the skills they bring to the sector and to acquire, through their own contributions and those of their employers, professional development opportunities, salary increases commensurate with experience and a pension that will enable them to work and eventually retire without fear of being unable to support themselves or their families.

As Canada’s baby boomers retire leaving fewer employees to replenish their ranks, charities and nonprofits that wish to recruit and retain the best and brightest talent both from Canada and abroad, must respond to these changing expectations and must compete for employer-of-choice status in a market where highly skilled employees will increasingly have their pick of jobs.

Though changing expectations of the sector require it to attract and retain even more highly qualified talent with strong management, financial, information technology and/or legal skills, the vast majority of organizations are not well-positioned given the lower pay and limited salary increases they typically offer as well as the absence of well-funded professional development opportunities and pension plans.

While all sectors are confronting the global race for talent as innovative, skilled professionals become a pre-requisite to success, this is a particularly serious problem for charitable and nonprofit organizations which enter the race at a competitive disadvantage and often nowhere on the radar screen of young graduates both from Canada and around the world.

It is also a serious challenge for society as a whole not only to ensure high caliber talent to lead a sector which generates almost seven percent of GDP and mobilizes more than 12 million volunteers, but also to avert the looming crisis for federal and provincial governments as a growing number of employees in this and other sectors move towards retirement age without the appropriate financial and pension support.

Do you require legal advice with respect to Canadian or Ontario non-profits or charities?

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Charity Lawyer Mark Blumberg

Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.

mark@blumbergs.ca
416.361.1982
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