Malcolm Burrows recently wrote a very thoughtful article for the September 2010 edition of Gift Planning in Canada on C-470, the private members bill to cap salaries at registered charities and to force charities to disclose salary information on the top 5 employees irrespective of their earnings. I have received permission to reproduce the article here and thought that some who are interested in compensation and HR practices in the charitable sector would find it useful.
Bill C-470 and the Backlash Against Fundraising
The charitable sector’s response to Bill C-470 is a bit like a weighty, serious newspaper swatting at a buzzy house fly. The fly - in this case a private members bill in Parliament to require a $250,000 salary cap for charity employees and disclosure with names and numbers of the top five salaried employees - is so unnecessary, uninformed and politically opportunistic that it should be easily crushed. But this fly continues its erratic flight path through the political process.
The fly is fuelled by negative public perception of charity fundraising. While the draft legislation targets all charities and employees with any job description, the underlying complaint is excessive compensation of fundraisers. The charitable sector has responded with sound and sensible arguments, but there is a political reluctance to kill something that has deep populist appeal. As a result, Bill C-470 has become a symbol – a warning for charities—that is far more significant than its actual content. And like all good symbols it is packed with emotional weight and open to interpretation by commentators of every stripe. Let me provide you with a bit of background and then comment on the phenomenon of Bill C-470.
The Bill & Politics
Bill C-470 is a private members bill introduced by Albina Guarnieri, Liberal member for Mississauga East - Cooksville, in October 2009. The bill proposes two new regulatory requirements for registered charities in the Income Tax Act. 1) Canadian registered charities would have to report “the name, job, title and annual compensation of the five executives or employees with the highest compensation.” 2) A salary cap that would enable the Minister of National Revenue to revoke registration if a charity “pays to a single executive or employee annual compensation exceeding $250,000.”
The bill was first introduced in the House in October 2009. The first debate occurred at second reading on March 15, 2010. At that time a few things became clear. First, the bill was triggered by the media reports about the CEO of Sick Kids Foundation in Toronto, Michael O’Mahoney, who departed under a cloud in early 2009 with a $2.7 million compensation package. Sick Kids, which no politician would criticize but many made clear to name, seemed to be the sole rationale for the bill. It may be a well-known and loved charity, but it is hardly representative of the sector in terms of scale or compensation.
In Guarnieri’s world charities are primarily supported by donors, when in fact registered charities as a group receive less than 13% of revenue as a group from donors. “Every year, Canadians dig deep into their pockets to contribute billions of dollars to some 85,000 registered charities,” she said. “Most of the donors are far from millionaire philanthropists. They choose to make a financial sacrifice for what they hope is a worthy cause. They choose to save less for their retirement, their own children’s education or some other personal investment or expenditure because they believe their dollars will be put to a higher purpose: helping sick children, aiding the poor and curing disease.”
The beauty of charities within the political process is they are easy to represent in emotional, self-sacrificial terms. It is effortless to play on fears that the goodwill of donors is being abused by charity misrepresentation or greed. It is hard to present the breadth and complexity of the charitable sector and simple to tap into romantic ideas that all charities are operated by volunteers for pennies on the dollar. Fundraising is the activity of charities that the public is most aware of and most likely to have an opinion on.
Ironically, the number of fundraisers receiving an annual salary in excess of $250,000 is probably quite small. Based on my review of CRA data, the list is most likely populated by doctors, professors and executives. Yet Guarnieri’s comments in the House of Commons make it clear that she is not targeting every charity employee that receives over $250,000. The implication is that there are employees worth paying for, and employees that are not, and fundraisers fall into the latter category. The political rhetoric is focused on fundraisers because that’s where the political capital will be earned among the electorate.
“We know that 2,147 individuals earn more than $120,000 a year at charities,” reported Guarnieri. “We do not know how much more. We can suspect that it might be a lot. We can suspect that because the average salary at charities is $71,000 compared to only $51,000 in private business.” If you want to spread fear, start with real tax data and then throw in an unsourced and unsubstantiated pseudo fact about the average salary at charities. Sub-text: the average fundraiser is getting paid much more than real contributors to the Canadian economy.
The government initially opposed the bill. On March 15th, the Conservative government (rightly) defended the measures in place to regulate the charitable sector and opposed the bill. Conservative MP Ted Menzies comments on behalf of the government were well informed. Charities are already required to report top ten salaries by range (top tier is $350,000+), but not include names. Menzies emphasized the diversity of the sector and the fact that the majority of registered charities have annual revenue under $100,000 and most are volunteer run. At the other end, there are government supported entities such as universities and hospitals with budgets over $1 billion per annum. Representatives from the other parties indulged in some rhetoric about betrayal of donor/taxpayer trust and more talk of fundraisers, but it was just usual democratic posturing. Most private members bills go nowhere. This one seemed to be a prime example.
But by April 21, when the House referred the bill to Standing Committee on Finance for further consideration, it became clear that the mood on the Parliament Hill had changed. Government opposition melted away and reasoned scepticism had turned into all party blessing. The bill touched a populist nerve about charities and fundraising, and to kill it in public could have negative political implications. This is when the bill became a source of considerable concern for charitable sector.
The charitable sector has responded in a thoughtful way. Imagine Canada prepared an excellent retort to the bill. In addition to educating politicians about the true nature of the majority of the sector – where under compensation is the bigger issue – Imagine tackled the harmful effects of the salary cap. The issues raised range from points on governance, contractual consideration, and the argument that no other sector in society has this kind of cap. Imagine also observed the cap would be fixed in the Income Tax Act, making inflation adjustments difficult. On the issue of salary disclosure by employee name, Imagine notes that small charities would have to report their top five salaries, even, for example, if they were all under $40,000. (All materials are posted on the Imagine Canada website.)
The Canadian Bar Association made a 14-point submission that covered much of the same ground. This submission also pointed out that salary caps would encourage non-transparent compensation structures as organizations seek to get around the rules. Also, in other fields salary disclosure have the paradoxical effect of pushing up the average salaries, not reducing them.
Both briefs are strong and make a good case for the safeguards in the current system. Both briefs are scrupulous in describing the effect on all charities – and especially the larger ones – while avoiding any mention of fundraising. For the most part, the sector is presenting a coordinated face. One of the university groups (who shall remain nameless) reportedly floated the idea of an exemption for their members, which is unconscionable, but pragmatic. This isn’t a battle that universities or hospitals want to fight. But generally the charitable sector has been telling a consistent story, until Dan Pallotta decided to write an editorial in The Globe and Mail on September 6th.
Pallotta Weighs In
It is remarkable that Dan Pallotta, the U.S. fundraising consultant and self-styled maverick author of Uncharitable, would weigh in on this seemingly obscure private members bill in Canada. Pallotta is a big gun who has never commented on Canadian legislative matters before.
Pallotta is the “it” man in the movement to bring business practices – innovative thinking, scale, marketing and juicy compensation – to charities and fundraising. Uncharitable is a rallying cry about how the frugal, righteous ethos of charities gets in the way of social progress. He is the guy behind the multi-day experience fundraising events, such as walks for breast cancer, rides, etc. He has a Harvard Business Review blog and a vaguely messianic profile. He is a brilliant and imaginative fundraiser – and a good businessman who seems to be making a nice little fortune from his entrepreneurial activities.
If Albina Guarnieri was to invent a fundraising bogeyman, he would look a lot like Dan Pallotta. This is rather ironic, since rhetorically Pallotta sounds a lot like Guarnieri. Both wrap themselves in the cloak of good causes. In the finest tradition of the “end justifies the means” argument, they defend a higher good, which is supposed to make any of position sound.
“Do we wish to see the end of breast cancer in our lifetime?,” Pallotta asks, quoting one of his own fundraising pitches. “Would we like to see the day when no child has to worry about dying of leukemia? I know the perfect way to prevent any of these things from happening: Maintain our antiquated ideas about charity compensation.”
To Pallotta pay seems to be everything. If charities don’t pay they will lose talent. If charities can’t pay they won’t be innovative or effective. It is bit beyond me how after Enron, Lehman Brothers and AIC – to mention but a few noted corporate failures where leadership wore golden handcuffs to bankruptcy – Pallotta can so blindly equate compensation with excellence. As Malcolm Gladwell has pointed out in his article “The Talent Myth”, high-priced talent is often a recipe for trouble.
“We’ve tried the deprivation strategy with executive pay in charities for a few hundred years. It isn’t working. We’re not moving the needle on social problems,” writes Pallotta. I agree that there is a problem with the poverty ethos in the charitable sector, the lack of core funding, and the poor compensation, but embracing high compensation is not the answer.
The other point that Pallotta makes is that charities just aren’t effective. He says: “what makes a mockery of the concept of charity is the abject lack of progress that derives from our dysfunctional ethic”. That’s a huge sweeping statement. There are effective charities and ineffective charities – just like businesses. We have made impressive progress in certain areas and could do much more in others. This wholesale dismissal of the contribution of charities reflects either a lack of knowledge of history or a personal agenda: if you have something to sell, create a problem. He seems to be blind to the progress made by traditional charities—and the civil or voluntary sector – in the past and present.
The idealism and commitment of the people working and volunteering for charities makes the charitable sector strong and resilient. Charities exist for their mission, which we need to serve. I believe that values are more important than compensation, even though charity compensation should be fair and reasonable. I’ve worked at charities and I’m employed by one of the world’s most successful banks. In my experience compensation is not the only motivator or indicator of success.
Pallotta’s perspective represents a view that is gaining ground in the voluntary sector. I appreciate the debate, but I worry that the world according to Dan Pallotta – in its pure form – is less about advancing charity than it is about selling to charities. And that is why his column is a gift to Albina Guarnieri. As one charity colleague commented, Guarnieri only has to read Pallotta’s column in the House of Commons and C-470 will pass by a fat majority.
Head, Philanthropic Advisory Services
Scotia Private Client Group
This opinion piece originally appeared in the September 2010 edition of Gift Planning in Canada.
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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.