Follow by Email

Saturday, September 14, 2013

Charitable Giving and Overhead

Just watched Dan Pallotta's TED talk on the subject:  http://www.ted.com/talks/dan_pallotta_the_way_we_think_about_charity_is_dead_wrong.html


He's unhappy because his AIDS ride charity got cut by its sponsors, because they had an overhead rate of 40%.  His point seems to be which would you prefer -- a bake sale that makes $71 with 5% overhead, or an organization that pulls in $71 million with 40% overhead.  And of course, after they cut him (and apparently 350 employees) and reduced overhead, the rides started pulling in a lot less.  He pointed out that someone with an MBA from Stanford is typically making about $400,000 a year after 10 years, and that's more than the CEOs of charities make.  So how are we going to "attract" all these Stanford smarties to bring their brilliance and creativity to the running of charities if we don't compete with what they would make in the private sector?

After a while I got very tired of his sanctimonious attitude and illogical examples.  The basic problem is that I only have a certain amount of money I can spend on charity every year.  For a charity where the idea is to funnel money to a certain cause, I don't like the idea that if donate $10, only $6 goes to that cause.  If there is another cause that I value just as much, which only has 20% overhead, I'll donate to that, because then I know that more of my money goes where I want it to go.  Yes, I understand that the $4 lost to overhead in the first place goes to valuable stuff -- funding brilliant CEOs, paying for advertising, and paying the salaries of those 350 employees -- all of which will help them raise more funds from more and more people.  So in one sense, my $4 is leveraging itself by financing more fundraising -- quite possibly for every $4 I spend on overhead, they manage to reel in another $10.  If that's the case, I can pat myself on the back and say that I was actually able to effectively donate $12 by donating only $10.

I think that's the way Pallotta is looking at it. But I don't think that's the right way to look at it, unless, of course, there's only one charity you have an interest in.  Charities don't produce anything that people buy (i.e. they don't produce products that can then be sold for a profit).  In that sense, they are only a cost, nothing more.  If everyone has only X dollars to spend on charity, then the more money that goes to overhead is just lost.  He gave statistics that suggested that charitable giving was currently 2% of GDP and that's what it has been for a long time.  Assuming that's just a constant - that's what people are willing to give, then the charities that have higher overhead are simply taking potential contributions away from the ones that don't.  In other words, in a world where the average charity overhead is 40 percent, then only 1.2% of GDP actually goes to the people who need it (i.e. the hungry people or the cancer researchers).  If the average is 10%, then 1.8% of GDP does. That's why I pick lower overhead, and why I think you should too.  If charitable spending is constant, which Pallotta's statistics seem to say that it is, the only thing we do by having the Stanford smarties take over charities is that they will lure charitable dollars from other, lower-overhead causes, essentially to pay their market-rate salaries.

As I've said before, people who make over $400,000 a year or so are skimmers.  They are not truly creating that kind of value by their hourly work -- they are simply near a torrent of cash and are able to skim some of it off, or even employ tricks to increase or preserve the flow.  And they have to live with themselves and their consciences when making that kind of income causes them to place the interest of their company over more universal interests, like the environment or their customers.  There's no justification for paying charitable CEOs the market rate for CEOs, just as there's no justification for paying government employees (e.g. agency and department heads, or federal judges) the market rate for private sector employees.  In both cases, it's like comparing apples to oranges.

The people who ought to be CEOs of charities are the former CEOs of big companies, who don't need to make the big bucks anymore, but want to compensate for all the damage that they might have done to the environment, or all the ways they might have cheated their customers, back when they were in the private sector.

Anyway, Pallotta was impassioned and he got a standing ovation from the TED crown.  Maybe I missed something.

As a taxpayer, I resent the 40% overhead crowd even more.  If someone in the 30% bracket donates $100, they can realize a $30 tax deduction.  Again, assuming that total charitable contributions are fixed, I'm sure taxpayers would rather give the deduction in a case where $80 or $90 of the $100 contribution went to charity, as opposed to merely $60.  At $60 (i.e. the 40% overhead rate), it's almost a matching system -- the government is contributing just as much to the charity as the individual. 

No comments:

Post a Comment