If we have said it once…

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Expert Perspective by Grahall’s OmniMedia Editorial Board

If we have said it once we have said it a thousand times: when allocating one of your most scarce resources (that would be cash for rewards) don’t target pay solely on how an individual performs, but on how important that job is to the success of the enterprise. The more important the position, the higher the possible (and actual) rewards should be.  Attracting and retaining top talent and high performing individuals to the most important jobs in your organization is critical to lasting success. Using this approach in your Total Rewards strategy may actually lower costs of attracting and retaining average individuals. Any incremental increase in compensation cost allocated to truly high performers in critical positions will be more than offset by the business results achieved through their greater output.

Ok, so why are we on our soapbox about this?  It is in reaction to the article by Stephanie Strom published in the New York Times on July 26, 2010 )Lawmakers Seeking Cuts Look at Nonprofit Salaries).  Strom quotes Ken Berger, President of Charity Navigator, an organization providing research and analysis of nonprofit groups as saying: “Many donors feel that paying the leader of a charity a six-figure salary is outrageous.” Strom continues saying “Mr. Berger disagrees with the argument, popular among many nonprofits, that to attract top talent to manage complex organizations, they must compete with for-profit businesses.”

We disagree with Mr. Berger. Not only must not-for-profits (NFPs) compete with for-profit (FP) organizations to attract qualified talent, but also they must compete to avoid losing experienced and successful leaders to FP businesses. Remember, the lion’s share of NFP Board members are in FP businesses and are always on the look-out for talented managers!

Like shareholders of FP companies, donors to NFPs want to make sure that their “investment” is appropriately managed, and the best leaders can help to ensure this.   The biggest challenge to NFPs in terms of competition for talent is that they have only salary and bonus – essentially cash – to use as an incentive to attract and retain their critical staff.  Whereas FP companies can offer long term incentives in the form of stock options.   Not surprisingly, because of this as Strom writes: “Most charities pay their leaders far less than corporate executives.”

As we have mentioned in a few blogs, most recently in our blog Innovation distinguishes between a leader and a follower: Steven Jobs: the most talented individuals in positions that have a large degree of discretion about how they perform their job (and being an executive of any organization would certainly qualify) can produce as much as four times the value of an ‘average’ worker in that same job.  The best part of this for businesses is that you don’t have to pay these high talent workers 400% more.  In fact based on compensation surveys, just 25% to 40% increment in total rewards is all these high performers require. So it would be a very good outcome for any organization (FP or not) to attract and retain the best people for their most critical jobs.

Some of these NFP’s noted in Strom’s article are big organizations with sophisticated structures, needing highly qualified leaders to navigate solutions to complex issues. In fact, like the “brough-ha-ha” over FP executive pay, what politicians, the press and the public overlook is that it is a very small number of companies who appear to have overpaid their executives. Second, the issue of pay is less about what one person is paid, but how overall pay is allocated. 

Like all scare resources, compensation must be allocated in a way that will optimize the potential success of the enterprise and support the business strategy.

We are not arguing for inflated pay for NFP’s (or for FPs for that matter). What we are championing is a rational view that recruiting a high performing individual into a critical position will provide an organization with unique opportunities and advantages. When the position is critical to the success of the enterprise, it is best filled by the most competent individual available.  And therefore, NFPs should not artificially limit the market for critical talent to just other NFP’s.

This debate reminds us of the uproar surrounding the payment of millions of dollars of compensation to the investment team for the endowments at the Harvard and Yale Universities. Both investment teams built billions of dollars of additional wealth for their endowments (often compounding at rates above 15% per year).  Less effective investment teams might have commanded a lower compensation, but if these “average individuals delivered “average” results, the endowment assets might have been many millions of dollars less in value.

The situation for CEOs of large NFPs is similar.  Hiring an average performer could “cost” the NFP many more times their compensation in lost donations, for example, or in diminished business performance.

Before we question any one individual’s pay it would be wise to consider all the implications. Inquiries are important, but informed inquiries are better than the alternative.

Contact Grahall’s OmniMiedia Editorial Board at edie.kingston@grahall.com

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