In monday’s The Globe and Mail, they ran a column/editorial by Dan Pallotta on the proposed salary limits for charity executives.
However, Mr. Pallotta’s background is not told to the reader, other than that he is the author of Uncharitable. No information about the book itself is given either.
Let me fill in the missing information:
In his groundbreaking new book, Uncharitable: How Restraints on Nonprofits Undermine Their Potential , Pallotta makes the case that the nonprofit sector needs to be deregulated so that it can directly harness the energy of capitalism and the profit motive in pursuit of philanthropy.
This is Pallotta’s cause du jour. This needs to be relayed to the reader so they can adequately judge who is doing the writing.
Now, his editorial has some flaws of logic. He is assuming, as many do, that increasing monetary rewards increases motivation, effort, and quality. This is wrong. Study after study has shown some simple facts: money only improves the speed of rote physical tasks. Anything that involves creative thinking, processing, or problem solving, monetary rewards actually make people slower. It also the quality of the output as well. Further studies showed that when you pay people just enough to take money worries off of the table, people work for intrinsic benefits. They want a sense of challenge in their work. They want to impress their peers. They want purpose and interesting challenges.
Pallotta needs to take a look at this research, and see how he can use it in charities. Pay the employees, not just the executives, enough that they don’t have to worry about money. Give them challenging problems. Let them impress their peers. Let them take ownership of the problem, rather than following the dictates of a CEO that is paid 100x more than they are.
Thats another part of the research that shocked people, especially researchers at Harvard. When someone is paid comfortably, and then they see someone being paid more, for what seems like the same work, then money worries become an issue again, and block effort and motivation.
Instead of placing a direct cap on CEO compensation, what should instead be done is to limit pay to a flat multiple of the lowest-paid full-time employee. Say 10x? That means janitors, which make an average of $30,000 a year, would set the limit at $300,000 for the executives. This motivates the CEO to pay his employees better. But due to the number of employees, no board will let the CEO give massive payraises to everyone. The employees, which do all the actual work Mr. Pallotta, are now free to stop worrying about money, and do the best job on their job, while the CEO is paid less.
There is also the fact that Pallotta seems to feel that restricting restricts the quality of the leadership. There is no empirical evidence this is true. For the last 10 years, Harvard economists have not found any link between executive pay, and corporate performance. If anything, there is a slight reverse correlation, where the higher the pay, the worse the companies do.
Mr. Pallotta, look into compensation, rewards and motivations, and pay. You may get some better ideas on how to make charities run better, than spending millions on a CEO. Spending more doesn’t help Wall Street companies, so how will it help charities?