Making those dollars work

I saw a very interesting TED talk today by Dan Pallotta.  He argues that the way we think about charity is mistaken, in particular that we should only worry about how much money charities make rather than worrying about what percentage of donations are consumed by overhead.  He argues for paying the people working at charities drastically more in order to attract talent and spending a lot on advertising because it increases the size of the charitable pie.  It sounds good at first glance of course because if you can get a great new CEO for $300,000 a year and spend $200,000 more on advertising a year but net $1,000,000 more a year in donations you are $500,000 a year ahead.  Marvellous!

Except when it isn't.  The trouble is that charitable giving is not an infinite wellspring and charities do not operate in a vacuum.  If I donate $100 to a charity that very likely means that another charity is not getting my $100.  That isn't universally true of course as you can redirect money from the for profit sector to charity but an awful lot of the additional money coming in from a highly promoted event is likely to come at the expense of other charities.  On the books of the charity doing the event it looks great but on the books of other charities it looks mighty sad indeed.  The same sort of reasoning applies to paying charity CEOs a lot of money to attract talent.  In theory this would be great if there was actually a strong correlation between pay and talent in a CEO but that simply isn't the case; people making hiring decisions for a top position with very hard to measure performance don't end up with better people when they have a bigger bankroll. (Sometimes they do, but sometimes they get the opposite.)

Also in this case the source must be considered.  Pallotta ran a for profit company that helped charities raise money and has been widely criticized because he was often only returning 10-20% of donations to the charities in question.  That abysmal a return rate is exactly why people want to make sure their donated dollars are going to charities with low overhead.  People are very leery of their donated money getting mostly handed over to pay people to run events, distribute leaflets, design marketing campaigns, and call them at dinnertime.  Many people consider Pallotta's efforts to be little more than a scam and I find myself agreeing with them.

I don't think that overhead percentage is the only useful metric of a charity.  There are many things to think about when it comes to donating money and I completely understand that sometimes charities need to invest in growth and infrastructure to support their activities.  That said I don't think that applying failed models of corporate governance to charities is at all the right approach.  Paying CEOs a ton hasn't resulted in companies all making lots of money and universally good decisions.  Throwing dollars at advertising agencies does no one any good.  Sometimes the need to keep overhead low does hamstring charitable efforts but it does ensure that what we get out the other end is a great return on our dollars and that is what the average person wants.