Nonprofit University Blog

I keep hearing that economic recovery depends upon the return of small businesses to a position of strength.  While nonprofits are, by no means, the largest part of the economy, we are an important factor that everyone seems to want to ignore.  And that just isn’t right.

According to a  Small Business Administration report released in February, there were 27.3 million small businesses (defined as business with fewer than 500 employees).  The nonprofit sector stands a tad below that at approximately 1.5 million.

A 2009 Congressional Research Service report had this to say about the economy of the nonprofit sector:

• In 2005, the nonprofit sector employed 12.9 million people, or 10% of the workforce.  (By contrast, the SBA reports that small businesses employ about half of those employed in the US.)

• From 1998 to 2005, nonprofit employment overall grew 16.4 percent, compared to 6.2 percent for overall employment in the U.S.

• Based on employment, the nonprofit sector is larger than the construction sector and larger than the finance, insurance and real-estate sectors combined, and it has nearly half as many employees as federal, state and local government combined.

• Nonprofits’ share of GDP grew 0.4 percentage points from 1998 to 2008.

A 2011 report from the Urban Institute reported that in 2006, the nonprofit sector contributed $666 billion to the economy, accounting for 5% of the GDP, 8% of the economy’s wages, and nearly 10% of jobs.  Not too shabby for a sector that everyone likes to write off as insignificant.  Imagine the state of our current economy without our sector.  It would be in worse shape than it already is.

So, I ask, why are small business being coddled (which I absolutely do not begrudge) and nonprofits being penalized.  To whit, a rash of actions—some being considered, some already taken—to increase the financial burden of nonprofits.  Here are but a few of my current favorites.

The United States Postal Service, hit hard by the decrease in personal correspondence, on-line subscriptions to magazines and print marketing, is, understandably hurting.  The cost of mailing a letter has increased multiple times over the last decade.  Now, the USPS is considering doing away with the special rate for nonprofits.  Donors, and others, already complain about how much money nonprofits spend on fundraising, mailing letters, sending gifts, etc.  The mailing the letter part was actually a mild expense thanks to the nonprofit bulk rate.  Do away with that, and the cost to raise money will go up.

I lost count of how many of the proposals for reducing the deficit included doing away with the tax break for charitable donations.  Contrary to the knee jerk reaction of many, this would not just have an impact on the million dollar giver, but could effect the small donor—the one who gives $25, $50 or $100—who itemizes her/his taxes.   So, the government earns a bit more income in tax revenue while the nonprofits struggle to keep their doors open.

Practically every major jurisdiction, and a good number of the smaller ones as well, have or are rethinking the property tax exemption for nonprofits.  A number have rescinded the exemption for large nonprofits; others are asking for “volunteer” payments for services used or, as Boston has done, asking for a “discounted” tax payment.

Chicago will soon start charging nonprofits for sewer and water.  California, however, wins the prize.  It is using a law that has been on the books since the 1940s, and taking the retraction of the property exemption to new heights.  The law allows each county assessor to determine whether a nonprofit is exempt or not based on his/her evaluation of just how much a nonprofit does for California residents.  The more a nonprofit does, the more likely to receive an exemption; the nonprofit perceived as doing less for the residents of California doesn’t fare as well.

Headquartered in California but do most of your work in states outside of the golden one or internationally, you’re likely to end up having to pay taxes.  But not always.

The David & Lucile Packard Foundation (which I love), gives just under 1/3 of its dollars to nonprofits in California, and yet it receives an exemption.

Stanford University, with one of the two best schools of business to integrate nonprofits, making me a huge fan, also is exempt, despite the fact that 55% of its student body in 2010 was from out of state.  

Variety, the children’s charity, is headquartered in Los Angeles; there are three chapters in California and 40 throughout the rest of the United States.  Wonder what its County Assessor said?  Besides the obvious of where you do your work, how do you measure “benefit” to California?  The Packard Foundation, Stanford and Charity the children’s charity all bring great benefit to California, regardless of where they do their good works.

Instead of thinking of ways that make it harder for nonprofits, how about we start valuing them for what they do for our communities and our economy.

Why does the scrutiny always get focused on the charities instead of the funders?  Are the latter immune from wrong-doing or questionable-doing?  And I am sure in far too many circles, the mere fact that I’m suggesting that a funder might do wrong is blasphemous and minimally cause for tar and feathering.  After all, look what happened to Rell Grrls  when an employee tweeted about Comcast!  But two different articles, read hours apart, just got me thinking.

Go get the nonprofit!  The New Jersey Division of Consumer Affairs is in the public comment stage on a proposal that would require nonprofits to provide the means for a donor to designate funds for a particular program.  The agency’s concern?  That if a nonprofit has used a specific program as its “come on” in a solicitation pitch, a donor must be able to restrict her/his gift to that program.  No longer would you be able to tell the story of the family fed through your food cupboard and only ask for unrestricted gifts of $25, $500 and $100; you’d also have to add the option of designating the gift to the food cupboard.  (Should this get accepted, it would only apply to nonprofits who “received” $250,000 in the previous fiscal year.)

You go New Jersey! How to make a challenging situation—raising unrestricted dollars, dollars that could pay the electric bill or buy new computers or fix the plumbing or the roof, all of which are essential to distributing food from the cupboard) even more so!   While I have not read the history leading up to this proposed requirement, I can only guess:  some individual gave a gift to a nonprofit and didn’t feel as those that gift was used as s/he wanted, so s/he complained to Consumer Affairs.  And maybe that happened10 times—or even 100 times.  Given the approximate 40,000 nonprofits in New Jersey, we are talking about  .25% of the nonprofits in the state.  And there is nothing to say that these .25% did something wrong; it’s just that the donor didn’t like it.

So, now let’s look at the funders.  How does this just not stop you in your tracks?  “The United Way of Buffalo and Erie County has decided that it will stop charging a 13 percent processing fee on all contributions designated by the donor for a specific charity. ….  In total, the elimination of the fee will free up an additional $220,000 for local charities this year.”  Kudos to the United Way of Buffalo and Erie for reducing its fees and allowing more money actually to go to charities—the purpose for which people gave in the first place.  But this United Way is not the one that charges a “processing fee;” just the only one I have heard of that reduced its fee and told the story publicly.  Every United Way I know charges a processing fee, which is not to say they all do.  Do the donors know that?  Most I talk to have no clue!  Hello, Consumer Affairs?

A day or two after reading about Buffalo and Erie, another United Way reported that it had collected $48 million in its most recent campaign and would distribute half directly to nonprofits and half through its Community Impact Fund.  But how much did it really raise?  I’m betting (and the odds here are 50-50) that the $48 million was what was left after it took out its processing fee. Were all of those donors given the option to designate 100% of its gift to a specific charity or program?  Or were they told we will give 100% minus the processing fee to your designated charity?

Look, I get it.  United Way is in exactly the same boat as all of the rest of the nonprofits:  it, too, must raise or earn operating dollars.  It is the struggle all nonprofits have:  United Ways around the country can no more do their work without computers and electricity and buildings.  Yet, how sexy is it to brag to your chums that you just paid the mortgage for “Nonprofit X?” Much better bragging rights (for donors seeking that) to say, “I just paid to provide dentist visits for ten deserving children.”    So, I am totally sympathetic to United Ways’ need to raise or earn its operating costs.  And, I assume, that the United Ways, and every other funder that raises money to distribute to nonprofits, such as community foundations, throughout New Jersey would be subject to the law/regulation cited above, it passes.  But that is not the point.  Transparency is; as is fairness.

Sometimes we lump the givers and the getters into the same pool, such as the fact that we all have to file some version of Form 990 once a year.  But sometimes—and this is particularly true when it comes to lowering the microscope on practices, questionable or otherwise—we set them apart, suggesting that one is better than the other.

We recently got a request from a smart executive director who wanted to enroll in our Certificate in Nonprofit Management.  She thought it would be a good thing for her, as she could learn new things, get a refresher on old things and expand her network.  But, she didn’t know how to justify this to the Board.  Her request:  did we have any data that showed the benefit of pursuing this professional development opportunity?

What?  Isn’t what she enumerated justification enough?  If need be, however, there is plenty of research out there that demonstrates the value of providing professional development opportunities for employees:  it correlates with greater job satisfaction, improved job performance, improved morale, and more.  But what really got me going is that I know that this woman’s board is predominantly made up of  people from the for-profit world, the world where professional development is as expected and accepted a practice as saying “hello” each morning to your colleagues.  So, why would they be resistant to such a suggestion?

And then I started thinking of all of the practices routinely accepted—no, more than accepted, actually expected—and seen as beneficial in the for-profit world that fail to thrive in the nonprofit sector.  And I have NO answer to the question “Why”?  Except that the nonprofit sector, once again, is seen as a second class citizen and not deserving of all of the rights and privileges of first class citizens!

My examples of expected practices that float easily in the for-profit world and struggle in the nonprofit sector:

1. Professional development:  as noted above, almost de rigueur in the for profit world, is a luxury in the nonprofit world.
2. Interim chief executive officers:  how many major, successful for-profit companies have experienced the benefit of an interim CEO? One who comes in and turns things around, rights the ship, whether that ship was on the verge of sinking or merely needed a subtle move to get out of a shaky current?  Some organizations do need a major overhaul, while others just need a change in perspective, style or personality, for example.  In the for-profit world, an interim CEO is often welcomed as an indication that the board of the organization is doing its job, whether that means it is replacing a CEO no longer right for the times, buying some time to do a good permanent hire, bringing in someone to make needed but painful changes.  Yes, it makes some investors weary, and it is one of the things that stock analysts point to as potential investment risk.  But there are also times when those very same analysts will say that an interim CEO is positive for the company’s bottom line.  I’ve yet to see any advisor or analyst categorically say “No, do not invest in a company being managed by an interim CEO.”

Yet, in the nonprofit sector, far too many funders have policies (and practices that are so entrenched they may as well be policy) that categorically forbid funding an organization led by an interim CEO.  Never did understand that policy, as hiring an interim is one of the signs of an organization looking to improve.  Members of nonprofit boards of directors whose for-profit companies may be being lead, now or in the past, by an interim balk at the notion of putting in an interim CEO at the nonprofit for fear of “what it will say to our donors.”  What? Like we are in charge? We saw a wrong and we righted it? Our executive director left on short notice and we wanted to buy time to hire well? We are losing our founder/long-serving executive director and we need space and time to figure out the new normal before we can hire correctly?  How is it that something seen as so good in one sector is seen as a sign of weakness in another?

1. Competitive salaries:  I almost do not know what to say here as it all seems so obvious!  Regardless of what sector of the economy in which those employed work, all are working to make the communities in which we live and work better.  We need banks and law firms and gas stations just as much as we need social service, education, health care, and arts organizations.  While employees don’t all want the same kinds of jobs, all want to be able to have a quality life style.  Why, oh why, oh why do we think those working in the for-profit sector deserve access to a better quality of life than those working in the nonprofit sector?  Why is competitive compensation such an expected part of the for-profit world and seen as anathema and an affront to the nonprofit sector?
2. Executive and senior level coaching:  This spring, my son, in his last semester of college, started looking for a job post graduation.  He had a conversation with his uncle, CEO of a Fortune 500 company, and asked him, among other things, how to differentiate offers from similar types of companies.  My brother’s immediate response was look for a mentor;  best advice he gave him.  One of my big laments about the nonprofit sector is that we do a lousy job at mentoring, and an even lousier job at providing coaching.  Mentoring is free, and yet we still see it as an intrusion on our time to serve our mission.  Coaching admittedly costs, but it is an investment in the future of the organization and the sector.  For-profits get this ROI and are willing to spend both time and money for the return it inevitably brings. Why don’t we?
3. Strategic planning:  No one likes doing it, but at least the for-profit world doesn’t spend as much time trying to avoid doing it as doing it.  Those in the for-profit sector understand the value and importance of it, the benefit it brings to the organization and its employees, the commitment  it demonstrates to investors.  Strategic planning is taking control of an organization and its future; it is giving it direction, goals and differentiation from the pack; and it is giving the organization and its employees’ confidence.  Without that plan, an organization is blowing in the wind, and anyone who has spent time in a wind tunnel knows that is not a position of strength!  And yet, too many nonprofits see strategic planning as an imposition and a diversion from mission.  With a goal of producing 10% more wickets, that wicket factory is not diverted from its mission, but rather 110% focused on it! With a strategic goal to open 100 more stores over the next three years, that bank is not diverted from its mission but singularly focused on achieving that expansion and doing so in the most cost effective and efficient way.  And yet, more often than not, nonprofits come to the planning process kicking and screaming, cursing the funder who made the strategic planning the stick for the funding carrot, complaining that their board members—many of whom have done strategic planning in their corporate lives—don’t want to give up the time for this insignificant work.  Really?

What will it take for nonprofits to understand that their singular focus on mission may too often prevent them from seeing the trees for the forest? What will it take for nonprofits to embrace what is good about the for-profit sector, and fight for its installation?  And what will it take for board members from the corporate world to stop treating the nonprofit sector with any less care, attention, nurturing—and value—than it does their for-profit world?

It’s late afternoon and I’m sitting on the porch of my sister’s slice of Northern Michigan heaven, working on my computer.  My niece, a freshly minted Ivy League MBA, joins me and asks me if I’m done working.  Almost, I respond, trying to finish a blog post I started before I left on vacation.  But I confess that it no longer inspires me.  “Write about bonuses,” she says.  “How do you feel about bonuses?”

Having just been joined by my sister, an elementary school teacher in an urban public school district, and my brother-in-law, an international attorney, I let the question slide.  In a funny turn of events, my niece had just found out that in the fellowship position she will start in September, working for a nonprofit that supports high-impact entrepreneurs, she is eligible for a 10% bonus.  How much money that meant was up for grabs:  10% of the salary the nonprofit was paying or 10% of the total salary she will earn, paid half by the nonprofit and half by her MBA alma mater?  To put this in perspective, 10% of half her salary would be just a tad more than what I net every two weeks!

So, what didn’t I say in response to her question?  What do I think about bonuses in the nonprofit sector?  They offend me, to be quite blunt.  But they offend me wherever they are offered; they just are offensive and difficult in the nonprofit sector.

Let’s begin with the offensive piece.  In teaching, as the semester starts to draw to a close, it is not uncommon for a student who suddenly realizes s/he has missed a test, not done a paper or chosen not to come to class on a regular basis to approach a professor and ask if s/he can do extra credit to try and bring up her/his grade.  My response is always the same:  you can’t do extra credit until you’ve done the work of the basic credit.  The extra credit comes in doing what is expected of you, but in an extraordinary way.  It is doing work that warrants an A instead of work that warrants a C.  The choice is the student’s.

It should be the same for an employee.  The employer should provide the expectations of work and employees should make the choice as to how to fulfill those expectations.  Those who do A work should be rewarded.  If the culture of an organization is to reward with money, fine; but not with a bonus.  They should be rewarded with a pay raise in the coming year.  If we truly want to thank an employee, support an ace staffer’s good work, we should provide a thank you that keeps on giving, rather than one that is over and done.  A bonus doesn’t increase an employee’s base pay on which each subsequent salary determination is built; only a raise does that.  A bonus doesn’t add to the calculations for retirement contributions; only a raise does that.  A bonus doesn’t say we have faith in your future performance, and appreciate your past; only a raise does that.

By the same token, those who do less than A work should also be given a message of money.  They should not receive raises or, worse, they should receive decreases in salary.  They should be given a plan for improvement and/or they should be let go.  While controversial, Jack Welch’s notion of forced ranking is not just a method for removing an organization’s worst performers; it is also a morale booster.  Those extra-credit achievers, while liking their own rewards, are still annoyed, at best, by the continued employment of those who do not pull their weight or just do C work.

So, go ahead:  if you are a money-based culture, reward.  But do it properly, if you can.  Which brings me to my second problem with bonuses in the nonprofit sector:  finding the money to pay them.  In the eight plus hours since my niece suggested the topic of bonuses, I’ve been playing with that donor ask, and I’ve not come up with a good one.  We all know how hard it is to raise money for the basics of operations—rent, lights, heat, building repairs, etc; thus, we can pretty accurately predict  how the ask for bonuses would go.  If raised income isn’t going to supply the source for bonuses, that leaves earned income.  Unfortunately, though, too few nonprofits have strong enough earned income streams.

Which brings me to my third and fourth problem with bonuses:  they contribute to the great salary disparities so often seen in nonprofits and they can assuage a lot of guilt.  Too often organizations limit the availability of bonuses to the upper tiers of the organization chart.  Yet it is these very tiers that not only offer higher salaries relative to the other tiers but also salaries that tend to be more competitive in the market place.  Bonuses only widen the compensation gap between the top and the rest of the organization and, in so doing, create morale and other problems.

For too many board members, bonuses are a panacea for poor salaries and guilt.  Rather than give a few people a supplemental income boost once a year, organizations should be working to improve their compensation systems for everyone (while simultaneously not being afraid to weed out the under- and non-performers.)  Why, if a nonprofit is willing to adopt the for-profit practice of bonuses, isn’t it first and foremost willing to adopt the for-profit practice of providing competitive, livable compensation?   Before we give the extra credit, let’s give the basics.  Got extra money?  Put it there!