Tuesday, February 23, 2010

CEO Compensation in the "Doing Good" Economy

I've recently blogged and tweeted a few things from Umair Haque and Dan Pallotta, both people I've become familar with through the Harvard Business Blogs.

Well, here's another thought-provoking post from Pallotta, talking about how non-profits compensate their CEOs and how it often runs counter to their own aspirations for growth and impact.

The typical humanitarian organization sets executive (and staff) compensation by sampling other organizations of similar size (as measured by annual budget) and then matching what they find. It wouldn't occur to most of them to do it any other way. This is a terrific practice if you have no significant growth aspirations for the organization. It's also is a terrific paradigm for keeping social conditions the same for a very long time. If we want social change to occur at the pace of molasses, we needn't change a thing. We have a system that runs at that precise speed. It reinforces stasis.

The IRS and the states attorneys general enforce the practices of this system. Their test for whether an organization is paying someone too much is to look at other organizations of similar budget size and see if the compensation levels match up. There's only one problem with this. What if an organization has decided to hire a leader at a much higher level of compensation because it no longer wants to match up? What if the organization wants to pay enough to get a leader that could help it grow dramatically? What if its people actually have some aspirations?

He goes on to make the case that non-profits with big aspirations should give themselves the permission to go after the talent that can make it happen for them--and to pay that talent according to what they may be able to get in the for-profit sector.

For-profit businesses set their sights on who they want and pay to acquire them. By contrast, it wouldn't occur to the humanitarian organizations to set their sights on the kind of leaders they would want if they gave themselves permission to dream a little bit — superstars with breathtaking track records who could quadruple their size in five years. Rather, nonprofits sets their sights on a pay range designed to ensure that it attracts no one worth any more money than any of its peers and then sorts through the available candidates. And this practice has gone on for decades.

What I find fascinating about this argument is the way it seems to run counter to our established notions of an organization that "does good." Read through the comments that Pallotta got from his post and you'll see lots of people taking him to task for suggesting that the talented head of a high-performing non-profit should be paid what the market will bear for his/her services, not what the altruistic mission of the organizations deems appropriate.

But this is where I want to bring in Haque's recent idea that "doing good" is the new measure of success in the for-profit sector. If Haque is right, and more and more for-profit companies are going to embrace "doing good" instead of "making money" as their primary mission, the whole landscape for recruiting CEO talent is going to change radically--with the for-profit and non-profit worlds in much closer competition with each other than ever before. No longer will the altruistic-minded be the exclusive domain of the lower-paying non-profit sector. Thousands of for-profit companies that pay their CEOs substantially more and credibly achieve missions focused on doing good in the world are a game-changer, and the serious-minded non-profit is going to have to find a way to compete or lose the talent war.

And, more interestingly, how will the Millennials perceive this divide? If they’re driving this change towards a “doing good” economy, will they not see the higher rewards that come on one side of the fence in a different light than the generations that came before them? If both types of organizations satisfy their desire for social responsibility, but the rewards in one area are much higher than those in the other, will any of us blame them for moving away from the place we've always considered the exclusive home of altruism?


Post a Comment