Category Archives: Organizational Health

For-profit, social benefit: oxymoron or smart choice?

Ten-dollar bill obverse/reverse

Profit and social benefit can go together.

Several years ago, a friend of mine came up with a very innovative way to motivate low-income kids to work hard on improving their vocabulary. Sounds like a great non-profit, right?

But here’s the surprise: he very intentionally formed his company as a for-profit. There are no deep pocketed donors, no fundraising drives. Rather the company is supported by government funding that goes to provide low-income kids with supplemental tutoring. Furthermore in many areas, his company gets paid for actual improvement of reading scores—results—rather than just delivery of service.

Taking a step back, if the societal goal is “raising highly literate kids”, beautiful things happen when a market is set up to pay for outcomes. That’s when entrepreneurs bring their creativity, talent, and energy to effectively meeting that need. And structuring as a for-profit gives him many advantages in serving this market.

Let’s consider the potential advantages of being a for-profit here, rather than a not-for-profit:

  • A for-profit can pay its staff competitive market rates, rather than the lower “nonprofit salaries” that are considered “appropriate.”
  • A for-profit can afford to hire a highly talented CEO with experience scaling services nationally, rather than someone less experienced.
  • A for-profit can avoid the criticism and scrutiny of the non-profit “overhead police” who don’t understand the connection between expenses and impact.
  • A for-profit is accountable to the market—in this case the kids and their reading scores—rather than simply needing to please donors to keep getting funding.
  • A for-profit doesn’t have to spend time on fundraising, and has much more control over future income.

I have to admit that when I first heard about my friend’s company, I just couldn’t understand why he turned away from the benefits of being a non-profit. But the more I learn about the field, and read books like Dan Pallotta’s Uncharitable, the more I see that there are real trade-offs to be had in structuring a social benefit organization.

One last thing: it’s worth noting that my friend is extremely committed to the cause of education. He’s not in it for the money. For many years he has put all of his earnings back into the growing company, so that he can reach more kids. For years, in spite of running a company that employs hundreds, he hasn’t owned a car. Clearly his motive is impact, not personal profit—which makes his choice of a for-profit structure all the more fascinating. Cases like this lead me to wonder if the assumptions behind “non-profit” are in fact a hindrance.

Why are so many non-profit salaries so low?

Homeless person, with shopping cart

a nonprofit mobile office?

Dan Pallotta’s book Uncharitable continues to move me; it is changing my views of where the nonprofit sector needs to go. In the first portion of the book, Pallotta delves into the origins of strongly held American beliefs about the nonprofit pay. He writes:

“In Puritan times, people gave directly to the needy, without using brokers. This is no longer possible on any meaningful scale. Charity is no longer an exchange between the non-needy and the needy. It is an exchange between the non-needy (donors) and the non-needy (the charity workforce) to provide services to the needy. Is an exchange between equals to help the needy. It is no different than the exchange between those who buy cars and those who make them. A law that was meant to provide an economic discount to the needy in face-to-face transactions is now improperly exploited to expect nonprofit sector workers to provide wage discounts to wealthy donors who are in essence buying a service from them, which they use their labor to provide. The donating public expects the nonprofit workforce to extend to it the law of mercy. But it was never intended that such a law be applied in this way.”

This is a big aha for me—over time two distinct dynamics have become confused as one. The first dynamic is the wealthy giving charity to the needy. The second dynamic is nonprofit employees (the non-needy but non-wealthy) working at below market rates, thus also giving charity to the needy. But in doing so, the nonprofit employees are in a way also giving charity to the *wealthy* as well, in the form of their under-priced labor. And this practice of low nonprofit wages is not just common, it’s widely considered to be the only acceptable situation.

I’ll never forget attending a mixer of the San Francisco chapter of YNPN and overhearing several discussions of nonprofit employees who have no health insurance. They were talking about where to go in the city to find free health clinics! These are smart, young, energetic people who could easily find work in the for-profit arena. They are living lives of poverty in order to work for nonprofits. It just doesn’t seem right to me, it doesn’t seem sustainable, and I absolutely can’t see this being good for the field. It doesn’t take much imagination to see many of these young people going and finding “real jobs” and only doing social benefit work on weekends. What a loss for the field.

So what’s going on here? My guess is that there are two factors in play.

One factor is that there are a few markets for the kinds of social benefit that nonprofits generate. These are organizations that are creating real value to society, but which society isn’t currently willing to pay for, at least not proactively. It’s a lot easier to get money to build prisons than it is to build programs that prevent the need for more prisons. I hope that over time as the underlying math and science of how societies work is better understood, the value of the right types of social investments will become obvious and uncontroversial.

The second factor is that there are huge discrepancies in the nonprofit world when it comes to pay—people at some organizations get paid extremely well, even if the impact isn’t clear. My guess is that this links to the relative lack of market mechanisms in the nonprofit world, where pay and impact can be worlds apart.

I wonder: if we can better understand and measure impact, and if we can create markets for that impact, can we find ways to fairly compensate talented individuals for the positive social impacts that they drive?