I do think that Bill happens to be right about the options. For example, our top-rated charity (VillageReach) doesn’t appear (based on its Form 990) to pay anyone more than $65,000/yr. Still, I would happily donate to a charity with high executive compensation over one with low executive compensation, if the former had more impressive social impact.

James E.D., we may be discussing this topic more in a future post, but briefly -

• I think there is a lot of similarity between “donor illusions” and the “Nike illusion” you mention. And yes, I think that funders deserve the lion’s share of the blame – charities market the way they do, presumably, because it works.
• However, one important difference is that people who buy Nike shoes do eventually figure out what they actually did and didn’t get for their money. As a result, the idea that Nike doesn’t turn you into LeBron James is widely recognized. By contrast, donors generally never get any information about the actual impact of what they funded, and there seem to be very few voices even acknowledging out that donor illusions are illusions (which is why we have made an effort to do so).

Quick question about donor illusions: How different are they from the “illusions” that for profit organizations use to sell products?

Isn’t a donor who believes that the success stories they see on a non-profits website are the rule rather than the exception as naive as a consumer who thinks Nike shoes will actually make them play basketball like Lebron James?

From my perspective, I think we have to be careful about blaming the non-profits here and place more responsibility on the funders (especially large funders, since smaller funders often follow their lead).

Interested to hear your opinion

I don’t think it is difficult to satisfy both criteria at once. Without citing specific organizations, you would first look at who GiveWell (or whichever rating service you choose to use) recommends, then consider the executive compensation question. I would go in that order. That is pretty simple and straightforward, I think. The impact question is certainly complex, but that is why organizations like GiveWell are helpful to individual donors who don’t have the time or the expertise to make those judgments.

I disagree. If you have to choose between two organizations with slightly different cost effectiveness and far different executive pay, you’d still do better to choose the one with higher cost effectiveness. Just as if you have to choose between two investments with slightly different future profit prospects, you should ignore executive pay and choose the one with better prospects. The Charity Navigator rating isn’t just less useful than a GiveWell-style analysis — it’s nearly useless if your goal is to actually help people with your donation.

Given the number of organizations out there with evidence of impact (I’m aware of only a small handful), I take issue with the idea that “one can find organizations that have both a good record on impact and do not pay its executives excessive amounts.” It’s hard enough to satisfy the first criterion without adding the second one in.

The issue is that - apart from the question of impact - there appears to be a deep and perhaps systemic issue with excessive executive compensation in the nonprofit sector which is most troubling as it relates to charitable organizations (because of the missions they have and who they serve). And I was trying to argue that such compensation is unnecessary and therefore the issue itself need not exist at all. But it does exist, and that is unfortunate.

I’m not saying that salaries are justified in every case. I am saying that it’s not a very useful question to ask. There any plenty of organizations who pay short salaries and fail to create any impact. There are also organizations that pay substantial salaries and make a difference. (I believe that Givewell is one of them). Rather than focusing on executive pay, which is more likely to create self-righteousness than anything else, it is more productive to focus on impact and cost-effectiveness. Pay is but one of thousands of ways in which a charity can waste money; rather than focusing on it, take the charity’s total costs into account and find out how much impact you are getting for those costs. If a charity has high pay but is also generating demonstrable cost-effective impact, then it’s worth giving to, no matter how unjust you may feel the salaries are.

See this article from the American Institute of Philanthropy for more on this topic: http://www.charitywatch.org/articles/salaries.html

Investors in the private sector may consider executive pay when deciding whether or not to invest in a firm, but they are far more likely to consider the revenue of the business and its future prospects for profitability. Likewise, donors should focus on a charity’s evidence of impact, rather than micromanaging their spending on executive pay or office supplies.