Dan Pallotta on Charity and the Culture of the Non-Profit Sector
What this covers
Dan Pallotta and host Russ Roberts examine the cultural and structural constraints that Pallotta argues have crippled the nonprofit sector's ability to scale impact. Pallotta, who founded the AIDS Rides and Breast Cancer 3-Days fundraising events, contends that charities operate under a distinct set of rules that prevent them from recruiting talent, investing in growth, and taking the risks necessary to tackle large social problems. The conversation centers on how nonprofit organizations are judged primarily on overhead spending rather than outcomes, and how lifting that constraint—by granting charities access to competitive compensation, advertising budgets, long time horizons, and capital markets—could transform their effectiveness.
The discussion ranges across the flaws in using overhead ratios as a proxy for charity quality, the double standard applied to executive compensation across sectors, and the paradox that low spending often prevents the very investments needed to grow. Pallotta's own experience provides the centerpiece: when his organization managed the fundraising events, they generated $305 million net over nine years; when charities took over operations to reduce overhead, unrestricted income collapsed dramatically. The speakers also explore how government spending may displace private charitable giving, whether the charitable deduction should be preserved or reformed, and whether the accountability imposed by private fundraising—as Roberts argues through the example of the Harlem Children's Zone—is actually a feature rather than a bug. The exchange addresses impact versus overhead as competing frameworks, the broken marketplace for social change, and the deeper question of whether society can move beyond what Pallotta calls an "addiction to simplicity" in how it measures and funds charitable work.
Pallotta argues that the nonprofit sector is crippled by a culture that judges charities on overhead and self-sacrifice rather than impact, and that granting charities the for-profit world's freedoms—competitive pay, advertising, risk-taking, long time horizons, and capital markets—would dramatically scale their ability to solve large social problems.
- Overhead ratios are a flawed proxy that ignore impact, quality, and the need to invest in growth.
- Low compensation norms prevent charities from recruiting the best talent by ignoring the benefit side of cost-benefit analysis.
- Pallotta's own AIDS Rides and Breast Cancer 3-Days demonstrated that business-like methods raised vastly more money than charities running events themselves.
Nonprofits face systematic legal and cultural deprivation across compensation, marketing, risk-taking, and capital access that for-profits enjoy.
- Society maintains two separate rule books—one for nonprofits and one for for-profits—and in the name of an ethic this discriminates against the charitable sector across five areas: compensation, advertising/marketing scale, risk-taking, time allowed to demonstrate value, and access to a capital market; this deprivation mindset worked for neighbor-to-neighbor aid but fails for large-scale global problems.
“in the name of an ethic, this separate rule book really discriminates against the sector in at least 5 different areas that I described in the book: compensation, the ability to advertise and market on the scale that the for-profit sector does, the ability to take the kinds of risks the for-profit sector takes, the amount of time the for-profit sector has to demonstrate the value of an investment, and last but not least a capital market itself”
- Telling charities to act more like business is disingenuous and cruel because society is not ready to grant them the big-league freedoms business enjoys; the correct framing is that we put the cart before the horse—we should first give charities permission to act like business (and we absolutely should) rather than preach businesslike behavior while denying them the means, since board members who say 'run it more like a business' usually mean drawing more blood from the stone, the opposite of how a business succeeds.
“this idea that we want charities to act more like business is disingenuous and cruel. Because we're not for a moment ready for charities to use the big-league freedoms we give to business.”
- The belief that wanting to make money signals lack of passion is sophomoric; people at Apple, Google, and heart surgeons are highly paid yet passionate and effective, and viewing those who want money as having no heart treats human beings as half a person who has no interest in their family, children, or own charitable giving.
“You mean the people who work at Apple aren't passionate about the iPhone and the iPad and beating the pants off of Android. Really. You mean the people at Google aren't passionate about an open system and spreading Android? A heart surgeon who makes a million and a half dollars a year isn't passionate about heart surgery”
- Salaries that are utterly unremarkable in the for-profit sector ($600,000-700,000) are treated as scandalous in the nonprofit sector, even though head football coaches at top-20 nonprofit universities each made at least $2.6 million, and entertainers like Judge Judy make $45 million—revealing an inconsistent cultural double standard applied only to charity executives.
“Salaries that would be utterly unremarkable, $6-$700,000 dollars in the for-profit sector, are scandalous in the non-profit sector. Meanwhile, that the head football coaches at the top 20 universities in the United States each made at least $2.6 million dollars last year and they are all non-profit universities.”
Overhead ratios are a fundamentally flawed measure that obscures actual impact and incentivizes low spending rather than problem-solving.
- The overhead ratio is deeply flawed because it operates on a mistaken theory of waste (the 90 cents going to the cause may itself be wasted), tells you nothing about service quality (the soup could be rancid), depends entirely on how broadly the charity defines its cause, and offers false transparency since the underlying accounting and definitions are hidden.
“it operates on a mistaken theory of waste... How do you know they are not wasting the $.90 that's being spent on the cause? That's where all the money goes; that's where the largest opportunity for waste is.”
- The deeper enemy is not the overhead ratio itself but our addiction to simplicity; donors must take personal responsibility, consider themselves philanthropists, and research causes the way they research a presidential vote or a washer-dryer—otherwise we risk merely trading one simplistic measure (overhead) for another (superficial star ratings of effectiveness).
“ultimately the enemy isn't just the overhead ratio. It is our addiction to simplicity. And we run the risk, if we don't make that distinction, of trading one simplistic measure for another.”
- Focusing on costs and overhead eliminates any conversation about impact, so we never ask how effective an organization actually is at solving problems—and a low overhead is meaningless if no problem gets solved while a high overhead is acceptable if the problem does get solved.
“this focus on costs and this focus on overhead eliminates any conversation about impact. So, we're not having a conversation about how effective the organization actually is at solving problems. So, who cares if the overhead is low if no problem is getting solved?”
- Charity is a fundamentally broken marketplace because, unlike the cellphone market where buyers can immediately judge an iPhone's quality versus a Samsung's, donors and government grantors choose based on overhead ratios rather than impact—like using the fuel gauge to figure out how fast you are going—so social change is not incentivized; only low overhead spending is.
“We have a fundamentally broken marketplace. In the cellphone business, we have a very healthy marketplace because the information is highly accurate... Not so with charity.”
Demanding charities keep overhead low institutionalizes their miniaturization and prevents the growth investments required to solve large problems.
- Demanding that charities keep overhead low prevents them from spending on the overhead things required to grow, institutionalizing the miniaturization of organizations—which is exactly the opposite of what is needed when confronting massive social problems.
“this demand the charities keep overhead below prevents them from spending money on the overhead things they have to spend on in order to grow. And that's how we institutionalize the miniaturization of these organizations.”
- Charities are discouraged from virtually any investment beyond capital investment in buildings—not investing in growth, IT, human resources, or talent because such spending gets labeled overhead—which produces high turnover (especially in development), compounding the losing proposition of asking people to work for two or three times less pay while also depriving them of the resources to realize their potential.
“They are not investing their growth, because that gets labeled as overhead. That's the primary area. They are also not investing in their strength or their IT; they are not investing in their human resources; they are not investing in their talent, which is why you see high turnover”
- Charities should be allowed to spend more on fundraising and advertising to build market demand for philanthropy—through television, newspaper, digital advertising, major gift officers, and direct mail—because spending on demand-building is how an organization recruits more donors and raises more money to implement programs.
“They should be building market demand for their philanthropy... we have to let these organizations spend more money on fundraising so that they can recruit more donors and so that they can raise more money and have more money to implement their programs.”
- If charitable giving could be moved to 3% or 4% of GDP, with that money directed disproportionately to health and human services charities encouraged to invest in growth, it would represent a tripling, quadrupling, or quintupling of the sector—the kind of scale required to actually solve large social problems.
“If we could move charitable giving to 3%, or 4%, of GDP and have that money go disproportionately to health and human services charities... you are talking about a tripling, a quadrupling, a quintupling of the size of that sector.”
Current charitable giving remains stuck at two percent of GDP because the broken marketplace ignores impact, and systemic reform requires capital markets and infrastructure.
- Charitable giving has remained stuck at about 2% of GDP since measurement began in the 1970s, meaning the nonprofit sector has taken no market share from the for-profit sector in four decades; that 2% equals about $300 billion annually, but only ~15% (about $45-50 billion) goes to health and human services charities—nowhere near enough to solve problems like homelessness, cancer, and suicide.
“Charitable giving remains stuck at about 2% of Gross Domestic Product (GDP) ever since we started measuring it in the United States in the 1970s. And that's a really important number because it tells us in four decades the non-profit sector hasn't taken any market share away from the for-profit sector.”
- The United States needs a national information infrastructure—an 'iTunes for charity'—providing user-friendly, regularly updated, objectively gathered narrative, financial, and impact information on every organization; it would be expensive to build but cheap relative to the $300 billion given annually, and in its absence donors must research causes personally rather than rely on overhead ratios.
“We need an information infrastructure in the United States for this, and I've written about the need for what I call an iTunes for charity that has narrative and financial and impact information that's user-friendly on every single organization in the country, that's updated regularly, that's online, and that's objectively gathered.”
- Echoing C.S. Lewis's remark that Christianity has not been tried and found wanting but found difficult and not tried, Pallotta argues we have never tried a pure methodology of capitalism—evidenced by its absence from the charitable sector—and that using capitalism's tools in charity would let us beat capitalism at its own game and use capitalism to promote love.
“There's this great quote by C. S. Lewis: It's not that Christianity has been tried and found wanting. It's that it has been found difficult and so has not been tried. And that's true of capitalism. We haven't tried a pure methodology of capitalism.”
- A real capital market for charity could be created two ways: forming for-profit charities that keep tax-deductibility for donors (since no benefit inures to them) but pay tax on profits and allow equity ownership; or, for tax-exempt organizations, creating debt markets where investors finance fundraising at high interest rates reflecting risk—as Pallotta's Breast Cancer 3-Days, launched with $350,000 and netting $194 million over five years, could easily have paid venture-capital-style returns.
“one way around that would be to create for-profit charities where you keep the feature of tax deductibility but otherwise there can be equity ownership in the organizations... Another way to do it, in the case of the tax-exempt organization, would be create debt markets”
Charities must measure value through cost-benefit analysis of outcomes, not cost alone, as effective fundraising and talent investment generate vastly more impact.
- A donor who insists a charity spend no money on fundraising so that more goes to the cause is effectively demanding to be the only donor, refusing to let the organization recruit others and placing the full weight of the organization on existing donors—which is not what the donor actually wants on reflection.
“Basically you are saying: I want to be the only donor. Because I don't want you to spend any money going out to find other donors.”
- Pallotta Teamworks was labeled controversial for averaging 40% overhead on the Breast Cancer 3-Days, but given that they fed participants nine meals over three days, erected 4,000 sleeping tents, and ran mobile catering, showering, medical units, and sewage systems moved daily, achieving the events for 40 cents on the dollar was remarkable compared to any vacation industry's margins.
“we got labeled as controversial for having an average overhead on these events of 40% on the Breast Cancer 3-Days. Well, bear in mind, we were feeding people, you know, 9 meals over the course of three days; we were putting up 4000 sleeping tents”
- Charities should evaluate compensation through cost-benefit analysis rather than cost alone: a fundraiser paid $80,000 who raises only $160,000 is more expensive than one paid $300,000 who raises $3 million, yet the sector only ever asks what a person costs and never what value they produce, applying a religious rather than rational lens.
“You could be getting someone who is only paid $80,000 and the organization says, we don't pay any of our fundraisers any more than $80,000; but that person is only capable of raising $160,000 a year or two times their salary. Versus another person who might cost $300,000 but is capable of raising $3 million a year. Now which person is cheaper?”
Donors and society must abandon addiction to simplicity and activism, taking personal responsibility to research causes as they would major purchases.
- Public attitudes toward charity can be changed quickly through methodical campaigns, as the pork industry transformed pork from a fatty heart-attack food into 'the other white meat' and the egg industry rebranded the high-cholesterol egg as 'the incredible, edible egg,' yet the nonprofit sector remains silent—lacking an anti-defamation mechanism, a legal defense fund, an advertising campaign explaining overhead, and a database to mobilize its 10 million employees to advocate for themselves.
“Look at the way the pork industry changed the way people think about pork from a fatty heart-attack waiting to happen to 'the other white meat.' Or the way the egg industry changed the image of the egg”
- The watchdog agencies relied on to inform donors about $300 billion in annual contributions—the Better Business Bureau, Charity Navigator, and Charity Watch—are tiny, with budgets around $1 million each (Charity Watch about $500,000) and only roughly 30 employees among the three, and crucially they do not measure effectiveness.
“The first two have a little over $1 million a year each; Charity Watch has like a $500,000 budget. People think they are these huge organizations; they are tiny. Between the three of them they have 30 employees. They don't measure effectiveness.”
- The charitable deduction should be kept where we want to incentivize giving (e.g. health and human services) because it lets the government obtain services at 50 cents on the dollar—forgoing $50 in taxes while the donor provides $100 of services—but it should be revisited where charities, like sham nonprofit hospitals essentially identical to for-profit ones, compete directly with for-profit industry, in which case no tax exemption is warranted.
“after reading his book I didn't feel so dumb because there really isn't much of a difference at all... no there shouldn't be any tax exemption there if they are competing with the for-profit hospitals”
- Government spending crowds out charitable giving—because people feel they already contribute through taxes and because there is less private money left to give—and government money comes with strings that contaminate it: central officials dictate spending, overhead caps (e.g. 11%) force organizations to steal from other programs, and Europe's heavy government social service correlates with much lower charitable giving.
“I absolutely think that government crowds out charitable giving, not only because of your sentiment about it but because you just have less money to give to charity.”
Evidence from events and social change demonstrates rapid cultural transformation is possible when systemic barriers to nonprofit success are removed.
- When the charities, reacting to overhead criticism, dropped Pallotta Teamworks to run the events themselves, their results collapsed: the AIDS Ride beneficiaries saw overhead rise to ~65% and net income fall from $6 million to ~$1.5 million, while Avon's Breast Cancer 3-Days net income dropped from $70.9 million in 2002 to $10 million in 2003—a $60 million loss of unrestricted income in one year.
“their overhead went up to something like 65%, and their net income went down from $6 million with us to I think about $1.5 million on their own. So a $4.5 million dollar loss in one year of unrestricted money for AIDS services.”
- The AIDS Rides and Breast Cancer 3-Days created by Pallotta Teamworks—multi-day grueling endurance events with four-figure minimum fundraising requirements and mass marketing—drew 182,000 participants and 3 million donors over nine years, raising $582 million gross and netting $305 million for the charities.
“we had 182,000 people ride or walk in one of those events over the course of 9 years. They raised a total of $582 million dollars”
- Charity used to be about neighbor-to-neighbor assistance, for which the deprivation mindset may have worked.
“it may have worked when charity was about neighbor-to-neighbor assistance”
- Profound cultural change is possible quickly: Pallotta, gay and 52, recounts that when he came out at 21 his parents believed he would never have a normal life, family, or children, yet thirty years later he is married to a man and has three biological children—offering this as evidence that if society could change on something as polarizing as gay marriage, it can certainly come to think more rationally about charity.
“I could not have dreamed that that kind of change would have happened in the United States in the course of those 30 years. But it has. If we can make that kind of change on something as polarizing as gay rights and gay marriage, we can absolutely get people to think more rationally about charity.”