Positive Cash Flow: For Profit vs. Non-Profit

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IVACTwo decades ago Your Business Blogger worked for IVAC, a medical device company. A competitive organization driven by sales numbers. Redundant, you would say. All companies are, or should be this way. But this manufacturer went to unusual lengths.

The W-2’s were published.

Each year we would learn that the top sales guy would earn around $250K. And the company president earned less, way less, than the top sales guy.

As it should be. The top sales guy in a for-profit enterprise, I would submit, is more valuable than the CEO in any single year.

In outstanding sales-driven organizations, the ‘top wage’ earner may not be the ‘top person.’

In any one year, the sales-person should be compensated based on the sales cash he generates for the company. That’s where his focus should be and he should be rewarded accordingly. By contrast, the Top Person should be focused on growing the company longer-term — and she should be rewarded accordingly as well. With long term compensation in stock options.

In outstanding non-profit organizations, the reverse should be true.

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Salvation ArmyAnyway, Anthony Begonia from the Salvation Army reminds us that the recent Forbes citation is a bit misleading, about who earns what at various non-profits. The reference uses Top Person and Top Salary categories:

Salvation Army

Humanitarian relief, church

Alexandria, VA

http://www.salvationarmyusa.org

Top Person: W. Todd Bassett

Top Salary:* $ 175,050

(* at extended entry)

These numbers may indeed be for the same person in some for-profit organizations. And probably for the Red Cross.

But not the Salvation Army.

Commissioner Bassett (and his wife’s!) total compensation is $98,326.00 See my previous post for background.

The Top Person does not have the Top Salary.

Other differences include commission/total earnings, of course. Forbes would be more accurate to list ‘Top Person’ and ‘Top Compensation.’

The purpose of a non-profit charity is to improve the human condition. The purpose of a for-profit is to maximize shareholder value.

The leadership of for-profits are enriched with cash. The leadership of non-profits are enriched with righteousness.

Because appearances are important. Jimmy Bakkers gold-plated bathroom faucets paid for by little old ladies’ social security checks demonstrated the disconnect between doing well and doing good.

Jack Welsh can get away with million dollar paydays.

Jimmy Bakker cannot.

The top sales guy gets paid commissions on sales for yearly performance. The CEO should get compensated for valuation increases over a number of years.

Non-profit measures are a test of the human heart. I am not persuaded that the non-profit CEO of the Red Cross should be earning $650k. Like Jimmy Bakker’s gold-plated faucets.

Cash Flow summary:

The Top Wage earner in a for-profit company should be the individual who generates the most cash over the year.

The Top Person in a for-profit company should be the individual who creates the most value over the years. (Plural.)

The Top Wage earner in a non-profit company should be the individual who monitors the cash.

The Top Person in a non-profit company should be the individual who creates the most good.

This matrix might be a solution to complaints of inflated Top Salary for-profit CEO incomes.

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Thank you (foot)notes:

This is an update for previous correction.

Business Pundit has more on Executive Pay.


*Results may be skewed due to unconsolidated data of national and affiliate groups, rounding or incomplete information. 1Charitable services as percent of total expenses. 2Percent of private support tremaining after fundraising expenses. 3Percent of private support remaining after surplus. A negative number indicates private support exceeded surplus. 4Total compensation, which may include benefits, one-time payments and deferred compensation, is based on latest available information. In some cases, sum is for a different year. Total compensation may not be that of listed top person. NA- Not available. – Ratio increase from previous reported period. – Ratio decrease from previous reported period. – Same as previously reported period. – No comparable data. Sources: IRS Form 990, annual report or statement of individual charities, www.guidestar.org, www.ministrywatch.org, www.give.org, Minnesota Attorney General’s Office; Chronicle of Philanthropy.

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3 Responses

  1. Bravo, Jack. Having worked for many non-profits over the years (mostly public policy, like Charmaine) they are operated like Soviet-era factories, not finely-tuned machines, which made it all the more aggravating for me, as I had worked in business before turning to policy. In fact, I worked with developing countries helping to develop their energy infrastructure. What consistently amazed me during my time working in the non-profit sector was that most, save one exception, was more bureaucratic and unproductive than my time working with the Albanian electricity corporation (KESH). You really need to do a book on this topic.

  2. Veronica says:

    Thank you for your insight. As I am in the midst of deciding if I should start for-profit or non-for profit company. Your clarification regarding the difference between top-wage person vs. top-person was very helpful. I wonder if there are grants available for-profit organizations or are they referred to as investors?

  3. Yes! this was very helpful. It help me decide what format I’m going to use to build my dance and film productions organization.

    Thank you,

    Bennyroyce

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