The UK charity sector does such great things – from funding most of this country’s cancer research to helping so many needy individuals. But I wonder if the sector needs to take greater heed of threats at both ends of its structure. At one end, it has super-sized, super-paying charities and, at the other, a long, long tail of micro charities. The situation threatens the overall credibility and efficiency of the sector.
Recent evidence about high pay levels at top charities came from the 2017 review by Third Sector magazine of the accounts of the UK’s largest charities. Amongst the top 100 charities it studied it found the average (mean) pay level for top-earners was £255k (a rise from £212k in 2015). That quarter of a million salary is about £75,000 more than what the UK’s Prime Minister gets for running the whole country, not just one charity!
Thirty-seven of the top 100 charities pay their highest earner more than £300,000 a year. Fourteen out of the hundred pay more than £200,00 a year. What amazed me, though, is the whopping size of the pay-outs amongst the very top of the pile – all packets worth above £400,000 a year:
Wellcome Trust – £3m; Nuffield Health – £1.25m; Royal Opera House – £730k; London Clinic – £540k; Consumers’ Association – £490k; Anchor Trust – £480k; Church Commissioners for England – £460k; St Andrew’s Healthcare – £430k; City & Guilds – £430k; and Marie Stopes International – £420k.
It’s not just a question of singling out the top earners, though. The survey also identified the overall number of people paid more than £60k in income: they included as many as 300 at Wellcome Trust. The figures for all ten of the top charities are as follows, also noting the charitable income of each organisation (in brackets):
Wellcome Trust – 300 (£390m); Nuffield – 275 (£768m); Royal Opera House – 115 (£142m); London Clinic – 77 (£142m); Consumers’ Association – 107 (£103m); Anchor Trust – 95 (£367m); Church Commissioners (CoE employees excluded) – 17 (£148m); St Andrew’s Healthcare – 144 (£199m); C & G – 185 (£141m); Marie Stopes – 95 (£266m).
I noted too the pattern amongst these top charities that they come not from household name charities but from philanthropic foundations, charitable private hospitals and arts bodies. None of them are fundraising-based charities. This suggests two thoughts….
On the one hand, it’s possible to argue that the general public perhaps doesn’t appreciate enough the wide range of services and activities that today’s charities are actually engaged in and so the sector (simply) needs to work harder to ‘educate’ the public more about the true scope and variety of today’s charity sector.
On the other hand, one could argue that some of the charities in the above list should not really be considered to be ‘true’ charities at all and they are simply exploiting the ‘star dust’/virtuous image and valuable range of tax perks and privileges that go with charities and they could/should be made to convert to a different form of non-profit or even commercial organisation. They could then be free to pay super-high salaries but they wouldn’t be able to do so on the back of any charitable tax breaks.
The overriding problem here is the simple but well-established fact that the general public do not like or support high salaries being paid by charities. A poll of 1,000 people by the consultancy nfpSynergy in 2016 found a majority (27%) thought that a charity CEO should be paid less than £30k a year! Only 5% felt that a charity with an income of more than £100m a year should pay its CEO £150k or more a year. In another survey – this year’s annual Donating Trends survey on behalf of Third Sector – found that “spending large amounts on senior executive pay”was the top issue that would reduce consumers’ trust in charities. That survey also found that only 10% of respondents consider that a charity’s CEO should ever receive more than £100k a year.
So, I am sure, if more of the general public really knew about the above sort of high pay levels actually being paid at many top charities, they would be shocked and very disapproving. Their trust in and support for the sector would be dented severely.
It seems to make no impression at all on Mr and Mrs Joe Public that many charities do need to pay to attract decent talent to be able to run their organisations – some of which, of course, are complex and large and come with many types of risk. The big gulf remains between what the public expects of charities and what charities themselves are doing today with pay levels.
Even if some of today’s super charities were to stop being charities, the core problem would not go away as consumers would still think charities should pay a lot less than they do. I agree with sector commentators like Craig Dearden-Phillips who believe that, if charities worked harder at explaining how they operate and how they need to pay for talent, then the general public will be able to accept moderately high salary levels for charity CEOs – up to about £100k (or even £150k a year), BUT the public will quite rightly continue to balk at super-high salaries. He believes that it’s time to for the Charity Commission to get tough on those paying silly money and stop them. I would agree entirely.
Alongside this issue of some very high salary levels, some large charities, arguably, also deserve the label ‘fat cat’ because of their high level of unused reserves or their low dispersal rate of income on charitable expenditure. Altogether UK charities have about £50 billion – yes that’s billion! – in their reserves: that’s a lot of spare money sitting around, even allowing for some buffer cash reserves needed by all charities. A study at the end of 2015 by the True and Fair Foundation (A Hornet’s Nest) found, for example, that the Wellcome Trust alone sits on long-term assets worth £19 billion and that the Church Commissioners has similar reserves of over £6 billion! That study also calculated that one in five of Britain’s biggest charities spend less than 50% of their total income on good works: for example, it found a rate of just 48% for Age UK, 46% for the British Heart Foundation, 46% for Sue Ryder, and just 24% for the Consumers’ Association.
There’s no space here to delve into that study, but it does raise the thought that some well-known charity names are holding onto their cash rather too much and/or are having to cover rather high overheads out of their income which is limiting what they can spend on good works. Furthermore, it is altogether rather a black hole because the sector lacks a consistent measure that donors and funders can apply across all charities to compare and appraise individual charities’ income to expenditure effectiveness.
Now let’s look at the other end of the UK charity sector – the tiddler end.
On this front, I think the following table says it all: it’s taken from the Charity Commission’s own website and shows the breakdown of the sector based on its records at the end of December 2016:
Annual income band No of charities % Annual income £bn %
£0 – £10,000 65,842 39.4% 0.218 0.3% £10,001 to £100,000 56,853 34% 2.007 2.7% £100,001 to £500,000 21,956 13.1% 4.826 6.6% £500,001 to £5m 8,972 5.4% 13.409 18.4% £5m + 2,201 1.3% 52.647 72.0% Not yet classified 11,285 6.8% 0 0 TOTAL: 167,109 100% 73.107 100%
The startling figure for me is that nearly 40% of all charities have an income of less than just £10,000. Furthermore, almost three quarters (73.4%) – yes three quarters – have an income of less than £100,000. But altogether from those two income bands – a mighty 122,695 charities – their total annual income represents just 3% of the overall sector’s income. In contrast, if you’re a charity with an income of just half a million pounds or more, you’re in the top 6.7% of all charities in terms of size!
Only 1.3% of all charities have an income of £5 million or more. Within this category (based on the NCVO’s 2016 ‘almanac’ review of the sector) just 40 charities have an income of more than £100 million but they, as a ‘super-group’, account for nearly a fifth of the sector’s entire income. What’s more, the clear trend for several years now is that the sector’s growth has been highly concentrated amongst these very largest charities, with the UK’s smallest charities that exist on under £1 m a year having seen their incomes decline. The extreme dominance of the biggest charities is getting more pronounced, not less.
Of course, any market or industry has its big boys and its minnows. But no business sector could have so high a proportion of its firms with a turnover of £10k (or even £100k) or less like the UK charity sector and actually survive. Such organisations would simply not be viable – an income of less than £10k is hardly enough to pay a part-time salary and a small weekly rent! Of course, in the commercial sector there is a ready inclination and market incentive for inefficient small players to be taken over by their more effective rivals. In the UK charity sector, though, such economic reality and an inclination for mergers seem to be really lacking. Whilst an increasing number of local, small charities are realizing they have to at least collaborate with other small charities to stand any chance of winning public contracts against national charities, the sector overall still sees many more new charities created each month than it does mergers or closures.
Ah, but we are ‘values-driven’ and quite different from those ‘grubby’ profit-seekers in the commercial world, I can hear many in the charity sector claim! But this is just defensive self-talk. There are thousands and thousands of ‘for-profit’ businesses that serve communities and the wider public and make valuable contributions to society – not just providing employment to millions, providing various public services, and paying oodles of tax into the nation’s coffers,but more modest things like the local café providing a meeting point for local residents! There are also thousands of non-profit ‘social enterprises’, of course, that are making more obviously direct social contributions, but they are not set up or run specifically in the form of a charity.
It’s just not credible to argue that it’s fine for the UK charity sector to have loads of small, micro organisations like the UK grocery sector has loads of micro/local shops alongside the large supermarkets. Obviously, those micro retailers do not enjoy the many and various tax perks that small charities do and they have to pay-out real-life, economic expenses to survive. On the high street, think of the many small local businesses (e.g. café owners, bookshops, clothes shops, bric-a-brac shops) that face the unequal, ‘subsidised’ competition from the many charity shops. Take away the crop of tax savings (e.g. no business rates to pay) and then see how many small charities would survive!
The most significant problem with too many small charities, though, is the compromised levels of efficiency and impact they bring about overall.
Remember that donors and funders give money to charities with the expectation that those charities will operate as efficiently as possible – that their donated money will be spent as well as possible. But high levels of efficiency are, of course, compromised where there are loads of micro-charities all lacking enough critical mass or joined-up integration to achieve maximum effectiveness. In a similar vein, commissioners of public service contracts require/expect charity bidders to offer adequate size and scale of experience, resources and capability, but if a sector suffers from loads of small uneconomic charities, that level of efficiency is not going to be possible: in which case the charity sector is ill-serving the beneficiaries it exists to serve and will widely lose out – as happens all over the country today – to larger, more economically-sound commercial organisations.
Unfortunately, the cause of a lack of mergers between charities is down, to a large degree, to the attitudes or hesitant/defensive leadership of their trustees themselves. Too often trustees do not want to give up their ‘little empire’ or they worry about losing a role to occupy their time in their retirement, or they worry about losing status if they become part of a larger organisation. Alternatively, some trustees are put off by the perceived complexity of carrying out a merger or fear of embarrassment should the merger not be successful. It does not help matters that the UK has approaching a million trustees – about as many as the actual number of paid employees working for charities – and very many trustees in small charities lack decent skills in governance or business management.
If charities want to carry on attracting grants and donations and continue claiming their current bag of tax privileges, they need – as well as increasing their overall efficiency as a sector – to explain, show and justify much better what they do and the beneficial impact they are making on society or in communities. The struggling café owner next door to the charity shop needs to understand what is different or special about what the charity shop is doing to make him ineligible for the same tax privileges. Just declaring that you are a charity is surely no longer enough to make people accept that you’re really doing something good or wonderful in the world. Charities need to work harder at measuring, explaining and communicating the actual outcomes they are bringing about for the ‘public benefit’.
The Charity Commission should be expected to use its weight and power to promote, or require, change by charities in a lot of the ways identified in this article. I would agree with the outgoing chair of the Charity Finance Group, Ian Theodoreson, that whilst the body perhaps should not actively dissuade or prevent people from starting charities, it should encourage such people – from the very time of registration – to co-operate with other organisations that already exist in the same field or are doing something similar.
But, of course, it’s not just a case of guiding new charities to be more collaborative. The Commission – together with the sector’s infrastructure and representative bodies (ideally showing the way be merging themselves along the way?!) – should be doing a lot more to push existing charities to either combine or collaborate with (the typically, at least, hundreds) of other bodies that are doing similar things in their field. I noted recently, for example, that this country has over 2,000 charities for veterans: why on earth does there need to be so many as that? (no wonder the government felt it necessary recently to set up a dedicated website portal to help the public actually to navigate their way around all those charities!).
Sure, many small charities are small because they serve a very local area or because they are driven passionately by a founder whose energy and devotion it would be wrong to stop. That’s fine and splendid, but one needs to balance that argument with the need to consider the overall efficiency and effectiveness ‘in the round’ for charity sub-sectors. Do so many parents really need to set up their own charity in memory of their son or daughter who tragically died of cancer? There’s a balance to be struck here, of course, but the pendulum seems to have swung too far towards too many tiny, charity minnows. Surely many of those minnows would be more effective if they weren’t so small and independent and worked more in conjunction with other similar charities ?
Mergers are not the only way, of course, for small charities to gain greater benefits of scale and efficiency. Alternatives include setting up a joint venture company together to run a joint activity; a joint venture project where two charities bring their respective skills and resources together and act together on a focussed initiative; shared ‘back-room’ functions e.g. HR, IT, telecoms services; and informal staff networking and co-operation.
Another approach – at a higher level – is for several charities operating in a specific field to form a collective ‘alliance’ or working partnership together whereby they jointly plan/share/co-operate on activities like fundraising, PR, marketing or lobbying. In this vein, an argument could be made that large charities should be expected to reach out to the many smaller charities operating in their field and set up semi-formal ‘support’ structures and services (e.g. HR, IT). What a transformation that could be!
Altogether, the “double-ended” problem I’ve outlined in this post is a major challenge to the UK charity as a whole. At its heart it raises the basic question of what exactly is a charity and what the public has a right to expect of charities if they are to keep their valuable range of tax privileges. Charities do indeed wonderful things for society, but they mustn’t over-reach themselves in thinking they’re too special that they can escape scrutiny. More modesty (and transparency) in pay levels amongst the largest charities would certainly help, at one end, as would more collaboration and mergers, in the long tail at the other end of the sector. Otherwise, both the credibility and overall effectiveness of the sector will really be in danger.
Written by Mike Owen, CEO & Principal Consultant at Owen Morris Strategy Group.
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