Paying Charity CEOs large amounts isn't as bad as it looks

A turn-off, but not a scandal.

The Charity Commission warns that spiralling levels of chief executive pay risk bringing organisations and the wider charitable sector into disrepute, following news in the Telegraph that 30 charity chiefs are paid more than £100,000.

High levels of pay and administration costs can be a real turn off. This comes from a natural desire to ensure that money is well-spent, which for a number of people means as much money as possible goes directly to the front-line, to helping people most in need.

To begin with, if all the money goes to the frontline, but staff at the front-line are being ineffective because the strategy’s poor, then that money’s been badly spent. For us, there isn’t a level at which pay in the charity sector becomes too high; charities are trying to solve some of our most stubborn social problems and they need to attract talent to be able to do that.

Pay in charities is a much more finely balanced argument than is usually supposed. We’ve put together some advice on how donors can think about whether or not giving to a charity with high salaries should be a cause for concern:

First, and most importantly, it’s all about impact. Knowing that children have been sponsored or that schools have been built isn’t enough: you need to know exactly what difference the charity is making, and how this is happening. Action on Hearing Loss’s annual report provides a summary of what it has achieved against its aims, which helps donors decide whether the organisation spends their money well.

Second, you need to consider the complexity of the charity. The CEO of Oxfam is paid £120,000, and is responsible for a £360 million budget, 700 shops in the UK and 5,000 employees and 20,000 volunteers who work in over 90 countries across the world—some of them very risky places to be. £120,000 doesn’t feel like a lot in the context of that job description. The CEO of Next also runs 700 shops (but no humanitarian aid) and gets nearly £1.5m. Of course, this is all proportionate to the task and budget at hand: you don’t want a £500,000 income charity to spend £100,000 on its CEO’s salary.

Third, although its difficult to tell from the outside, what value is the CEO bringing? Have they increased the charity’s profile and fundraising? Have they devised a good strategy? If the case is that you need to pay up for talent, then supporters should be able to see the fruits of that talent.

Finally, it’s worth thinking about the quality of the staff throughout the organisation. If the charity is making an argument that they need to pay well to attract the best staff at the top, then you want them to apply the same logic to front-line staff. Medicins Sans Frontières has a rule that the chief executive can’t be paid more than three times the pay of the lowest paid member of staff.

By making the judgement call based on these factors — and not on gut feelings about pay — more money will be well spent. We’d like to see the impact of the UK’s leading aid charities make the headlines, instead of six-figure salaries that really say nothing on their own.

Angela Kail is head of Funder Effectiveness at New Philanthropy Capital, which helps donors choose effective charities

This piece first appeared on Spear's.

Photograph: Getty Images

This is a story from the team at Spears magazine.

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Let's turn RBS into a bank for the public interest

A tarnished symbol of global finance could be remade as a network of local banks. 

The Royal Bank of Scotland has now been losing money for nine consecutive years. Today’s announcement of a further £7bn yearly loss at the publicly-owned bank is just the latest evidence that RBS is essentially unsellable. The difference this time is that the Government seems finally to have accepted that fact.

Up until now, the government had been reluctant to intervene in the running of the business, instead insisting that it will be sold back to the private sector when the time is right. But these losses come just a week after the government announced that it is abandoning plans to sell Williams & Glynn – an RBS subsidiary which has over 300 branches and £22bn of customer deposits.

After a series of expensive delays and a lack of buyer interest, the government now plans to retain Williams & Glynn within the RBS group and instead attempt to boost competition in the business lending market by granting smaller "challenger banks" access to RBS’s branch infrastructure. It also plans to provide funding to encourage small businesses to switch their accounts away from RBS.

As a major public asset, RBS should be used to help achieve wider objectives. Improving how the banking sector serves small businesses should be the top priority, and it is good to see the government start to move in this direction. But to make the most of RBS, they should be going much further.

The public stake in RBS gives us a unique opportunity to create new banking institutions that will genuinely put the interests of the UK’s small businesses first. The New Economics Foundation has proposed turning RBS into a network of local banks with a public interest mandate to serve their local area, lend to small businesses and provide universal access to banking services. If the government is serious about rebalancing the economy and meeting the needs of those who feel left behind, this is the path they should take with RBS.

Small and medium sized enterprises are the lifeblood of the UK economy, and they depend on banking services to fund investment and provide a safe place to store money. For centuries a healthy relationship between businesses and banks has been a cornerstone of UK prosperity.

However, in recent decades this relationship has broken down. Small businesses have repeatedly fallen victim to exploitative practice by the big banks, including the the mis-selling of loans and instances of deliberate asset stripping. Affected business owners have not only lost their livelihoods due to the stress of their treatment at the hands of these banks, but have also experienced family break-ups and deteriorating physical and mental health. Others have been made homeless or bankrupt.

Meanwhile, many businesses struggle to get access to the finance they need to grow and expand. Small firms have always had trouble accessing finance, but in recent decades this problem has intensified as the UK banking sector has come to be dominated by a handful of large, universal, shareholder-owned banks.

Without a focus on specific geographical areas or social objectives, these banks choose to lend to the most profitable activities, and lending to local businesses tends to be less profitable than other activities such as mortgage lending and lending to other financial institutions.

The result is that since the mid-1980s the share of lending going to non-financial businesses has been falling rapidly. Today, lending to small and medium sized businesses accounts for just 4 per cent of bank lending.

Of the relatively small amount of business lending that does occur in the UK, most is heavily concentrated in London and surrounding areas. The UK’s homogenous and highly concentrated banking sector is therefore hampering economic development, starving communities of investment and making regional imbalances worse.

The government’s plans to encourage business customers to switch away from RBS to another bank will not do much to solve this problem. With the market dominated by a small number of large shareholder-owned banks who all behave in similar ways (and who have been hit by repeated scandals), businesses do not have any real choice.

If the government were to go further and turn RBS into a network of local banks, it would be a vital first step in regenerating disenfranchised communities, rebalancing the UK’s economy and staving off any economic downturn that may be on the horizon. Evidence shows that geographically limited stakeholder banks direct a much greater proportion of their capital towards lending in the real economy. By only investing in their local area, these banks help create and retain wealth regionally rather than making existing geographic imbalances worce.

Big, deep challenges require big, deep solutions. It’s time for the government to make banking work for small businesses once again.

Laurie Macfarlane is an economist at the New Economics Foundation