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by Arepo
Dec 1 20211 min read3 answers 8

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We (CEEALAR) have been talking to our paid staff about the idea of doing something like 'annual compensation of $x plus y% of any funding the organisation receives' - the idea being to try and emulate the incentives behind the stock-based compensation that startup employees receive.

I'm surprised that on reflection I haven't heard of other EA orgs trying something like this. Does it seem like a reasonable idea? Are there hidden pitfalls - or upsides? Are there more nuanced ways of doing something like this that might work better?

A couple of concerns with the initial idea:

  1. An employee of a for-profit gets to keep their stock even after they leave, so long-term benefits they bring to the org would still be rewarded in expectation, which wouldn't apply in this approach. Perhaps we could make the per-instance value of y lower, but commit to 'paying' them a gradually decreasing percentage of donations even after they leave?
  2. Unlike a for-profit we're not trying to maximise income - the ideal would presumably be that we stabilise long-term at maybe a couple of years runway, or a single year, but with a stream of reliable regular donations coming in. So as long as the organisation keeps operating, y would end up being a constant, rather than the variable with unlimited upside that stock would be. Maybe this is just fine, though? The better work the staff do, the more likely the org is to keep operating, and the value of y in that scenario could just be 'something slightly higher than a simple salary would have been' - without the huge potential payoff, but still aligning incentives pretty well.

Thoughts?

ETA: To clarify based on comments, the idea is not that staff would necessarily be involved with fundraising, any more than startup employees are expected to promote the stock price. The idea is that 'nonprofit staff doing a good job overall' is to EA funding as 'for-profit staff doing a good job overall' is to stock price: a noisy signal, but more encompassing than perhaps any other.

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joshcmorrison

Dec 02, 2021

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This is an intriguing idea, and I'm all for experimentation in nonprofits generally and with compensation specifically. I also find nonprofit performance incentives potentially valuable and interesting.

One problem I see is lots of funders would hate this: from their perspective it creates a sort of tax on their donation. Instead of the whole donation going to whatever new thing they'd want to fund, a percentage gets set aside for current employees. I think this is part of the reason (per Jared's smart reply) that grantwriting commissions are looked down upon in the industry. 

Another problem could be that lots of donors want to feel like nonprofit employees are not motivated by money, and implying otherwise could make the nonprofit unatttractive. 

I think the broader principle-agent issue is that funding and results are orthogonal to one another (probably the central problem for nonprofits generally), so compensating based on funding raised incentivizes employees to pursue flashy or unfairly charismatic projects, overpromise, and embellish or lie about results. (Though to be clear, nonprofits/nonprofit fundraisers already face these incentives). 

One analogous idea I've noodled around with a bit is results-based bonuses where you set a goal, a probability of success, and a dollar figure for achieving the goal, and you set aside a pool of money where if the employee achieves the result they receive the amount it's worth divided by the estimated probability of success. If my job were an example, this would look something like if 1Day Sooner's goal is to have a 50% chance of our work being the but-for cause of saving ~4 million DALYs by 2030, you could set aside $100K of my compensation each year and if we achieved the goal, I'd receive 2x that. one problem is a lot of results take a long-term to materialize (and are hard to prove/calculate reliably), and you might have to pay too many premiums (to adjust for risk + time value of money) to make it worth it.

Linch2y16
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I'm much more excited about results-based compensation than funding-based compensation, for nonprofit employees.

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Linch
2y
I can imagine pretty large numbers here. For example, if we value reducing 0.01% existential catastrophe at 100M-1B, I think it's plausible that we should be backpaying people who created projects of that calibre 1%-10% of the value of the xrisk reduced.  (They can then choose to regrant the money, split it among their own staff who contributed to the xrisk reduction, or spend it on fun stuff). 
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Arepo
2y
This seems like a good example of what I'm concerned about. How could you show that a project reduced x-risk by any specific amount?
Linch2y10
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Some quick points:

  1. Seems (almost) strictly easier than figuring out how much xrisk a project reduced in advance of its creation.
    1. and we should really be moving in that direction, at least for xrisk reduction mega-projects.
  2. I've been informed since the creation of my motivated reasoning in EA post that a number of places do explicit cost-effectiveness analysis of these things. I assume they'll be improved in the future.
  3. We'll eventually have fairly quantitative models of all x-risk reduction efforts (ideally before we all die). My proposal is more forwards-looking than backwards looking.
  4. Tbh I'm not aware of visibly successful xrisk reduction efforts, at least of this magnitude. So this is more of a future problem/incentivization scheme anyway.
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Arepo
2y
I agree with that! I didn't mean that the latter would be better, but that neither seems feasible.
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Arepo
2y
I agree in theory, but selecting meaningful 'results' is extremely difficult in practice - input welcome! We're also talking to the staff about separately paying them some kind of results-based compensation, but much, probably most of what they do can't meaningfully be quantified, or would be horribly distorted if it were. Even at the organisational-output level, we can look at things like how many forum posts with what net karma came from the hotel, or what the average income of guests N months after their stay would be, which are examples of the sort of things we ultimately care about but a) it's hard for any individual to say what numbers would be counterfactually above expectations, and b) the staff have only indirect influence on these, and if they meet some preagreed criteria but these outputs counterfactually decrease, the organisation has clearly gone wrong. Also, (I only now realise) the unspoken premise of my question was that the vast majority of funding for CEEALAR and projects like it will come from the EA pool or sources adjacent to it. It's too weird an initiative to qualify for any more general charitable grants that we've found. On that assumption, plus the assumption that EA donors are discerning and want cost-effectiveness for their dollar, our funding is comparable to customers purchasing a product - noisier than a market signal for stock price, but getting more at what we really care about and want to incentivise staff to enable than any other apparent metric.
Arepo2y2
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One problem I see is lots of funders would hate this: from their perspective it creates a sort of tax on their donation. Instead of the whole donation going to whatever new thing they'd want to fund, a percentage gets set aside for current employees. I think this is part of the reason (per Jared's smart reply) that grantwriting commissions are looked down upon in the industry.

I really hope this isn't true for EA donors. For most EA organisations, the staff are the supermajority of the cost anyway, so the only questions should be whether this sort of inc... (read more)

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joshcmorrison
2y
Yeah I wasn't really talking about EA donors per se: I think EA nonprofits should try to be funded by non EA donors (/expand the EA community) to the extent possible and that we also shouldn't assume there's a clear differentiation between EA and non-EA donors. That said, I do think the tax effect I outlined would reasonably be of concern to EA donors  or insofar as it's not because the compensation mechanism will definitely create better results, it may make the argument a bit circular. I also think there's a principle/agent problem with donors (maximize impact) and non-profit staff (motivated consciously or unconsciously in part by maximizing compensation/job security), and it would be a mistake to assume that shared EA values fully solve that problem. 
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Arepo
2y
'I think EA nonprofits should try to be funded by non EA donors (/expand the EA community) to the extent possible' The extent possible for 'weird' EA projects is often 'no extent'. We have applied to various non-EA grants that sorta kinda cover the areas you could argue we're in, and to my knowledge not received any of them. I believe that to date close to (perhaps literally) 100% of our funding has come from EAs or EA-adjacent sources, and I suspect that this will be true of the majority of EA nonprofits. 'Assuming that shared EA values fully solve the problem' is exactly what we're trying to avoid here. Typical nonprofit salaries just work on the assumption that the person doing the job is willing to take a lower salary with no upside, which leads to burn out, lack of motivation and sometimes lack of competence at EA orgs. We're trying to think of a way to recreate the incentive-driven structure of successful startups, both to give the staff a stronger self-interest-driven motivation and to make future such roles more appealing to stronger candidates.

Davidmanheim

Dec 01, 2021

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It's a principal-agent problem, and given the goals of having the staff help fundraise, you probably want to think about what their marginal contribution would be, and what aligns goals. I can imagine you might want to have the formula be something like "1% of any funding over 70% of current operating costs up to 200% of current operating costs."

Arepo2y3
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The idea would not necessarily be to have the staff help fundraise, any more than a startup that pays equity expects its employees to pump the stock price.

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Linch2y2
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Who's the principal here? CEELAR? Or EA overall?

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Davidmanheim
2y
In many ways, this is a multi-level alignment problem, so yes. Narrowly, it's aligning employees with CEELAR, but very broadly, it's aligning employee motivations with maximizing good in the universe - we just have better metrics for the former.
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Arepo
2y
'we just have better metrics for the former' Can you clarify this? Which statement are you referring to by 'the former'? What metrics?
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Davidmanheim
2y
We can build better metrics for aligning principals and agents in the context of a single company with clear goals and metrics for success (fundraising, surveys of how well they are doing, funder evaluations, etc.) than we can for aligning it with "humanity and good things generally" (where we know we have an as-yet intractable alignment problem.) 

Linch

2y

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As someone considering entering EA full-time, this sounds not-so-great. Would this mean EAs should spend some time at better paying non-EA jobs before committing to EA full-time? 

I will encourage you to apply, see the landscape, and decide based on that. I'm personally not too worried about the financial status of EAs doing FT work at fairly well-established orgs. I'm at least somewhat worried about people who have career uncertainties, e.g. going from internships/contracts to contracts with some gaps in between, and/or people who go through multiple rounds of rejections, and think people in roughly that position should seriously consider taking up non-EA jobs for a while before coming back to direct work.
 

Arepo

2y

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'An ideal EA is probably past the point where they have any significant personal needs or desires that are unmet - and if given more money they would donate it because they believe someone else needs it more than they do. Of course in practice idk how many that holds true for (including myself).'

This seems meaningfully false for all the people I have known working at EA nonprofits except perhaps the founders of the biggest name ones. The salaries range from 'pretty damn stingy' to 'lower end of what you'd expect for market rate'. Obviously they're enough to live on, so what you say is true in a 'at least halfway up Maslow's hierarchy of needs' kind of way, but they're certainly not enough to dispense with all financial worries.

'Your proposal might create status dynamics where people look at their coworkers pay and think they need to make more - not in absolute sense but relative to their coworker.'

I might be missing something here - how would you get this effect if all the staff were compensated this way? We might eventually end up paying some staff more than others, but a) I think proportion of bonus to base rate would be the same, and b) why would this be different if they were on (differing) flat salaries?

Chris Leong

Dec 02, 2021

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To be honest, I don't think that sounds like a good idea. On the other hand, it might make sense to release a plan of how you'd spend more funding to staff which would include how you might increase compensation based on funding.

Arepo2y1
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I've left some replies in the discussion here - I'd be interested if you read them and still thought it was a bad idea, and if so, why.

Based on the broadly negative responses to date though, this seems like it might be the most sensible option.

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Chris Leong
2y
I guess when I think about existing charities a lot of them have these perverse incentives to do things to get funding, rather than fix the problem, even without these bonuses. On the other hand, I'm keen to see staff paid fairly and I think people are more likely to think of working somewhere longterm if they see that there's a possibility of this.

Arepo

2y

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As someone considering entering EA full-time, this sounds not-so-great. Would this mean EAs should spend some time at better paying non-EA jobs before committing to EA full-time?

This is opening quite a can of worms! Personally I'd say you should get industry experience first and only apply for EA jobs if you think you might be uniquely qualified for them, but others here may disagree.

Arepo

2y

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I wouldn't delete it, just clarify anything you think was unclear, so we don't have to restart the conversation :)

a) I think proportion of bonus to base rate would be the same,

I mean that compared to a normal flat payment system, where person A got an annual $x salary and person B got, say, $2x salary, in the graduated system you'd just have person A get, say, $0.9x salary and a bonus of between $0-0.2x, where person B got $1.8x salary and a bonus between $0-0.4x . In other words, their relative salaries wouldn't be noticeably different.

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jared_m2y19
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FWIW: in the 2010s I remember being surprised to learn that the Association of Fundraising Professionals opposed percentage-based compensation for full-time nonprofit fundraisers. 

I don't have a refined view on pros/cons of variable compensation structures like this in certain nonprofit contexts, but am sharing this primary document in case valuable as food for thought. Some excerpts are below.

AFP holds that percentage based compensation can encourage abuses, imperils the integrity of the voluntary sector, and undermines the very philanthropic values on which the voluntary sector is based. AFP stands firm with its Standards which prohibits members from working for percentage-based compensation or accepting finder’s fees...

Members shall: 
21. not accept compensation or enter into a contract that is based on a percentage of contributions; nor shall members accept finder’s fees or contingent fees. 
22. be permitted to accept performance-based compensation, such as bonuses, only if such bonuses are in accord with prevailing practices within the members’ own organizations and are not based on a percentage of contributions. 
23. neither offer nor accept payments or special considerations for the purpose of influencing the selection of products or services. 
24. not pay finder’s fees, commissions or percentage compensation based on contributions.

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Arepo2y5
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Thanks, that's interesting. I think some of their reasoning seems reflexive: in particular their first and third stated reasons only state possible downsides without weighing them against the comparable upsides of incentivising work that supports the charity's outputs.

The rest doesn't seem like it would apply to the model we're thinking of, in which all staff would receive a percentage of all donations. Eg:

  1. Percentage-based compensation can provide reward without merit. Contributions that materialize at a given moment are often the culmination of the efforts of many people, including volunteers, over long periods of time

This doesn't seem to apply if it's not just the fundraising staff (and to be clear, we don't have anyone for whom fundraising is more than a tiny fraction of their role).

And

  1. The fundraiser whose compensation is based on a percentage of charitable contributions raised may influence donor choice so as to generate the greatest current result rather than preserve the donor’s assets for the best long-term benefit to him or her, and to the charity.

This doesn't seem to apply if staff were getting a percentage of all donations.

Their fourth point - that nonprofits do better when they 'actively involve' volunteers is unsubstantiated and, IMO for most nonprofits, false. See eg these discussions on the subject.

On their last remaining reason:

  1. Donor attitudes can be unalterably damaged in reaction to undue pressure and the awareness that a commission will be paid to a fundraiser from his or her gift, thus compromising the trust on which charity relies.

That's part of what I hoped to find out by posting here. I would hope that specifically EA donors would be actively in favour of the idea if it seemed to improve incentives, though if the discussion around the question so far is representative it seems not...

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jared_m2y2
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Yeah, I was similarly uncertain about how much AFP’s policy serves to “defend the 20th century status quo of nonprofit operations” (which much of EA is challenging, for good reason) versus good-faith efforts to make the field operate well — putting aside fundraisers’ personal economic interests. The balance is a bit murky…

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Arepo2y1
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Do you think there are good arguments against this kind of compensation even within an EA context?

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