Reward Good Work, Not Just Good Ideas

In a market economy, people are motivated to do their best by the prospect of economic reward. Take that away and you have North Korea or the (not coincidentally) former Soviet Union.

Yet most foundations — which arguably are among the crown jewels of the market economy and were created by some of its biggest winners — do exactly that. Grant makers typically award a specified amount of money to a nonprofit group before any work whatsoever has been done — taking away any real economic incentive for grant recipients to do their best. Unless a grant recipient truly messes up and must repay the grant money, the nonprofit group gets the same sum, regardless of how well or how poorly it performs. As foundations demand more and more of charitable organizations, and increasingly turn away unsolicited proposals, they are setting up a dynamic that ensures that foundation funds won’t be used as effectively as they could be.

Of course, if nonprofit groups don’t do a good job carrying out the work they have pledged to do, they may never again get a grant from that foundation. But even if they do a superb job, there are no guarantees they will get a repeat grant — particularly in a world where grant-making priorities seem to change with the wind.

To be sure, charities have a chance to show whether they can do a solid job in their proposals and during the foundation’s review process. But that is part of the problem: All foundations are doing when they make grants is rewarding good proposals. They aren’t always rewarding top-notch achievements.

Unfortunately, as most people with any experience in philanthropy must ruefully acknowledge, what grant seekers say in a written proposal isn’t always what they provide — especially as more and more applicants hire professional writers to put their proposals together. And, of course, once grantees have their award letter in hand, the game is more or less up. They have already won their economic reward.

That is not to say that without the prospect of economic reward, all grant recipients will do a poor job. Many nonprofit officials care deeply about their work, and will do their best simply for that reason. And those who come to foundations with program ideas of their own are often truly motivated to give it their all.

That is, in fact, the premise under which traditional philanthropy has always operated.

But in recent years, as foundations have become more activist in their grant making, that dynamic has changed. Spurred by the desire to be more focused and more strategic, foundations increasingly are setting explicit agendas of their own, issuing competitive requests for proposals that read almost like fixed-price contracts on which applicants are invited to “bid.”

Under those circumstances, the grantee is helping the foundation to achieve its goal — rather than, as in the past, receiving help from the foundation to achieve goals of its own.

As a result, it may now take something extra, such as a performance-based economic reward, to encourage grant recipients to do their best.

While the basic idea of incorporating economic incentives into grant making sounds simple enough, putting it into practice turns out to be a little more complicated. Among the issues:

• How should the reward be structured? Grantees will still need operating capital upfront to do the work specified in their proposals. Maybe the reward could be a kind of “performance bonus” to be awarded if and when the agreed-upon goals of the grant have been fully achieved.
• How can a foundation — which is legally required to use its grant dollars for charitable purposes — provide a grantee with an “economic reward?” Clearly, foundations can’t provide a personal profit to a charity’s managers in the way that corporations reward their top performers. However, a no-strings-attached supplemental grant might be a sufficient motivator for most nonprofit organizations, especially given how few foundations make grants to help pay operating costs or otherwise give charities discretion over how a grant could be used.
• How can foundations best measure performance? What results should be examined? It’s relatively easy to measure some grants. For example, if a foundation supported a pediatric clinic, it would be easy enough to count the number of kids who receive care. But grants to develop new leaders, reduce crime, raise academic performance, or deal with other vital but amorphous needs are hard to measure in the short run, and often are influenced by factors over which the grantee has little or no control.

But probably the most difficult challenge for many foundations will be at a more personal, emotional level. Many of those who are drawn to the nonprofit world — including foundation staff members as well as grantees — are motivated, at least in part, by a strong altruistic impulse. The concept of economic reward, at least in its pure form, appears to be utterly antithetical to that impulse. Coming to terms with the fact that altruism alone may not always be enough to carry the day will not be an easy truth to accept. On the other hand, failure by foundations to do so would seriously limit the effectiveness of their grant making — a price that in the end would be paid by those whom the grant is intended to serve.

Stephen Isaacs is editor of

To Improve Health and Health Care: the Robert Wood Johnson Foundation Anthology, and Paul Jellinek was, until recently, vice president of the Robert Wood Johnson Foundation. They are the principals of Isaacs/Jellinek, a company that advises foundations.