Three common questions I get about nonprofit compensation are these: Where can I find data about what I need to pay nonprofit employees? Is it ethical to pay fundraisers by commission? And is it wise to pay nonprofit employees bonuses.
In answer to the first question, there is a small cottage industry of groups producing nonprofit compensation surveys that are available for purchase. Larger organizations tend to have a firm on call to help them set the compensation range for various jobs, especially newly created ones. When I ran Grameen Foundation, we started working with Quatt Associates once we passed $10 million in annual revenue and we had a good experience. It saved us a lot of time trying to guess what an appropriate salary range was, especially for new and upgraded positions.
In terms of the question about paying fundraisers on commission, I wrote about that here.
But what about giving annual, performance-based bonuses to nonprofit executives? When asked about them over the years, I usually expressed vague discomfort and skepticism. In one position I accepted, the outgoing CEO had negotiated annual bonuses. I refused to accept any and discontinued the tradition, without exactly knowing why. I guess it just didn’t feel right. On occasion I opined that the “bonus” that a nonprofit employee gets is being able to do meaningful work, and that those working in the commercial sphere get cash bonuses in some sense in lieu of being able to do meaningful work related to improving society and helping people.
I recall when a nonprofit in the microfinance field gave a large, one-time bonus (though I don’t think they called it that) to their long-tenured, retiring CEO who had arguably been somewhat underpaid for years and who had secured in a huge windfall during her time as a leader. My recollection was that this was a rather controversial decision inside that organization.
I have recently read some books which present ideas and data that give a firmer foundation on which to reject bonuses for nonprofit employees and executives. The underlying concept revolves around the difference between how people respond to intrinsic vs. extrinsic rewards. In other words, in which cases are people motivated to do something because they get a reward (such as cash) and in which cases are they motivated simply by doing the right thing or applying self-defined values such as integrity, hard work, and so forth.
One of the key insights is that extrinsic rewards aren’t necessarily additive to intrinsic ones. For example, let’s say that on a scale of 1 to 10, I am motivated at level 7 to do a good job at work for intrinsic reasons (for example, the belief that one should always do your best at anything you engage in). If an extrinsic reward is added, one would think that my motivation would stay the same or go up. Not so, according to some research. It can, and often does, go down. One of the insights of the book Door Dash: The Behavioral Economics of Peer-to-Peer Fundraising is that paying previously uncompensated volunteers can decrease their engagement, effort and performance.
I am currently reading the book Humankind: A Hopeful History by Rutger Bregman (which I highly recommend) and the author raises similar questions around bonuses in many professions. His first point is that people tend to try to game the system to receive the largest bonuses in ways that actually undermine their long-term goals and/or society’s long-term interests. Think of teachers that are rewarded for students’ achievements on standardized tests (and who neglect other important subjects as a result) or bankers who are given commissions and bonuses for making sketchy loans that may later bring down their firms or even the entire financial system (see: Global Financial Crisis of 2008).
But he makes a deeper point about how in all but the most basic and rote work, extrinsic bonuses tend to erode intrinsic motivation – a force that plays a huge role in sustaining effort in a mission-driven organization. The key quote that I highlighted was this: “A few years ago, researchers at the University of Massachusetts analyzed fifty-one studies on the effects of economic incentives in the workplace. They found ‘overwhelming evidence’ that bonuses can blunt the intrinsic motivation and moral compass of employees. And if that wasn’t bad enough, they also discovered that bonuses and targets can erode creativity. Extrinsic incentives will generally pay out in kind. Pay by the hour and you get more hours. Pay by the publication and you get more publications. Pay by the surgical procedure and you get more surgical procedures.” (The study referenced can be found here.)
I believe this dynamic probably plays out even more profoundly in nonprofits, where intrinsic motivations are so important. If you could somehow align bonuses with the long-term interests of the organization and its mission, so that you aren’t incentivizing the wrong things, they might be workable. But in practice, it is often terribly difficult to do so. As a result, while I believe that fairly compensating nonprofit employees is important, I remain a skeptic when it comes to giving out bonuses in mission-driven organizations.