John is the executive director at a relatively small nonprofit organization that provides housing to at-risk and homeless youth. The organization employs about 20 full-time employees across three locations and receives about $2 million in annual revenue from grants and donations. John has done an exceptional job in eight years growing the organization from one location, three full-time employees, and less than $250,000 in revenue to a larger operation capable of serving more people from the community.
From a for-profit company perspective, traditional thinking dictates that John should be rewarded for his contribution to the organization and to the beneficiaries of its services. In other words, by expanding the organization’s reach, John has maximized the benefits provided to all stakeholder groups, supported the values of all those involved and achieved a moral victory of sorts.
However, as is common in the nonprofit sector, John’s pay has only grown slowly over time and certainly not at the same pace as the organization’s tremendous growth. At this point, John wants to ask for a raise from the organization’s board of directors to move his pay closer to what he thinks is fair.
But like most nonprofit employees, John finds himself in a tough spot. Viewing the world through the lens of a zero-sum game, as most of us tend to do, John’s larger salary means an unknown quantity of at-risk and homeless youth will go without a place to stay because there will be less funding for operations. Additionally, from a donor’s perspective, a larger portion of a $100 contribution is going to pay John’s salary as opposed to what the donation is being made for (i.e., achieving the organization’s mission). At the end of the day, it may be immoral to pay John more because of the effect that he has on the organization’s mission; this, of course, would ignore the fact that John’s leadership was instrumental in the organization serving more people in the first place.
Based on surveys and opinion polls, we can say with confidence the public’s perception is nonprofit employees opt for less compensation by virtue of their choice to work in the nonprofit sector. There is an “implied vow of poverty” associated with working outside of the for-profit sector in a capitalist economy.
And in many ways, the same phenomenon also applies to public workers and government employees. The principle is the same: Individuals working within public agencies and governments receive contributions and donations in the form of taxes and work to achieve a mission of promoting the public good. Whether these value judgments about compensation in these sectors are good or bad doesn’t change the fact that they exist and have real consequences. But, if nothing else, public scrutiny over compensation in the nonprofit and public sectors makes it even more necessary to establish a credible, defensible compensation framework.
In practice this means:
- Investing in quality salary survey data rather than relying on intuition or anecdotes alone
- Creating a consistent policy or set of rules about deter-mining raises and starting pay levels
- Analyzing internal equity and external market pay gaps and creating a plan to address them
- Examining base pay competitiveness in the context of the total rewards package and making sure the employee value proposition as a whole is compelling.
To some extent, one could argue managing compensation in this context has more of an ethical component than managing compensation in a for-profit business because the consequences of those decisions on stakeholders in the community is greater.
Lastly, for nonprofit employees in particular, ethics is not a matter of whether to follow the law or to violate it. In the United States, the IRS imposes price ceilings on nonprofit executive pay based on what is “reasonable and not excessive”; thus, it is the responsibility of all nonprofit managers and boards to comply with applicable laws and regulations.
Do you think there are for-profit sectors where the “implied vow of poverty” perspective also applies? Have you ever come across this perspective in practicing compensation — and what effect did it have on the organization?