Tuesday, March 31, 2009

My controversial views on nonprofit wages

I am presenting my analysis of studies that compare nonprofit, for-profit and government wages at the Nonprofit West Coast Data Conference. Since this is an academic conference I must stick to the data rather than state my opinions. However, there is so much I want to say beyond my presentation. Luckily this blog is all about stating my opinion and I don't have to worry about sticking to research protocol. :) So...here are my controversial views on nonprofit wages.

I was outraged when the 2009 Independent Sector policy platform stated “most nonprofit employees earn wages that are considerably lower than their counterparts in either for-profit businesses or government" (p. 3). I have been reading alot about nonprofit wages recently and found studies that reported nonprofit workers made comparable wages to for-profit workers in select industries (Salomon & Sokolowski, 2006, Ruhm & Borkoski, 2003).

It appears many members of the general public, nonprofit workers and funders believe that nonprofit workers are paid less than for-profit workers even though there are studies that contradict this low-wage perception.

I believe many members of the general public, nonprofit workers and funders believe nonprofit workers make less wages than for-profit workers because of funder and IRS influence on nonprofit wages.

1) Many funders want nonprofits to have low overhead percentages. Since salaries are considered overhead, many funders want nonprofit wages to be low and might react negatively to higher nonprofit wages.

Also funders have influence over many national nonprofits especially the Independent Sector which has many high power philanthropists as members of their organization. These members may want nonprofit salaries to remain how they are so if the Independent Sector changed their policy brief to state nonprofit workers make comparable to for-profit workers, they may receive many negative reactions from donors and policy makers.

My counter argument to funder influence is assuming the studies are true that nonprofit workers make comparable wages to for-profit workers. Because of these comparable wages, nonprofits would be able to recruit more qualified workers, and these qualified workers would generate diverse funding beyond the traditional foundation and individual donor sources. It appears that organizations are already moving beyond traditional funding sources and may not need to ask for funding from these sources if this trend continues. I believe higher wages can also lead to increased organizational efficiency.

2) The IRS is another key influence in the nonprofit wage arena because they regulate 990 reporting and executive compensation. The IRS recently changed the nonprofit tax form 990 to get more information from nonprofits and as a result many nonprofits are struggling to learn the new reporting requirements. The IRS also started cracking down on nonprofit executive compensation levels (Guidestar, 2007) and determining what compensation levels are appropriate. They may begin to regulate all nonprofit pay if they perceive it to be too high.

As a counter argument to the IRS influence, as stated above, I believe higher wages can allow for nonprofits to recruit more qualified workers. These qualified workers can find innovative ways to operate nonprofits that turn away from the traditional 501c3 charities. This trend is already starting to occur with organizations that are doing well without having to be a 501c3.

These counter arguments help look at nonprofit wage in new ways in order to recruit qualified workers into the sector.

What do you think? Do you believe the nonprofit l0w-wage perception? What are some ways nonprofits can look at wages in a new way?


Michelle Murrain said...

There are a ton of issues here. First, you can't always call the nonprofit sector one sector when it comes to wages - there are all sorts of different parts of the sector - some are going to be more comparable to the for-profit sector than others. It's hard to make apples-to-apples comparisons. A nonprofit hospital most likely pays it's doctors as well as a for-profit hospital, but there are plenty of job descriptions with no counterparts in the for profit sector. What do you compare a social worker to? Or a minister? A hospice nurse?

I think part of the problem also is a lot bigger than just a simple non-profit vs. for-profit wage issue, and trying to recruit people with higher wages. So many jobs that people in the nonprofit sector do just aren't valued as much by society as those in the for profit sector. I think when we care as much about people as we do about money, then social workers will be paid the same as bankers.

Nonprofit SOS said...

I agree, but want to note a few things. Not all salaries are considered overhead. Salaries of office managers, finance people, etc are, but program staff salaries are not often considered overhead or classified that way. Also, I agree with the first study you mentioned - that nonprofit workers do make less than their for-profit counterparts (in most cases). When studies include hostpitals or universities, it greatly skews the data. I completely agree that nonprofit workers should make at least the same as their for-profit counterparts. I do want to note that it is all comparative. A nonprofit that has a budget of $500,000 should not have an ED that makes $150,000. So, it all depends.

- Kristen

Peter Campbell said...

I've seen enough evidence in my career -- including professional wage surveys that compared nonprofit salaries to for-profit market -- to not believe, fully, that nonprofit staff make less than for-profit and government equivalents. As Michelle notes, this doesn't mean that every nonprofit pays less, and some sub-sector factors will play into it.

My take on it is that it's not that bad a thing for NPOs -- in general -- to pay a little less than for-profits for equivalent jobs. But I have a few riders to that.

First, this has to be quantified. If the opportunity to support meaningful work comes at a reduction in market value, that difference has to be recognized and palatable to the employee. Using myself as an example, I make, I'm pretty sure, about 85% of what I would make in a comparable position at a for-profit. So 15% of my earning potential is donated to the mission of my organization. This has a real value to me - my pride in my work, my satisfaction with my life, my family's satisfaction, the model it presents to my 9 year old -- those are all pretty qualifiable things. I'm protecting the environment that he'll grow up in - that's worth paying to do.

But paying less comes at a cost, and, in the IT realm, I think we've seen our industry roundly ravaged by this. I've seen plenty of examples of tech workers being offered 50-60% of what they could make elsewhere. In that case, the people that take the jobs might be taking them because they can't get comparable, better-paying work elsewhere; or because they want an excuse to not take their work too seriously. Turnover in nonprofit IT positions is insanely high (per NTEN's survey, among other sources). Nonprofits that pay poorly are probably not properly assessing the cost of this instability.

As far as determining which pay scenario is true, when you've seen conflicting surveys, here's what I've told staff of mine when they've marched in my office with a survey that says that they should be making $10k more than I'm paying -- go back and find ten surveys, and come back with the average for your role. You can find "a" survey to support any pre-formed conclusion, but an aggregate will reveal a more meaningful trend. The aggregate on our industry, I'm sure, would show us paying 70-85% of for-profit market, at least in IT roles, and likely in most.

Ken G. said...

Great posting, but as the previous commenter pointed out, talking about "nonprofit sector wages" as one sector is like including Microsoft and the local hardware store as one sector.

Beyond the bias of who has supported these conflicting studies, I would like to know more about how they compared "sectors." And, of course, their bias feeds into what numbers they chose.

So, to answer your question, yes, I do buy the "low-wage perception" because from where I sit, I don't include major universities and hospitals as part of "my sector." I work with small to mid-size local social service agencies, and the wages are pitiful compared to what those with comparable educations earn in the "business sector."

A more fair comparison would be between like-sized organizations. Compare a $1,000,000 business to a $1,000,000 nonprofit, and compare executive compensation. Do the same for each size level. My guess is that the nonprofit pay will come in slightly lower. But it's just my guess.

Bjorn Arneson said...

Thanks for the post--would like to offer an alternate argument:

Employers in any sector will offer the wage necessary to recruit and retain qualified workers. Workers tend to sort into the sector that best matches the compensation mix they hope to earn. When we think of compensation as composed of both monetary *and* intrinsic returns, it seems reasonably believable that the nonprofit sector, offering higher intrinsic returns to workers who share that orientation, will be able to offer lower wages than the private sector.

However, it seems that the boundaries between sectors are blurring--cross-sector networks and collaborated outcomes (and the extrinsic and intrinsic opportunities that workers perceive) may put equalizing pressure on wages across sectors.

Maria Gajewski said...

Heather, this is definitely a complex and important subject. I look forward to talking with you about it at West Coast. Safe travels.

Heather Carpenter said...

Thanks for all your comments everyone -- I appreciate hearing your perspectives on nonprofit wages.

Anonymous said...

Hi Heather,
Peter C didn't mention that his 15% donation is pre-tax dollars - another IRS issue to consider.


Tony Pipa said...

If you look closely at the report, fields that pay higher in the NP sector than the for-profit are fields where non-profits dominate or have significant market share. I would say this is a result of "market failure" providing limited incentives for for-profits to enter a particular field and/or limiting the capital available to make for-profits viable (hospitals are the exception). So I don't find the comparison very useful. Also, keep in mind that the primary data source is based on nonprofits that have 4 or more employees - and the report makes no estimation of how many nonprofits are missed because of this.

As others commenting here have mentioned, if you were to compare compensation across positions at organizations with comparable budgets and/or market share, I think without a doubt you'd find lower compensation in the nonprofit sector - and at times significantly lower compensation. For example, the report states that average wages in social assistance organizations are $390/week, while average weekly wages in the overall for-profit sector are $669.

I agree wholeheartedly that it's normal for the non-profit sector to pay lower wages, because as Peter says, work in the sector offers compensation in other, less tangible ways. But it can also be so far below that employees have difficulty living financially sustainable lives.

This is also not just due to "funders" (if by funders you mean foundations/high-profile philanthropists) or the IRS (which is woefully understaffed when it comes to oversight of the nonprofit sector - to my mind, they're hardly a factor). It's the larger donor community, the general public, and many times the culture at nonprofits themselves that contribute to this situation. I don't know how many board conversations of which I've been a part where board members push to skimp on personnel costs in ways that they would never consider at their own businesses, because they know the results would be disastrous over the long-term. Here's a link to another extended conversation on nonprofit compensation:

Bill said...

What if the entire "non" profit paradigm is wrong? What if our focus on percentages of fundraising + administrative costs vs. program costs, misses the boat. Who cares if a nonprofit is efficient if it isn’t effective? Why are we so risk adverse when in the for profit world risk is encouraged for a learning organization. I am reading a fascinating book on these very points by Dan Pallotta titled, "Uncharitable: How Restraints on Nonprofits Undermine Their Potential.” You can read about this and other nonprofit issues on my blog, "Tips & Tools for Nonprofits" at www.501cweb.com.