Still on the subject of nonprofit vs. for-profit salaries, let’s try to chase down some of the other commonly heard reasons for the disparities. One that comes up fairly frequently is, “we can’t afford to compete with for profits when it comes to pay.”
Ok, that sounds reasonable. But, wait. Why not?
Aside from requiring a charitable purpose, prohibiting private ownership and limiting ways of raising capital, nonprofits and for-profits should be identical. (Anybody want to argue with me on this point?) Nonprofits simply provide a service that donors want to buy.1
In fact, since nonprofits have no way to share profits with employees (with stock, stock options, or profit sharing plans) I would argue that nonprofits should actually need to pay higher base salaries than for-profits.2
One of the reasons that the previous sentence sounds totally bonkers is explored by James Heyman and Dan Ariely in the November 2004 issue of Psychological Science. It turns out that people use two completely separate frames of reference to analyze transactions: either an economic frame or a social one. I would theorize that simply because of the kinds of work that most nonprofits do, transactions live in a nebulous gray area between the economic and social frames.3 Because even though we are helping people (an altruistic/social frame ), we are also receiving monetary payment for that activity (an economic frame.)
TL;DR: Heyman and Ariely ran three experiments to see if subjects varied the amount of effort they expended on tasks where they were receiving either economic payment or social payment. They found that when gifts were given to the subject before a task, or when no payment was mentioned at all, subjects behaved altruistically and the effort was independent of the value of the gift. In contrast, when money was given as payment, effort decreased as the size of the payment decreased.
Great news! This job pays nothing!
In the first experiment, the authors asked subjects if they thought someone else would hypothetically help move a couch into a van. Each request tested the effect of one of five different incentives: no mention of anything at all, low or medium levels of cash, or a small or medium amount of candy.
The authors found that offering the smaller amount of candy didn’t have the same effect that offering the smaller amount of cash did. In fact, offering nothing at all had the same result as offering the larger amount of cash. In other words, the size of the gift (a social transaction) didn’t affect effort, while the size of the monetary incentive (an economic transaction) did.
The second experiment was similar to the first, except that it was no longer a hypothetical situation. Participants were asked to complete a menial task on a computer with similar incentives and identical outcomes.
The third experiment added a twist. In addition to the money and candy incentives, the authors occasionally told the subjects the cash value of the candy they were receiving. This time, the cash value candy behaved just like the cash did. The smaller candy portion incentive resulted in less effort than the larger candy portion incentive.
Thus the authors provide support for the two distinct types of transactions. In addition, even mentioning cash has the effect of moving the transaction to an economic frame rather than a social one.
The nonprofit spin: I’m reminded of Governor Schwarzenegger, who accepted an annual salary of just $1 during his term in office. Obviously, he didn’t need the money, but he certainly wouldn’t accept a salary of $1 for Kindergarten Cop 2, so that wasn’t the reason. Could it be that he was attempting to frame his work as a social transaction? Since he still needed to take $1, perhaps he should have asked to be paid in candy to get the intended effect.
Especially in the universe of philanthropy, we don’t want to move transactions from social to economic. Doing so would eliminate the warm glow effect of giving by eliminating altruism altogether. We certainly don’t exhibit any feelings of altruism when paying the cable bill, and the corollary is that we don’t feel we’re entering into an economic transaction when we respond to a charity’s direct mail piece.
When we move this concept to nonprofit salaries, we get confusion. Schwarzenegger (and others) make the case that public or charity work resides in the social realm. Many employees of public or charitable organizations would probably disagree.
The distinction may come down to the individual participants in the transaction. For the Governor of California the participants include voters, who may look favorably on the social frame. For run-of-the-mill nonprofit staff, the participants include organizational management, and occasionally volunteer leadership. For officers, key employees and select others working for nonprofits, the participants also include the IRS and anybody with access to the Form 990. See the difference there?
Since transactions with donors are social, and transactions with employees are economic, nonprofit employee salaries get stuck in the middle. Recognizing that improper framing might be one of the reasons for “we can’t afford to compete with for-profit salaries,” might give nonprofit employees a firmer base upon which to set their salary expectations.
Or it could just be good fuel for your next salary negotiation.
I have to mention that Dan Ariely’s book Predictably Irrational includes a discussion of this article, and is also completely fascinating.
1 As a total sidebar, I can’t count the number of times that folks have come up to me after a cooperative extension session to say something like, “We’re not going to be able to make any money, so we’ve decided to make the company a nonprofit.” Yikes! That’s not a nonprofit, that’s just a terrible business idea.