Nonprofit Employee Compensation: A Dangerous Legacy

When I started my consulting firm, my Dad gave me some wise advice. He told me that a business isn’t a real business unless it pays employees a living wage – and still has a positive bottom line. And by living wage, he didn’t mean minimum wage. He meant a competitive wage.

For small businesses, and for nonprofits, paying competitive compensation is sometime difficult. Bigger organizations have better bargaining power when it comes to benefits. They have more redundancy internally which makes it easier to grant sabbaticals, more paid time off, and other work schedule benefits. They also tend to have more established and lucrative revenue sources, which means they are able to pay slightly more than their smaller competitors.

But my Dad’s advice was still spot on. While he might have been most concerned about whether I was making a living wage, I learned that putting together a thoughtful and competitive compensation package is often the difference between being able to compete effectively or battling to stay alive.

Most nonprofits operate with the lean, small business mentality. While this is necessary in many respects, a real nonprofit business should not be built at the expense of its employees. It just isn’t good business.

Why Underpaying Employees Isn’t Good Business

Most people intuitively understand why underpaying employees isn’t good business. From my perspective, there are two particularly important reasons.

First, you often get what you pay for.

It isn’t that hard to figure out what a nonprofit pays its employees. For executives, all you have to do is pull up the 990 on Guidestar. For other positions, word on the street is probably good enough. If you are underpaying your team, you already lose a group of qualified candidates who don’t apply because they just can’t stomach the pay cut they would need to take to join your organization. I often hear people say that prospective employees will take a pay cut if they care enough about the mission. Sure, that might be true to a degree, but they still need to pay their own bills. If the difference between competitive compensation and what you are offering is significant, many of the top performers won’t apply.

Many top performers who do apply will see this as their sunset opportunity. It is a chance to work fewer hours, spend more time with family (or golfing, or fishing, or whatever). These individuals may have strong skills, but if times get tough (as they often do in nonprofits), they may not stick it out.

Sometimes nonprofits settle for a less experienced individual instead of hiring the talent needed to do the job. For example, an organization may need a marketing director to manage brand awareness and increase donations. However, they may decide they can only afford a marketing coordinator. Of course, that is a sacrifice that many small businesses and nonprofits make because of real budget constraints. However, many organizations then rely on that less experienced individual to do the strategic thinking they needed, and suffer as a result.

Second, turnover is expensive.

Most human resource professionals will tell you that compensation is not the reason people leave an organization. However, it certainly can contribute to dissatisfaction. If someone is working long hours, feels undervalued, and is paid well, they might choose to stick it out because they have stable income. This gives the management team time to address the dissatisfaction. However, if they are working long hours, feel undervalued, and are living on food stamps because of low pay, they may take action more quickly.

Most organizations underestimate the cost of turnover, especially to a small organization. It wreaks havoc internally as critical tasks are left unfinished. More significantly, it can cause poor morale to spread more quickly than the common cold.

Hiring a new team member takes time and distracts other employees from responsibilities on their plates. It also takes time for a new employee to get up to speed and begin contributing productively to the organization.

Why Nonprofits Underpay Employees

Of course, you probably understand the drawbacks to underpaying team members. Most every nonprofit does it. But why?

I believe it’s a cultural thing.

Most nonprofits start out as organizations run by volunteers. They donate their time as the organization gets off the ground. When they get big enough that the original volunteers can’t handle the workload, they hire someone.

Sometimes, they hire one of the original volunteers. Since this person was previously donating time, they take a lower compensation package because it feels awkward to be paid. Other times, they hire someone just to take care of low level administrative tasks, and then grow that position into an executive director. In some cases, they hire a more experienced manager. However, since the work was previously performed on a volunteer basis, it feels like they are paying someone who could have been volunteering. This is the start of a culture of underpayment.

It is reinforced because this same system of development happens across most nonprofits. Now, it becomes more broadly acceptable to pay less for talent if you are a nonprofit. “Competitive” compensation for a given position becomes a comparison across nonprofits, and not across the broader market.

This model is reinforced by boards of directors who hire new leadership with the predecessor’s compensation, or that of peer organizations, in mind. It’s also perpetuated by donors and grantors, who are particularly critical of executive compensation.

How to Address Compensation Issues

Whether or not my theory about why it happens is correct, there is little doubt that nonprofits routinely underpay employees relative to the broader market. At the same time, there are financial realities involved! I rarely run across a nonprofit that could simply raise compensation to competitive levels without negatively impacting its mission or the organization’s financial stability. So, what can an organization do to correct this issue?

First, commit to correcting it over time. It will take years for most organizations to make the changes needed to ensure all employees are paid competitively. It will also require more than simple pay increases. To ensure that it doesn’t negatively impact your organization, you may need to restructure job responsibilities and expectations, renegotiate benefits, and replace individuals whose skill sets aren’t aligned with the organization’s needs.

Second, stop asking “can we find someone who will do this job for this amount of money?” And start asking “how do we get the job done while paying competitively?” The answer might require creativity. For example, if you can’t afford to hire a full-time team member with the right skills, you could:

Use an outside consultant.

For example, if your budget accommodates a marketing coordinator, but you need a director, you might supplement the coordinator with an experienced marketing consultant.

Outsource.

Sometimes an organization actually needs a range of skills not found in a single individual. For example, you might need a human resource director for one day per week, a payroll manager for two days, and a benefits administrator once in a while. These situations lend themselves well to outsourcing. In this example, using an organization like Archbright ensures that the staff is paid competitively while allowing the organization to tap into the skills as needed.

Source share with other nonprofits.

Another approach is to share a set of resources between nonprofits. For example, your organization could collaborate with two or three other organizations of similar size to share an accounting, technology, marketing, human resource or other back office team. You can read more about source sharing here.

Leverage volunteers.

Nonprofits have an advantage that other small businesses do not. You can ask people to volunteer to do important work. As a small business owner, I am required by law to pay anyone who works for me. While volunteers take time to manage, they can provide expertise and fill specific project needs to save compensation costs.

Nonprofits, like small businesses, need to be real companies. We should all aim to pay competitively for the talent we need. Our organizations will become more effective as a result, and we will be better able to deliver on our missions.

About the Author

Heather Fitzpatrick is a management consultant who focuses on helping organizations create thoughtful, strategic plans to achieve important goals. She provides strategic planning, marketing planning, financial planning and business planning expertise to a broad range of nonprofits. An active community volunteer, Heather has also served on 10 different boards of directors.

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