The Case for Incentive Pay in Nonprofits

by John A. Haas, Ph.D.

Because “need more funding” describes conditions at most nonprofit organizations, regardless of sector, most have avoided using — or even considering — incentive pay as part of their employee compensation package. But should they?

The Anti-Incentives Cultural Bias

Many nonprofits are under constant pressure to engage in sustained fund raising and marketing efforts just to deliver on their stated vision and purpose. Already strapped for money, how could they possibly afford to pay incentives?

Consider first the prevailing culture among nonprofits.

While nonprofits, like any organization, need to be mindful of their bottom line, their primary purpose is not to make money, but to fulfill a socially-oriented mission. Employees and volunteers who dedicate time and effort pursuing the mission certainly are not doing so to maximize their personal income. They passionately believe in the cause, and that’s what drives them.

If offered incentives, many employees at nonprofits may well respond: “I already work as hard as I can. The prospect of more money won’t get me to work any harder!” Offering incentives may even be construed as an insult.

Legal limitations, ethical guidelines, and public disclosure requirements govern compensation practices in nonprofits, especially for those engaged in fund raising. A raging controversy exists over the ethics of paying development officers a percentage of funds raised.

The Association of Fundraising Professionals (AFP) takes a strong and unequivocal stand against contingent-pay. Their 1992 position paper developed by the ethics committee states: "Members shall work for a salary or fee, not percentage-based compensation or a commission." The AFP cites the main consequences of contingent pay:
  1. Charitable mission can become secondary to self-gain.
  2. Donor trust can be unalterably damaged.
  3. There is incentive for self-dealing to prevail over donors' best interests.
But this doesn’t mean nonprofits can’t pay incentives based on other factors. For example, they could be paid based on the number of new donors, the number of new donors contributing more than $X, the number of new donors residing in specific zip codes or (roughly) between the ages of X and Y, etc.

How Incentives Can Help

Offering key employees — or better yet, all employees — an opportunity to earn at least some additional compensation can produce the following benefits:
  • Encourage clearer definition of organization goals, budgets, and plans. Target incentive payouts would be budgeted.

  • Identify specific, measurable targets that define how each incentive participant can best contribute through individual and/or team effort within their job responsibilities.

  • Get participants to pay more attention to measures, and seek and expect regular reporting on progress toward goals.

  • Encourage better internal communication and more focused action planning.

  • Assuming that all employees seek to do what’s best for the organization, incentives help define what “a good job” means for the current period.

  • Individual and team goals can be updated for different time periods, reflecting current priorities.

  • While money is often not the primary motivator for nonprofit employees, even a few hundred dollars tied to goal achievement would always be welcomed.

  • Perhaps most important, incentives can generate greater “buzz” and excitement as people are encouraged to think about their organizations and roles in new and creative ways.
Because many nonprofits struggle to survive and thrive, and have limited discretionary funds, if they can’t provide monetary incentives, they owe it to themselves, their employees, and ultimately their cause to consider alternative approaches in their reward and compensation plans.

John Haas, president of Management Strategies Group, helps small- and mid-sized organizations manage major change through new organizational designs and compensation systems. Call him at 617-964-1020 or email jhaas@managementstrategiesgroup.com.