Lessons learned from the Nonprofit sector about pay

I spent most of the last decade working to build the capability and capacity of Singapore’s Social Service sector. Like most HR people, I had the notion, before I joined, that the nonprofit arena could learn a lot from corporates regarding HR practices, and compensation in particular. Not to say that there were not good practices that I was able to bring to the nonprofit world, but there were a great deal of lessons about motivation that I learned from the nonprofit organizations which I am sure will be of great use to the corporate world.Let’s dive deeper into the idea of how the social sector’s HR practices—particularly around compensation—are challenging traditional pay structures and what this means for motivation and retention.

In nonprofit organizations, research has consistently shown that employees are often intrinsically motivated, meaning they derive satisfaction from the purpose of their work rather than from financial rewards alone. This intrinsic motivation is where employees are willing to accept lower wages or forego certain financial incentives because they feel personally invested in their organization’s mission. This notion challenges the corporate assumption that higher financial incentives always drive better performance or retention.

Stable Pay and Retention in the Nonprofit Sector

A study published in the Journal of Labor Economics examined nonprofits that actively choose lower incentive pay and focused on stable, predictable wages for their employees. These organizations found that a commitment to stable pay structures actually increased retention rates among staff members. The reason? Employees in mission-driven roles often prioritize job security, predictability, and alignment with the organization’s goals over variable pay that could detract from their sense of purpose.

For instance, nonprofit employees working in healthcare, education, and social services sectors often reported that stable, predictable pay allows them to focus on their roles without the distraction or stress that comes from financial variability. In essence, by taking money “off the table”. High-stakes performance-based incentives, while effective in some corporate settings, may not yield the same results in nonprofits because they can inadvertently shift focus from the mission to individual gains.

In our case, we challenged assumptions from compensation consultants that continued to emphasize variable pay as a means to get better results for these organizations. What we found is that clarity in communicating the purpose, values and impact the organization had on the beneficiaries of the services they provide were far greater motivators.We also found that attraction and retention were negatively influenced by pay. That is, if pay was too small, candidates would shun the organization, but above-average pay did not yield above-average attraction or retention. What was found to drive attraction and retention, even more than high levels of pay, was working with like-minded people. The sense of “Tribe” drove net promoter scores high, and improved retention by several percentage points.

The Negative Impact of High-Stakes Incentives in Mission-Driven Roles

High-stakes financial incentives can, in some cases, diminish an employee’s intrinsic motivation. The social sector has highlighted this issue by showing how variable financial rewards can cause employees to shift their focus from collective goals to personal achievement, which can erode the collaborative culture essential in mission-driven work environments.

For example, consider a nonprofit organization working on social work. For one thing, setting targets was in itself difficult. Were Socials Workers to be measured on the number of cases they attended, or on the impact they created for those they serve? In truth, some cases may be more straight forward to address, while others may require complex interventions over a period of time. Incentives based on any volume-based metric would have a negative effect on overall impact. In fact, many social workers were willing to forgo the bonus if it meant they would not be able to service a case properly. 

In general, if team members are given individual financial incentives tied to fundraising goals or other performance metrics, this could create competition among employees and detract from their shared goal of societal impact. Studies have shown that in such cases, employees might experience "motivational crowding out"—a phenomenon where the introduction of external rewards (like high bonuses) can reduce the motivation that comes from the work itself.

Lessons for All Sectors: Key Insights from Nonprofits

Studying pay practices in the nonprofit sector has yielded several key lessons about aligning pay structures with organizational values and purpose. Here’s what all organizations can learn:

1. Align Compensation with Organizational Values: When pay structures reflect an organization’s values, it reinforces employees' sense of belonging and purpose. 

2. Consider the Unintended Consequences of High Incentives: Incentive pay works best when it aligns with employees’ motivations. In social and mission-driven environments, high incentives can sometimes lead to disengagement because they may conflict with the collaborative and purpose-driven culture. This is why many nonprofits reduce the amount of variable pay, provide more team incentives, even at lower levels, and prioritize predictability and stability in pay structures to support a sense of security and dedication to the mission.

3. Invest in Purpose-Driven Work Environments: Nonprofits often build a workplace culture that emphasizes the impact of the work itself. This environment fosters long-term commitment and can be cultivated in corporate settings by aligning roles and rewards with organizational values and purpose, creating a work culture where employees feel they’re part of something larger than themselves.

   
   

Applying These Lessons in Corporate HR

Corporate HR can take a few steps to implement these insights from the nonprofit sector:

• Reevaluate Incentive Structures: Instead of defaulting to high variable pay, consider incorporating incentives that reflect your organization’s mission and values. For instance, team-based incentives or project-completion bonuses might promote collaboration rather than competition.

• Emphasize Job Stability and Long-Term Rewards: If the goal is to build long-term employee commitment, focus on stable pay structures with predictable benefits. This approach could be more effective in roles that are customer- or community-focused, where a sense of security can directly influence performance and retention.

• Create Meaningful Work Opportunities: Build an environment where employees can connect with the organization’s impact. For example, you might create opportunities for employees to participate in community or environmental projects that align with their roles, giving them a direct sense of their contributions’ impact.

Final Takeaway

The social sector’s approach to pay challenges the notion that "more money equals better performance" and instead highlights the power of purpose and stability. For rewards professionals, this is a reminder that compensation isn’t one-size-fits-all. By thinking carefully about how pay structures support or detract from organizational values, we can design compensation strategies that attract and retain mission-driven talent—whether in a nonprofit, a corporation, or somewhere in between.

What’s your experience? Have you experimented with purpose-driven pay structures? Share your thoughts below—let’s learn from each other across sectors.