Doing Good for Society and Doing Well Financially? Compensation in Nonprofit Organisations

By Wim Maas

After my Master of Science in Accounting, my thesis supervisor asked whether I had considered doing a PhD. I remember thinking it was not for me. Two reasons: First, I wouldn’t say I liked most of the accounting research and its limited relation with real-world problems. Second, my interests were too broad to focus on a single topic for years. What I did like was teaching. The interactions with eager students and the reward of seeing them learn. So instead, I did an educational Master’s program and a year of teaching at high school before rejoining my alma mater as a teacher. 

PhD journey 

It was after two great years of teaching at university that I learned that my career path is not only unusual but also impossible in academia. Irrespective of teaching performance, experience, or the number of other degrees, without a PhD and publications a career in academia is wishful thinking. So, it was time to revisit my decision. The beginning of my PhD was a struggle. I had to switch topics twice to find something that interested me enough to sacrifice many nights and weekends for. When I found my topic I realized it is something that had been close to my heart for my entire life.  

This strange thing called volunteering 

I always volunteered a lot. As a child, I used to help my mother go door-to-door and collect donations for charity. As a teenager, I was constantly tutoring others, in class or after school. I did youth camps, church work, pilgrimage trips with the sick, handy work for the elderly, and I was on the board of a nonprofit before the age of 18. As a student, I volunteered at a local cemetery, did a board year at a student sports organization, taught English at an orphanage, and picked litter to keep my city clean. The payout was always: satisfaction. As an economist, I saw the opportunity costs of these activities, but also the non-monetary utility I derived from them. Of course, now, as a teacher, I still know very well what it is like to get paid in fulfillment, at least in part. 

The question of why doing good for society and doing well financially often diverges has always intrigued me. When I found theoretical and empirical literature on why people are okay with receiving lower pay for satisfying work, I knew I found my research topic. For the past 5 years, I have researched the curious complications and trade-offs related to compensation in nonprofit organizations. My first research question is whether excessive compensation of executives at nonprofit organizations can lead to a decrease in the number of volunteers working for that organization. I found that it does. When news articles report on executive compensation, the number of volunteers two years later is down by 13%-17% on average for every standard deviation increase in compensation. 

Distributional justice and moral disillusionment 

Two theories possibly explain my findings. One is distributional justice. It may seem counterintuitive, but when volunteers learn of the salaries of executives who work for the same organization but receive professional salaries, it may invoke feelings of injustice or unfairness. Distributive justice theory, which builds on equity theory and the theory of relative deprivation, focuses on the social comparison of rewards. The tension in the research question is whether volunteers, who by nature work for free, actually care about the relative pay of others in the nonprofit organization. 

A similar, but alternative explanation is found in the theory of moral disillusionment. Moral disillusionment refers to the state of disappointment and loss of faith in previously held moral beliefs or ethical standards. A recent experimental study finds that consumers react more negatively to transgressions in nonprofit organizations than transgressions in for-profit businesses. Their expectations are violated. Consumers expect nonprofits to behave morally and deviations from moral behavior evoke dissonance. I expect something similar might be driving my results. When volunteers learn that executive salaries deviate from what they find reasonable, they may lose faith in the organization. 

What’s next

My second PhD project concerns tax avoidance by nonprofits via compensation restructuring and my third project is on the role of non-profit compensation consultants. By now, my dissertation is largely finished. But, many more questions on compensation at nonprofit organizations are yet to be explored. Compensation is important to get right for nonprofit organizations to optimally contribute to society. 

Wim Maas is a lecturer and PhD candidate at Tilburg School of Economics and Management at Tilburg University. His empirical research at the Department for Accounting at Tilburg University focuses on compensation in the nonprofit sector. The first two working papers of his dissertation can be found here and here.