Efficiency Wages and the Nonprofit Sector

Hey girlfriend.

You should get paid more. You should have more sick time, and more flex time to be with your family or go to school or rest.

I know, I know, it’s all about the mission, but for me, it’s still important that you get paid more per hour.

It’s good for you, but it’s also good for your nonprofit.

Don’t believe me? It’s true.

Walmart is even raising the wages of their employees (And creating a ladder for them to climb). Why? Because they’ve realized that just paying people as little as possible is making their stores sink.

“From store managers nationwide, they heard that years of cost-cutting meant Walmart had become viewed as a last-ditch option for employment — not the place that ambitious people might want to work. They were under such pressure to keep labor costs low that the employees they hired showed little loyalty or career-building devotion to their jobs.”

What are the two most common cries that we hear from people trying to hire development directors or other development staff?

1. They just won’t stay!
2. They just aren’t qualified!

If you don’t pay well and expect the moon on a stick, why would qualified people want to work for you?

If you don’t pay well and a desperate qualified person comes to you for a year and then jumps to a better paying job as soon as they can, was that a bad hire?

Or was it you failing to support this person in their career goals?

Most fundraising people have had a long list of short-term fundraising jobs.

I remember working full time at nonprofits that had no fundraising plan, no fundraising budget, no database and no structure or mentorship for me as a young fundraising professional.

Did I apply for other jobs while I worked at those nonprofits?

Oh hell yes I did.

I felt like with an at-will work environment, and paying me as little as possible, I did not owe them any loyalty, even though I believed in the mission. Even though I wanted to see my cause succeed, I came to think that the actual nonprofit didn’t have to. That is the sad truth.

When you don’t invest in your people, they think, “Why should I do my best for you?”

“It’s not that the retail industry doesn’t offer potential paths to good incomes. Starting pay for an assistant store manager at Walmart is $48,500, and the manager of one of its large stores can make comfortably above $100,000.

The problem — described by Walmart managers and people outside the company who study labor markets — is that there is no clear path for an entry-level worker to get there. Much training is impromptu, and chains have tended to view their hourly workers as interchangeable cogs rather than resources worth investing in.”

Does this sound familiar?

A well paying fundraising job can pay over $100,000 a year, and even at a small nonprofit you can make $50,000 and $60,000 per year, but if you’re making far below that right now, how do you get there?

Here’s what happens when you don’t pay a living wage. Here’s how it snowballs.

If you’ve ever been frustrated at the turnover in your nonprofit, or frustrated that you just can’t seem to hang on to donors, it’s time to start looking at the wages you pay, and the opportunities you give to employees. 

According to this article by Lindsay Bacher (no longer working in the sector) at YNPN Chicago,

“Yes, more people need to negotiate salaries and advocate for themselves. At the same time, when the pay range is $28,000-$30,000 for a position with 3-5 years of experience, we are negotiating within a broken system.

We tell people to advocate for pennies when the nonprofit system and culture is structured explicitly to pay low wages.”

When I spoke with someone at the Portland Development Commission, he said we don’t focus on nonprofits because “They bring the median income of the region down.”

I teach people how to negotiate their salaries now, at the Fundraising Career Conference, and it works. I’m teaching this at the Association of Fundraising Professionals National Conference next year.

Here’s an interview that you’ll like about how to negotiate your salary with Meghan Godorov

and here’s another one with Marc Pitman

But it’s not just about fundraising professionals negotiating, as Lindsay eloquently pleads. It is the structure of the system that needs to change, and that needs to come from boards and senior staff like CEOs and Executive Directors who create these salary ranges. The culture of our organization begins at the top.

So I created the Nonprofit Leadership Summit and the Next Level Fundraising Conference to talk with nonprofit leaders directly, so people could start to understand some of this economic imperative to pay people more.

Here’s what we teach nonprofit leaders about the case for “efficiency wages” as Walmart calls them.

It’s going to cost you $300,000 at least each time a fundraising person leaves in lost fundraising revenue, training costs, opportunity costs and donor attrition.

And it’s going to make you more money to have them stay for longer than the industry average of 12 months.

This fundraising staff turnover ultimately affects your ability to provide services or advocate, and that will save lives, help more children learn to read, preserve more habitat, even give you a buffer for when you have lean times at your nonprofit.

“It is in an employer’s best interest to pay more than necessary to get a worker into a job. The 18th-century economic thinker Adam Smith described the need to pay a goldsmith particularly well to dissuade him from stealing from you. More recently, economists (including Janet L. Yellen, the Federal Reserve chairwoman, who worked on these topics as an academic economist in the 1980s) have found evidence that people are more productive when they are paid above the market rate.

An employee making more than the market rate, after all, is likely to work harder and show greater loyalty. Workers who see opportunities to get promoted have an incentive not to mess up, compared with people who feel they are in a dead-end job. A person has more incentive to work hard, even when the boss isn’t watching, when the job pays better than what you could make down the street.

Want some proof that “efficiency wages” work?

• Higher pay at New Jersey police departments, for example, led to better rates of clearing cases.
• At the San Francisco airport, higher pay led to shorter lines for passengers.
• Among British home care providers, higher pay meant less oversight was needed.

“The management philosophy that became popular in the 1980s that led companies to cut pay for low-wage workers, fight unions and contract out work may have been profitable for the companies that practiced it in the short run,” said Alan Krueger, a Princeton economist and leading scholar of labor markets. “But in the long run it has raised inequality, reduced aggregate consumption and hurt overall business profitability.”

So if your nonprofit is dedicated to having everyone make below $15 an hour, because “that’s the going rate” or “200 people applied for your job and we can replace you in a minute” they have no idea how they are shooting themselves in the foot.

There’s a reason people leave the sector to make higher wages elsewhere. There’s a reason people job hop in the fundraising sector particularly. There’s a reason that people have a 50% or WORSE donor retention rate. There’s a reason you “just can’t get good help these days.”

Bottom line: Pay people above the market rate, and you will get more fundraising income at your nonprofit.