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There is a considerable literature, albeit inconclusive, on whether workers in the nonprofit sector are paid less than their counterparts in the private and public sectors. For example, a large national study in the U.S. showed positive and negative differentials for some occupations and industries, but no systematic differences that are sector wide (Leete, 2000). Other studies targeted to specific sub-sectors are mixed in their results: many support these negative wage differentials and others do not (Bond, Raehl, & Pitterle, 1999; Naci Mocan & Tekin, 2003; Naci Mocan & Viola, 1997; Preston, 1989; Shahpoori & Smith, 2005).
In comparing the wages offered by for-profit firms and nonprofit organizations, it is helpful to note at the outset that nonprofits often have greater financial restraints than their counterparts in the for-profit sector and, hence, may offer lower wages. But the reverse may also be possible: for-profit firms that are subject to market discipline and responsibility to shareholders may have less scope to offer higher wages to workers. Thus it is not evident, prima facia, whether nonprofits or for-profits, would offer higher wages.
Despite the lack of unambiguous evidence for negative wage differentials, nonprofit workers often perceive themselves as underpaid compared to their counterparts in other sectors. A recent survey conducted by the Brookings Institution (Light, 2003) found that nearly half of all paid nonprofit workers in the human services believe they could make more money elsewhere, but they see themselves as driven by mission not money. Another survey reported that current nonprofit executives across all sectors in the U.S. believe that they could have made more money working in another sector (Bell, Moyers, & Wolfred, 2006).
Career counsellors and executive placement centres publicize the negative wage differential. For example, a prestigious business school in the U.S. offers financial aid to those students choosing to work in the nonprofit sector because "students are interested in public service careers, but their educational debt burden may inhibit them from pursuing these jobs since they tend to provide lower compensation than the for-profit sector" (Almanac, 2005, p. 2).
Perpetuating the perception of lower wages are several leading websites focused on nonprofit employment. They explicitly inform individuals searching for employment that nonprofit salaries are lower than in other sectors on average. Lynda Ford, a human-resources consultant, maintains that nonprofits offer lower salaries because they compensate employees by creating a good work environment (Klineman, 2004). Furthermore, the hue and cry in the media about some excessive nonprofit salaries has given rise to a tendency to lower executive salaries in the nonprofit sector. In the last few years, federal agencies in the U.S. and Canada are also paying greater attention and giving more scrutiny to executive compensation in the nonprofit sector.
Against this background, in this research we examine the perceptions of executive directors in Canadian nonprofits regarding wage differentials in the nonprofit sector compared to the for-profit sector. These perceptions, especially concerning their own wages, are important because it is in this context that executive directors make choices about where to work. This, in turn, determines the managerial labor supply for the sector. We first present a brief review of the theoretical explanations offered by scholars for wage differentials. We then turn to the empirical findings on wage differentials before presenting our findings.
Date Posted: 10 March 2008
This document has been peer reviewed.