Journal of Economic Behavior Organization Vol. 43 2000 423–446
Wage equity and employee motivation in nonprofit and for-profit organizations
Laura Leete
1
Public Policy Research Center, Willamette University, 900 State Street, Salem, OR 97301, USA Received 18 July 1998; received in revised form 5 July 1999; accepted 8 July 1999
Abstract
In this paper, I argue that because nonprofit organizations rely disproportionately on intrinsically motivated employees, they provide a particularly interesting context for examining the relationship
between wage dispersion and employee motivation. If certain hypotheses put forth in the literature on psychology and employee motivation are correct, then wage dispersion should be less apparent
in the nonprofit sector than in the for-profit sector. I examine labor market data from the 1990 US Census on nonprofit and for-profit employees and find a strong link between wage equity and
sector of employment. This finding is supportive of the view that wage equity is related to worker motivation. Alternative explanations for the observed wage patterns are examined and rejected.
© 2000 Elsevier Science B.V. All rights reserved.
JEL classification: J31; L31 Keywords: Wage equity; Worker motivation; Nonprofit institutions
1. Introduction
A new interest in the relationship between the economics of labor markets and the psychol- ogy of worker motivation has developed in recent years. Economists and others have been
exploring previously neglected concepts, such as the relationship between organizational structure, worker motivation, envy, pay, and workplace performance see Rabin, 1998. In
this paper, I argue that because nonprofit organizations rely disproportionately on intrin- sically motivated employees, they provide a particularly interesting context for examining
some of these issues. If certain hypotheses put forth in the literature on nonprofit organi- zations, psychology and employee motivation are correct, then wage dispersion should be
E-mail address: lleetewillamette.edu L. Leete.
1
Fred H. Paulus Director for Public Policy Research and Associate Professor of Economics and Management. 0167-268100 – see front matter © 2000 Elsevier Science B.V. All rights reserved.
PII: S 0 1 6 7 - 2 6 8 1 0 0 0 0 1 2 9 - 3
424 L. Leete J. of Economic Behavior Org. 43 2000 423–446
less apparent in the nonprofit sector than in the for-profit sector. I examine labor market data from the 1990 US Census on nonprofit and for-profit employees. I find a strong link
between wage equity and sector of employment. This finding is supportive of the view that wage equity is related to worker motivation. Alternative explanations for the observed wage
patterns are examined and rejected.
Many authors have recognized that nonprofit organizations are organized along different motivating and operational principles than for-profit organizations. The differences between
nonprofit and for-profit organizations extend, to varying degrees, to their reasons for ex- istence, organizational goals and methods, products produced, and constituencies served.
I will argue here that such differences may well lead to different approaches to human resource management, in particular with regard to the distribution of wages in relation to
worker motivation.
A large number of nonprofit organizations are formed for one of two reasons: to produce a certain level of quality when it is less than perfectly observed by the consumer, or to produce
goods or services while abiding by certain moral, intellectual, aesthetic or religious princi- ples. Several authors have suggested that under such conditions that the organizational goals
of nonprofits are often best achieved by intrinsically motivated employees and by employees who identify very closely with the goals of the organization. There are many methods of
encouraging employee compliance with the goals and principles of the organization, such as incentive and monitoring schemes. I will argue below, however, that for many nonprofit
organizations, the use of intrinsically motivated employees may be the most satisfactory solution. Indeed in some cases, it is the only solution; intrinsically motivated employees are
sometimes inherent to the service being provided. Parishioners may object to confessing to a priest who is motivated by anything other than faith. Heart patients may be reluctant to
submit to the knife of a surgeon who does not put the quality of her work above all else.
Several authors have noted the wage level consequences of hiring intrinsically motivated employees in nonprofit organizations. In particular, in his seminal work Hansmann 1980
suggests that nonprofit employers will use wages as a negative screening device by offering salaries below those in the for-profit sector. This should deter those highly motivated by
monetary concerns from seeking nonprofit employment and attract those for whom love of their work dominates. This idea is formalized by Handy and Katz 1998. Leete 2001
finds evidence that is consistent with such wage setting practices in some portions of the nonprofit sector. No author to date has pursued other implications of the need for some
nonprofit organizations to hire and retain and continue to motivate intrinsically motivated employees. Frey 1997, however, has written more generally on the relationships between
intrinsic and extrinsic motivation. Others have written about the relationship between work morale and status and equity comparisons within firms of all types. In this paper, I will relate
the two literature, pointing out the possible role of wage equity in maintaining intrinsic motivation and organizational identification. I will then relate this to wage setting practices
in the nonprofit sector.
In Section 2 below, I provide an overview of previous literature addressing nonprofit human resource issues and the psychology of worker motivation and I relate this literature
to the notion of wage equity. In Section 3, I examine empirical evidence on the distribution of wages in the nonprofit and for-profit sectors. In Section 4, I summarize the implications
of the findings.
L. Leete J. of Economic Behavior Org. 43 2000 423–446 425
2. Literature review
