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2. Literature review
In this review, I will first summarize writing on the subject of worker motivation as it relates to perceptions of employer fairness and wage equity. I will then provide an overview
of scholarship relating to worker motivation and the mission of nonprofit organizations. Finally, I will discuss the implications of these two bodies of work taken together.
2.1. The psychology of wages and worker motivation The literature relating to worker motivation spans the disciplines of anthropology, psy-
chology, sociology and economics. I will review four branches of this work: the first two of these relate worker motivation explicitly to the structure of wages, the latter two relate
worker motivation to general employee perceptions of employer fairness. In the first body of work, wage equity is linked to worker morale, productivity and group cohesiveness. In
the second, the literature on reciprocity and gift exchange, the perception of wage fairness is linked to worker morale. In the third group of articles, the relationship between intrinsic
and extrinsic motivation is considered. Finally, the effects of organizational pride on behav- ior are discussed. In the last two cases, the relationship between wage equity and worker
motivation is not made explicit, but will be drawn out here.
2.1.1. Wage equity, work morale and group cohesiveness In the literature relating wage equity to worker motivation, the perception of wage fairness
or equity is generally understood to be based on the extent to which differences in wages between an individual and the relevant reference group are considered to be justified within
the context of a culturally determined understanding. Adams 1963 writes, “Inequity exists for Person whenever his perceived job inputs andor outcomes stand in an obverse relation
to what he perceives are the inputs or outcomes of Other,” p. 424, where ‘Person’ is an individual and ‘Other’ is a reference individual or group. The relevant reference group is
generally taken to be other employees in the same occupation in the same firm, all employees in the same firm, employees in the same occupation in other firms, or other employees in
other firms. Most commonly, the first two groups have been considered most relevant. As Frank 1985 discusses, local comparisons generally carry more weight than more distant
ones.
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Frank and Stark 1990 have both argued that wage dispersion within a reference group diminishes work morale because it introduces relative status deprivation for those at the
low end of the distribution. Clark and Oswald 1996, using survey data from a sample of 5000 British workers, find empirical evidence that relative pay does in fact affect job
satisfaction and overall utility. In a closely related argument, Levine 1991 suggests that wage dispersion leads to lower group cohesiveness, which he defines as the propensity of
workers to obey group norms. In turn, he argues that cohesiveness promotes productivity,
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Baron and Pfeffer 1994 refine this understanding by suggesting that wage inequality will generate more dissatisfaction the more closely people work together, the less differentiation there is among them in rank or other
identifying characteristics, the more interdependent their work, the more important the social relations of work, the smaller the organization, or the less that employment is out-sourced from the organization.
426 L. Leete J. of Economic Behavior Org. 43 2000 423–446
particularly when work requires cooperation between employees. He provides a variety of types of evidence to support his contentions. Lazear 1989 elaborates a similar argument.
Adams 1965 suggests that workers who perceive themselves as unfairly paid will lower their work effort; the more participatory the firm and the more discretion employees have,
the easier it is for employees to ‘punish’ a firm they feel is treating them unfairly.
Lazear 1991 suggests, however, that the effect of wage inequity need not necessarily imply a net loss of motivation or productivity. The loss of status to those at the bottom of
the wage distribution is by definition equal to the gain to those at the top. While there may be an efficiency gain from harmony in the work place, there can also be efficiency
gains spawned by competition between workers to win tournaments stressed by Lazear and Rosen, 1981. However, as Rabin notes, the human dislike of loss relative to reference
points or to the status quo is greater than the love of gains. This casts doubt then on whether the benefits of status gains to winners, and their productivity implications, will outweigh
the costs to losers.
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2.1.2. Reciprocity and gift exchange Closely related to the wage equity literature is the literature based on reciprocity and
gift exchange. In this view, derived from anthropology and emphasized by Akerlof 1982, employees ‘give’ to the employer in proportion to what they perceive they have received.
Along these same lines, Rabin notes the reciprocal nature of preferences: people will be altruistic if they perceive others being altruistic. Rabin cites evidence of a strong positive
correlation between subjects’ contributions to a public good and their beliefs about how much others are contributing. Furthermore, Rabin argues that individuals determine their
disposition toward others according to the motives they attribute to them, not solely ac- cording to their actions. Thus, employees will put forth more effort when they feel they are
receiving a fair wage.
2.1.3. Intrinsic and extrinsic motivation Frey 1993a,b, 1997 writes extensively about intrinsic motivation and the factors that
contribute to or detract from it. He writes: “Persons are intrinsically motivated if work is performed for work’s sake. Many different conceptualizations of intrinsic preferences
exist see Deci and Ryan, 1985 . . . For our purpose intrinsic work motivation is identified with work morale or work ethic” Frey, 1997, p. 429. Frey argues that intrinsic motivation
is both costly and fragile. It is psychically costly to muster and to maintain the inner forces required to support intrinsic motivation. Furthermore, it can be either crowded-in
or crowded-out by elements and conditions that he identifies, particularly by externally imposed commands, rewards or sanctions related to the performance of the job extrinsic
motivation. His argument rests on the premise that individuals are motivated in part by the desire for “feelings of competence and self-determination” Deci, 1975. These feelings
can be diminished when extrinsic motivation either positive or negative is introduced. In addition, Frey argues that individuals operate under what amounts to a principle of
conservation of motivation. They muster only the intrinsic motivation needed to accomplish the task, given extrinsic conditions. Following Deci and Ryan 1980, Frey identifies a
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Lazear 1991 suggests other reasons why wage compression may be efficient as well.
L. Leete J. of Economic Behavior Org. 43 2000 423–446 427
number of conditions under which intrinsic motivation is more likely to be crowded out by external factors. These include, among other things, when the employee perceives unfairness
in their relationship with the employer. While Frey does not explicitly discuss the relationship between wage equity and intrinsic
motivation, several possible connections are clear. First, perceptions of workplace unfairness are, according to Frey, likely to promote the crowding out of intrinsic motivation. Second, if
Frey is correct, then productivity gains from status differentiation, such as those discussed by Lazear and Rosen may not be forthcoming when productivity depends in an important
way on intrinsic motivation. Because status differentiation amounts to a heightening of extrinsic motivation, under certain conditions discussed by Frey, this may serve only to
crowd out intrinsic motivation among both winners and the losers. Thus, all else equal, one might expect firms that rely more heavily on intrinsic motivation to rely less on status
differentiation as a motivating mechanism.
2.1.4. Organizational pride In a related literature, Smith and Tyler 1997 also identify fairness as an important
principle affecting the attitude and behavior of individuals in organizations. They define pride as the status of the group one belongs to, and respect as one’s position within the
group. They write that “Feelings of pride are linked to judgements that group authorities are trustworthy, neutral and respectful . . . These results support the argument that people
care about fair treatment by authorities because the fairness of those procedures indicates to those involved that they are respected members within their groups and that their groups
are positive and valuable” p. 147. They go on to note that “people who feel proud or well respected will be more likely to endorse or engage in conforming group behaviors”
p. 151. They provide experimental and survey evidence that this is the case. Thus, feelings of pride and respect can encourage conforming behavior, but depend at least in part on the
perception of fairness in the workplace. The wage structure could well be central to such an assessment, and thus, again would be linked to employee motivation.
2.2. Employment relations in the nonprofit sector While the literature discussed above relates to worker motivation more generally, non-
profit scholars have frequently noted requirements for employee motivation that are par- ticular to nonprofit settings. These needs are generally identified as being rooted in the
reasons for the formation of nonprofit organizations. The economic theory of nonprofit or- ganizations and the resulting typology of nonprofit organizations are well summarized in a
number of places, in particular in Hansmann and Rose-Ackerman 1996, and thus, will not be reproduced in full here. Instead, two basic types of nonprofits will be discussed explicitly
here: those formed as a result of information asymmetries, and those formed to uphold the ideological principles of the stakeholders.
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Examples of nonprofits that are formed due to information asymmetries include those that provide education, medical, nursing home
and childcare services. In these and other cases, it is often difficult for the purchaser of the
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Other types of nonprofits that are not as relevant to the discussion here include clubs those formed to serve the interest of their members, mutual savings associations and insurance companies.
428 L. Leete J. of Economic Behavior Org. 43 2000 423–446
services to monitor andor evaluate the quantity andor the quality of the good or service purchased. If quantity or quality is costly to produce, for-profit organizations pose a risk
of moral hazard to the consumer. Managers motivated by monetary incentives may skimp on either quality or quantity while skimming profits. In some cases, this may be at the
expense of those who are least able to express their needs or to care for themselves. Other nonprofits exist explicitly to conduct activities in accordance with the religious, aesthetic,
moral, ethical andor intellectual values of the organizations’ stakeholders. Examples in- clude religious organizations, civil rights and civil liberties watchdog groups, museums,
symphonies, arts preservation or arts appreciation groups. In these cases, the very existence of the organization is predicated on the assumption that it will uphold the values of the
stakeholders.
Both Hansmann and Rose-Ackerman discuss the participation of intrinsically motivated managers in the nonprofit sector in the context of these types of organizations. Hansmann
highlights the importance to nonprofits of managers who are motivated more by the desire to produce a quality product than by monetary rewards. According to Hansmann, the in-
ability of nonprofits to distribute residual earnings the nondistribution constraint leads to an efficient match between nonprofit organizations and intrinsically motivated managers.
His discussion does not extend beyond this observation. Rose-Ackerman, however, goes further. She suggests that ideological customers may prefer patronizing organizations run
by like-minded individuals. Ideological founders are those motivated by ideas rather than profit — those ‘with strong beliefs about the proper way to provide a particular service’
p. 719. They will then seek to hire managers and employees who share their vision and, thus, need little monitoring to ensure that they work towards the same goals as the organi-
zation founder.
There is some evidence to support the conjectures of Hansmann and Rose-Ackerman. Weisbrod 1988, p. 32 discusses evidence of the sorting of nonprofit and for-profit managers
by goals and personality type. Mirvis and Hackett 1983 analyze Quality of Employment Survey data for 1977 by sector of employment and find that nonprofit employees are more
likely than government or for-profit sector employees to report that “their work is more important to them than the money they earn” p. 7. In a comparison of matched samples,
they also find that nonprofit employees reported the most variety and challenge in their jobs, the most autonomy defined as freedom and responsibility to decide what to do and when,
and the least extent of ‘overeducation’. Furthermore, nonprofit workers were also less likely to report “that their jobs sometimes go against their conscience” p. 9, and reported higher
levels of intrinsic rewards from the job, such as feelings of accomplishment and self-respect when they do their jobs well. Newman and Wallender 1978 report that nonprofit workers
develop a ‘mystique’ about their organization.
All of this suggests that intrinsic motivation and identification with organizational goals play a more important role in the nonprofit sector than elsewhere. However, as noted by
Frey 1993a, intrinsic motivation is both costly and fragile. Thus, nonprofit firms must not only find appropriately motivated employees, but must also direct and support their
motivation. To this end, one might expect nonprofit organizations to rely more heavily than for-profit organizations on practices that strengthen intrinsic motivation, improve
adherence to group norms, and organizational pride. In order to accomplish this, following the discussion above, they may rely more heavily on wage equity. As Frank highlights,
L. Leete J. of Economic Behavior Org. 43 2000 423–446 429
localized wage comparisons take on a particular importance. However, what is ‘local’ will be defined by the scope of the particular labor market. Thus, one might expect wage equity
to occur within or across all occupations within an organization, or within an occupation but across organizations in a particular industry. Any of these comparisons may apply only
to higher level employees — managerial and professional employees, and technical and administrative support staff — those who have the most information about relative wages
and whose workplace conduct is most dependent on self-determination. Furthermore, to the extent that wage inequity in the US has race- and gender-related components, one
might expect these to be diminished in nonprofit organizations as compared with for-profit organizations.
This emphasis on wage equity in the nonprofit sector is not meant to downplay the possible importance of such factors in for-profit settings, but rather to highlight the nonprofit sector
as a context in which these factors may be relatively more concentrated as compared with the economy at large. While motivated employees or organizational pride might be productivity
or sales enhancing in the for-profit sector, they may be the sine quibus non of the nonprofit sector.
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Furthermore, the implication that wage equity is important to maintaining worker motivation can only be taken to suggest that wage equity may be a necessary precondition,
not that it is a sufficient one. For example, Freeman and Medoff 1984 note that while wage equity is greater among union than among non-union employees, stated job satisfaction is
not.
3. Evidence of wage equity in the nonprofit sector
