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ASU Lodestar Center Blog

Research Friday: The Trouble with Pay Raises


Welcome to Research Friday! As part of a continuing weekly series, each Friday we invite a nonprofit scholar or practitioner to highlight a research report or study and discuss how it can inform and improve day-to-day nonprofit practice. We welcome your comments and feedback.

The research on how compensation systems affect employee motivation is both fascinating and surprising. The evidence flies in the face of some underlying, pervasive assumptions: namely, that people work primarily for money and that the best incentives to keep people motivated and productive are financial.

It turns out that most people do their best work when they are motivated by something other than money. Things like purpose, achievement, recognition, and autonomy—to name a few. In fact, you can often muck it up—de-motivate people!—by directly tying financial incentives to their work. I can’t believe I’m about to back up this claim with a YouTube video, but here it is: Daniel Pink talking about the severe limitations of financial incentives and what really motivates people to do great work.

(Since this is Research Friday, I’ll point out that he summarizes years of research studies in support of this phenomenon.)2

You probably knew this. After all, this is the nonprofit world, where we get things done for free all the time, and often find ourselves being the ones—happily—doing the free work. But nonprofits don’t just have volunteers. They have employees, and they need them. And the problem is, although financial incentives are a weak motivator, they can be a strong de-motivator. In fact, there is a huge tendency for employees to get disgruntled and de-motivated by the compensation structure.

How? Some of it happens through the natural human process of comparison. People are more concerned with relative, rather than absolute, pay. They’ll compare their compensation to their co-workers and use that information to decide how much the organization values them.1 This will happen regardless of the compensation system, but performance-based pay raise systems, by nature, create unequal, variable pay, which compounds the problem.

Another reason employees become unhappy with their compensation (and the organization) is because employees often view the performance-based pay raise system as unfair. The more a person’s job includes the following elements, the harder it is to fairly evaluate (and reward) individual performance:1

  • Cooperation with others—when the task involves working in cooperation with others, there are always questions of relative credit. Organizations can unwittingly reward competition (grabbing the credit, avoiding the hard tasks) instead of bolstering teamwork.
  • Variables out of the employee’s control—as anyone who has been fundraising for the last four years in the nonprofit sector knows, employees can’t always control factors that affect job performance.
  • Unquantifiable goals—When the goal is something like “making a positive difference in the life of a youth,” the judgment often comes down to the supervisor’s anecdotal, incomplete information. Have you ever had a job where you felt like the judgment of your performance was based on who talked to your supervisor most recently? Someone calls to complain, and you are doing a bad job. A letter of praise, and, wow, what a great job you are doing!!

Jobs in the nonprofit sector very often contain all of these elements. They are complex, they involve creativity and soft skills, and they require teamwork. It’s hard enough to measure a whole organization’s progress towards its mission, let alone assign individual credit for that progress. It's no surprise when employees perceive job performance evaluations as unfair.1

Organizations that are aware of this information have strategies that go something like this:

“Let’s make sure our employees aren’t de-motivated by their compensation or the pay raise system by offering them competitive salaries and benefits packages, and a structured, fair, raise and promotion system.”

“Let’s make sure our employees are motivated and engaged by building a culture that emphasizes purpose, teamwork, recognition, and achievement.” (Note: although not the subject of this post, work-life programs have also been shown to improve employee engagement).

I’ll close with an idea: raises that are not based on performance. A few alternative bases can be the following: seniority, cost of living and market adjustments, training and education, additional job duties, and promotion.3 The keys to making this work are excellent training and professional development, and a clear, transparent, and structured process. (These will help avoid the Peter Principle risk.)

Another key is addressing poor job performance by easing low or unengaged performers out of the job or the organization. Because, as a nonprofit, you can’t afford to have anyone working for your organization who isn’t passionate about your mission. You literally cannot afford it, because it is the best, most motivating thing a nonprofit organization has to offer its employees: the chance to work for a purpose.

The ASU Lodestar Center is getting ready to launch our compensation and benefits survey, where we will ask nonprofits about the kind of jobs they have, the compensations for those jobs, and the benefits they offer. We’ll aggregate the responses and compile the data into a big report. We’ll be sending it out soon.

Stephanie La Loggia is the Manager of Knowledge Resources for the ASU Lodestar Center. Some of her past research projects include the Nonprofit Compensation & Benefits Report and Arizona Giving & Volunteering publications. Stephanie teaches undergraduate courses in the Nonprofit Leadership and Management program, and she has also been a youth summer camp director for over 20 years.


[1] Hard Facts, Dangerous Half-Truths And Total Nonsense: Profiting From Evidence- Based Management, (Chapter 5). By Jeffrey Pfeffer and Robert I. Sutton, Harvard Business Press, 2006.

[2] Drive, The Surprising Truth About What Motivates Us. By Daniel Pink, Canongate Books, 2010.

[3] “Abandoning Pay-for-Performance Myths in Favor of Evidence.” By Brian Levine, and Colleen O’Neill, World at Work Journal, 2011.


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