Hiring in Non Profits and For Profits
Many people can tell you what their job is, the job title, the industry they work in, etc. But if you ask them what sector of ownership they are in, not everyone knows how to answer that. If you're like me, you've had a lot of different jobs over the course of your life. I focused a lot on what industry I wanted to be in (art, culture, higher ed, etc.) but I didn’t realize that my industry would dictate the sector of ownership would be in - almost every company I worked for was non profit. The working world is very much divided between three primary sectors of ownership: for profit, public and non profit.
But the distinctions between sectors is not always so clear cut. Sure a non profit with 501c3 status is undeniably a non profit, but it may in fact generate a profit at the end of the year. Meanwhile, there's no guarantee that a for profit business will profit at all - it could turn a loss for several years in a row. A publicly owned organization like city hall is thought of as bullet proof but even city governments like Detroit have filed for bankruptcy. All of this uncertainty has an effect on the employees working for the entity in question.
Weighing the long-term advantages for each sector, let’s consider how a career can be profoundly affected over a lifetime depending on which sector you're employed in (or contracting with). What sector can offer you the most job security and advancement opportunities, the most pay and benefits, the best culture? Here's an overly generalized table to start the conversation.
What is the difference between these types of ownership that drive such trade offs? Simply put, ownership should create the correct market incentives. For profit firms are driven to increase shareholder wealth (they are FOR profit) and they follow the market's need for various products and services. However, there are certain industries that do not follow the market so well and lend themselves to public ownership, such as transportation, utility provision, national security, et al. In the US, most industries are privatized but there are many Americans (soldiers, teachers, public works) who get their paycheck from federal, state, county or municipal governments.
Besides for profits and public orgs, there may still be areas of service that are not being addressed by the market or by public mandate and this is where nonprofits come into play. Services like assistance for the mentally challenged, arts and cultural projects or health care and job education below the poverty line will never be cost effective enough for profit or high enough on the ballot box for public agencies to be sufficiently mandated. Because of the difficulties of working outside the market or public mandate, many nonprofits are funded by grants, endowments, foundations, trusts or other indirect sources.
Non profits are widely known to not offer competitive pay compared to positions in the for profit sector (see Dan Palotta’s excellent TED talk). Studies indicate that the discrepancy is typically 25% for positions of the same title. Additionally, the average smaller size of a non profit may mean more managerial oversight responsibility along with less pay. There are disagreements on what metrics to use since the titles between the two sectors may not be appropriate to compare, for example President can mean one of the highest salaries in a Fortune 500 company versus a volunteer position (with an expected donation) in a small non profit.
In “Compensation in the Nonprofit Sector”, Ruhm and Borkoski argued that the difference in wages between for profit and nonprofit employees is not statistically significant. They attribute this difference in compensation was due to shorter working hours and location of nonprofit jobs in low-paying industries. Further, this is partly due to the two sectors being divided by industries that are profitable (consumer electronics versus foodbanks for instance) and the more profitable industries can pay higher wages.
It’s also important to note that women represent up to 80 percent of workforce in nonprofits - possibly tied to the industries of human services and education which have predominantly female coworkers. This phenomenon could be highly linked to the average lower salary in a nonprofit as women notoriously receive less pay than men across the board.
BENEFITS AND PERKS
When the term non cash compensation is thrown around, it means benefits and perks including deferred income plans, retirement contributions, paid or subsidized health, dental, life and other insurances, paid vacation, sick and personal time, stock options and many other add-on benefits to working for a particular employer. Free coffee machines, workout facilities or paid travel accounts are other forms of non cash compensation. Because of their lower cash compensation, nonprofits are looking to recruit and retain employees through company specific benefits and perks. However the small size of non profits (many are 2 - 5 people) means less economy of scale and group discounts to insurance and memberships are less feasible on this small scale.
Money isn't everything. Advancement within a company or within an industry is important to those who seek greater challenges or more ownership through time. Many individuals realize early on that they will need to rise through the ranks of a particular industry before reaching their desired role or salary. The different sectors each offer advancement but there are different pathways towards these terminal positions. There are also some particular struggles of recruitment and retention within nonprofits.
It is difficult to recruit from within a nonprofit for certain positions due to several factors. Development positions in particular can be a grueling and high pressure since many orgs consider it the primary or most dynamic source of revenue. IT, finance, operations and other occupations that are shared between for profit, public and non profit are difficult to recruit since non profit compensation is lower than the other sectors.
On the plus side for would be employees, entry level positions in small nonprofits typically have less qualifications and can be used to springboard into higher positions several years down the road. The 2013 Nonprofit Employment Trends Survey showed that entry-level vacancies “were most often filled by candidates from outside of the nonprofit sector. Mid-level vacancies were most often filled by staff promoted from within the organization.” This is a healthy life-cycle where non profits can recruit from outside their sector and promote from within.
However, in the same survey, the retention of leadership was also at issue since many nonprofit orgs lack a formal strategy for successioning an executive director or president. Experience with nonprofits is required for these senior level positions but more and more there is an expectation to have skills from the for profit sector. It may be equally important for senior positions to have perspectives on municipal, state or federal agencies that supply funding or assistance to the non profit. For this reason, senior and executive vacancies are commonly filled by senior managers and executives from other nonprofit organizations. Those of us in the nonprofit sector have seen the shuffling of E.D.s between orgs.
There is an expected increase in hiring in the Finance/Administration/Operations area for nonprofits - following 17% in 2013 up from 14% in 2012 . This could be a refreshing and healthier balance of staff since nonprofits often under-invest in infrastructure and long-term growth. This lack of financial foresight is often done to minimize overhead for programs, which is often seen as a measure of efficiently using grants or foundation money. Some nonprofits are disallowed to use funds for various expenses and some are also capped in what they can offer in executive pay as well.
"Job security" is also not about money as much as it is the lessening of the risk of unemployment, it's the measure to which an employee can expect to continue working at a given position or company. The ability to continue employment has a real value to an employee (and an employer!) and is a major factor to consider when pursuing a particular career or employer. In non profits there is a staggering amount of voluntary resignations due to “burn out”. This trend is brought about by the excessive workload per wage that are put upon non profit employees
I'm not making up this trend of burnout, when a non profit adds more programming, 48% of organizations intend to use current staff to support the new programs. This is the most popular strategy year after year which culminates in a voluntary termination. The effect is compounded in that 74% of nonprofit orgs expect to use current staff to take over duties for eliminated employees. This is a truly frightening combination for the poor staff that stay on board! In the following charts we can see the anticipated turnover that can result in this compounding of responsibilities.
Perhaps the most specific difficulty is a nonprofit’s oversight of profit in order to meet its passionate agenda. This predilection toward the passionate leads to hiring abnormalities based on relevance to the organization’s agenda rather than best candidate for long-term financial viability of the organization. We see the reverse issue in for profits where profitability is emphasized most often and can become the only agenda; a glaring oversight of how the employee feels about the product or service they intend to make, sell or perform.
In the for profit world there could be some opportunities for employees to redefine the mission only they rise through the ranks. Even more removed are public employees who are offered little room for this kind of redirection since agendas comes from elected officials who base their legislation and funding on public pressure. Human resource scholars Bezboruah and Oyum argue that non profit employees are more attached to this mission than employees in federal government and private sector employees, saying “the human resource challenge is the most significant because the [nonprofit] personnel are the architects and agents of the services.”
This difference in culture between the three sectors can be jarring for those who are considering a career shift. Nonprofits have begun recruiting executives (presidents, marketing directors, CFOs) from the for profit world in hopes they will make their organization more competitive, but the culture shock can be abrupt. It takes time for new employees to adjust to the different bottom line, people over profit. Of course for profits now use the phrase ‘multiple bottom lines’ to describe their social responsibilities; but the emphasis is clear enough in the very name of the sector “for profit”. Perhaps the culture of nonprofits may prove to be more advantageous in recruiting new generations since mission commitment has been found to work better for younger workers than for their older counterparts.
One of the peculiar challenges for nonprofits is that the people who pay for the service are not actually receiving the service. If you could see a spectrum of who pays for the services actually received, you'd notice that for-profit is mostly funded by direct sales to buyers, non profits mostly fund by indirect and then public organizations are somewhat in between. You may remember the national discussion on the Affordable Care Act whether it was a tax (merely government raising revenue) or a fee (recouping the cost of a benefit given to the beneficiary). And note that eligible gifts to a recognized charity by law cannot receive any benefit - this is the antithesis of a sale. All these differences reveal the differing cultures that will be in the workplace.
It's not always logical to draw comparisons between a for profit firm, public agency or a non profit org if they are rarely within the same industry, with different payroll sizes, different budgets, locations, etc. I’ve found that most industries are almost entirely within one sector, for example there are not many non profit or public companies in the consumer electronics industry. However there are certain industries that are split between sectors, such as the USPS alongside FedEx and UPS or the presence of non profit and for profit hospitals and schools. There are even some private companies that are knocking on the door of previously public endeavors, such as SpaceX’s foray into NASA’s territory of space travel. Only when such companies of different sectors are in the same industry, same size, budget, location, is there a meaningful comparison.
The percentage of US employment in nonprofits has grown from 5.6% in 1972 to current estimate of over 10%. Yet, nonprofits have consistently underperformed in market compensation and are not able to match many of the benefits offered in the public and for profit sectors. The lifecycle of nonprofit occupations is relatively healthy in that middle and upper level positions are filled from within the sector, although not necessarily within the org itself.
The growth of nonprofits must be evidence of some kind of perceived advantage for an organization. Could the advantage be the lower salaries than other sectors? Certainly the advantage is not in economies of scale since the bulk of nonprofits are so small, however the nimbleness of a small org is enviable to a large bureaucracy. And a further designation with 501c3 status allows tax deductible gifts as well. Perhaps the growth in non profits is due to the growing importance of socially responsible businesses with multiple bottom lines.
If nonprofit employees are more loyal to a mission than contributing to shareholder wealth, can this loyalty be used to drive better HR practices and improve retainment? Hopefully nonprofits can develop competitive career advancement opportunities for entry and mid level employees to keep their experience within the org and help them “bloom where they grow”. Burn-out will be a continued issue as long as nonprofits expect to place responsibilities for new programs and terminated positions on its current employees