Competitive Compensation and Ethical Funding

Monday August 29, 2022 comments Tags: compensation, ethics, nonprofit, accounting, mission, vision

Any accounting business and tax advice contained in this podcast is not intended as a thorough in depth analysis of specific issues. Nor is it a substitute for format information. Nor is it sufficient to avoid tax related penalties. If you have specific questions that you need advice for, be sure to schedule a strategy session and not solely rely on information in this podcast.

What I wanted to focus on was news. So oftentimes I hear nonprofits say that they don't want to end up in the news. And so I am going to go through some articles, pull out what happened, and also give you some tips on preventing this being your organization. To lay the groundwork for this, I'm actually going to talk about an article that doesn't talk about any specific organization. But it does talk about compensation and since we're at the beginning of the year, and compensation as you move forward is going to be a hot topic, I wanted to dig into this. 

So this was an article by the University of Texas. The title of it is “Manager Pay Level Drives Misreporting of Nonprofit Financial Performance.” And this is based off of a study by Eric Chen, who's an assistant professor of accounting over at the McCombs School of Business at University of Texas in Austin, and Shinjuku Jang of Cornell University. Sorry, if I mispronounce any names. I know I hate when people do it to me. 

But what caught my eye about this article is because their study was trying to say, hey, if people are coming into this role, because they're connected to the mission and not to the pay, what effect does that have? And what they found is when people said, Oh, I'm super committed to the mission, the pay doesn't matter. They were more likely to misreport how much was going to program expenses, versus total expenses, when compared to someone who picked a job, because the pay was better than if they went with a for profit organization? 

This is not surprising to me. So how do you prevent this? How do you stop people from saying like, Oh, I want to be in this organization and I'm okay with, you know, massaging the numbers, perhaps, because I know that if I massage the numbers will look good to funders, and they'll continue to give us money. How do you stop that? You think about your compensation and think of could someone with the same experience that we're asking for, get paid in a different sector? A comparable amount? 

If you see that you are underpaying you will find that you're going to get a lot more of these mission driven people. There's nothing wrong with being mission driven. You definitely want the people who work for you to be connected to the mission, but if they're more tied to the mission. They're more tied to you getting your donor funding, they are going to be more likely to do things that are in your favor, that could perhaps make these procedures unethical in order to do that.

So as you review your pay, consider what are comparable organizations paying? What could put us at risk? Have we adequately thought about this? Is this a question that maybe you want to ask, in the interview process about? What drives this person to come into this work? Because yes, again, you want them to be committed to the mission. But you also want to be realistic and see like, are they feeling other offers? Is there something that you could do that would make it more equitable as compared to other places? And consider, always consider this, Who are you perpetuating into the spaces, I always think of like, when you pay very little, there's only a certain type of people who can afford to work for the organization. 

So that's the other side, if you're like, we're not so worried about people massaging the numbers, but we want to make sure we have a diverse candidate pool, make sure that you're paying people enough so that they can say no to another job that will cover health care and benefits and a living wage to work at your organization. 

All right, that's it for this week. Let me know what you think. Do you agree with the article and let me know if your organization has taken a look at the compensation to see how you stack up with other organizations, other industries, to make sure that you are attracting the best candidates who will be holding things up to an ethical standard and not massaging because they're worried about losing funding.

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Link to Article: Manager Pay Level Drives Misreporting of Nonprofit Financial Performance



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