Non-profit companies are often under considerable scrutiny from potential donors when deciding if and how much to donate. A recent study looked at the relationship between employee compensation in non-profit companies, donations to those companies, and company financial performance. The results suggest that when employees of non-profit companies are paid above the market median, this has a negative impact on donations. This negative effect appears to be mitigated by sound financial performance however.
Key Topics: Financial performance; Non-profit; Compensation
Title of Reviewed Article: The Impact of Employee Compensation and Financial Performance on Nonprofit Organization Donations
Researchers: Wenli Yan (Virginia Commonwealth University) and Margaret F. Sloan (James Madison University)
Publication: American Review of Public Administration, 2016, Vol. 46 No. 2, pp. 243–258.
Setting the Scene
Employee compensation and company financial performance are typically two of the primary factors which are considered by potential donors in making donation decisions, who appear to consider elements such as excessive employee compensation or notable financial ineptitude. Sargeant, Ford, and West (2006) found that excessive senior management compensation is seen by some as a violation of public trust, and that donors reduce their contributions accordingly (Balsam & Harris, 2014; Tinkelman & Mankaney; 2007).
Financial performance is essential for the continued operation of a company, and its long term stability. Potential donors are interested in both the current state of operations and also how the company is positioned for the future. Research indicates that having high revenue concentration, such as relying on government funding can create greater stability (Chikota & Neely, 2014; Gronbjerg, 1993), while others have suggested that a more diversified revenue base reduces dependences on single sources (Chabotar, 1989). Tuckman and Chang (1991) outlined four criteria to identify financially vulnerable in non-profit companies, namely revenue concentration, inadequate equity balances, low administrative costs, and low or negative operating margins. Studies such as these have informed ratings by non-profit watchdog organizations, which further helps to inform donors on various financial information relating to non-profit companies.
Some researchers suggest that average donors do not go to the length of gathering financial performance information when making their donating decisions (Cnaan, Jones, Dickin, & Salomon, 2011; Sloan, 2009), although they may be more likely to reference CEO or executive compensation or general financial performance (Balsam & Harris, 2014; Tinkelman & Mankaney, 2007).
To further understand these factors effecting donor behaviour the researchers of this study put forward the following research questions for examination:
Hypothesis 1 – “Higher than the median employee compensation will decrease non-profit donations in organizations when the organizations’ financial performance is low.”
Hypothesis 2 – “The negative impact of higher than the median employee compensation on nonprofit donations will be moderated as organizations’ financial performance improves.”
How the research was conducted
This study used 2008 – 2010 data from 10,206 non-profit organizations in the US, sourced from the American Society of Association Executives (ASAE) Foundation and The Institute for Nonprofit Research, Education, and Engagement (INPREE) at North Carolina State University.
The researchers established a model capturing factors that can affect donations to non-profit companies, including measures of employee compensation, financial performance, and financial capacity.
Non-profit donations were assessed as a proportion of total revenues, and excluded government grants and membership fees.
The measure of employee compensation included total employee salary and benefits.
Key Research Findings
The results largely support Hypotheses 1 and 2, as above-median compensation was found to have a negative effect on donations when a company’s financial performance was below average, but this negative effect was mitigated as the company’s financial performance improved.
When considered in isolation, the financial performance indicators of operating reserve and equity ratio, were not found to effect donations. Revenue concentration however, was found to be negatively related to donations.
The results highlight that the relationship between employee compensation and donations is a complex one, with the impact of employee compensation varying depending on the strength of the company’s financial performance. Excessive compensation, it would seem, generally acts to discourage donations, but while above median compensation has a negative effect on donations in financially underperforming companies, this detrimental effect is lessened as the company’s financial performance increases, perhaps because donors view the higher compensation as more deserved.
Organizational and Reward Implications
This study provides valuable guidance to non-profit companies on the impact of employee compensation on donations, which is often a hot topic for such companies, particularly in relation to CEO and senior management compensation, which can potentially lead to ‘bad press’. The finding illustrate that donations are impacted by both internal and external factors. The results further indicate that companies should make financial performance a top priority, which puts the company on a sounder financial footing, whilst also facilitating greater donation levels.
This study is one of the few that examines in detail, using an extensive data set, the complex relationship between non-profit employee compensation, donations, and company financial performance. While this study adds valuable insight to this research area, it would be interesting to see future research include additional examination of donation behaviour from the viewpoint of potential donors.
Source Article: Yan, W., & Sloan, M. F. (2016). The Impact of Employee Compensation and Financial Performance on Nonprofit Organization Donations. The American Review of Public Administration,46(2), 243-258.
Published by: Sage Publishing
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Balsam, S., & Harris, E. E. (2014). The impact of CEO compensation on nonprofit donations. The Accounting Review, 89(2), 425-450.
Chabotar, K. J. (1989). Financial ratio analysis comes to nonprofits. The Journal of Higher Education, 60(2), 188-208.
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