Thursday, July 21, 2005

Should It Pay To Work For A Non-Profit?

There's a very interesting article in today's Pioneer Press by Edward Lotterman on what the dispute between Minnesota AG Mike Hatch and Medica demonstrates about why people work:

Minnesota Attorney General Mike Hatch has an uncanny knack for raising questions that illustrate fundamental issues in economics. His suit against Medica, which goes to mediation today, is a prime example. It involves a core question in economics: What motivates people to work?

The suit involves pay for Medica's board of directors. Hatch charges the directors "hijacked" the organization and are paying themselves excessive amounts for serving on the board. Board members average $50,000 to $60,000 annually. Medica replies that this is fair for the effort required and on par with other nonprofit HMOs nationally.

50 to 60K a year to serve on a board is hardly excessive when measured against the for-profit companies. The question is whether people working for non-profits should expect to receive less pay and benefits:

Many believe that those who work for charitable or nonprofit institutions should accept less money than those doing similar jobs at for-profit businesses. This belief lies at the heart of the attorney general's suit.

The lines are not clear, however. Managers of nonprofit social service agencies often earn much less than those doing similar work in businesses. The gap for custodians or webmasters is smaller. Accounting and legal firms may charge nonprofits less for their services than they do businesses. But nonprofits typically pay the same price for gasoline, light bulbs and copier paper as everyone else.

And claims processors at nonprofit HMOs earn about as much as their counterparts at comparable for-profit institutions, as do and cardiac surgeons at nonprofit hospitals. So do most other salaried workers with comparable responsibilities.

For what it's worth, I come down on this side of the argument:

Others respond that you get what you pay for. If you want people with the experience and skills to run a large organization, they must find it worth their time, one way or another. Moreover, an inexperienced board is more likely to fall captive to the organizations' full-time managers. This is a far more common problem in large anonymous member organizations such as Medica or mutual insurance companies and pension funds than overpayment of directors.

In some respects, the need for a strong board with high caliber members is greater at non-profits than at regular businesses. There are no shareholders with a stake in the business to keep tabs on the board and bring pressure against it if results don't meet expectations as there are at for-profit companies. There is no stock price to use to gauge performance (however imperfect that measurement tool can be). It's in the best interests of non-profits like Medica (and their customers) to put together the best board they can. And that usually doesn't come cheap.

UPDATE: It doesn't get much better than this. Thanks King.

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