People Blog & Insights

Pay Ratios: Do They Work for Nonprofits?

Private jets, lavish vacations, mansions with glittering pools. We’ve all read the headlines about “perks” like these afforded to high-ranking executives at large corporations, while the rank and file barely get by. As CEOs’ salaries continue to soar, the average worker’s is in decline, sparking conversations around equity and how we can ensure the average worker is able to do more than make ends meet.  

One solution that has garnered attention is the implementation of pay ratios between the highest and lowest paid employees – setting a cap on how wide the disparity between those salaries can be. This tactic is meant to rebalance the scales and minimize the widening pay gap that is rampant across corporate America. This concept is also gaining popularity in the nonprofit sector as their leaders work to ensure equity and transparency across their organizations.  

But are pay ratios the right solution for Executive Directors in the nonprofit sector?  

Apples to Oranges 

For-profit companies have the freedom (and budgets) to set the direction and guidelines on how (and how much) to pay their executive leaders and employees. But nonprofits are in a different position. IRS guidelines on reasonable compensation, funder requirements and historic and prevalent sector practices often dictate how nonprofits spend their dollars, with the lion’s share going to programmatic activities and a small amount to salaries, benefits, and overhead. This means that most organizations pay below market rate for just about every position, including the executive director. So if a nonprofit is already paying lower salaries, and then layers on a pay ratio, that could leave executive directors with the opposite problem of corporate CEOs – being insufficiently compensated for their work and responsibilities. And with events such as the pandemic, the Great Resignation, and inflation changing how and why we work, nonprofit leaders and staff are no longer willing to take a pay cut to do good work. They want to do good and live good. 

The corporate sector is influencing pay in the nonprofit sector, increasing pressure to compete with for-profits that typically pay better wages and can offer more attractive benefits and perks.  But, just because nonprofits need to compete doesn’t mean we need to take on every corporate practice. Our solutions will need to be different to fit our context. If nonprofits want to stay competitive and attract the best talent, they have to find ways to invest in their staff and pay equitably across the board. 

Change the View

So if not a pay ratio, then what? The sector is at a crossroads where a mindset shift could change everything. Rather than accepting below market pay as the standard and looking to band-aid solutions like pay ratios, we can create a more equitable system where everyone is paid to market. Where we’re truly valuing staff members’ talents, contributions, and responsibilities. For executive directors, who handle a myriad of responsibilities, their pay should be higher than the most junior staffer. But, in this model, that junior staffer is paid at market rate so we can worry less about policing the pay gap. The nonprofit sector is bigger than ever, contributing an estimated $1.5 trillion to the US economy in 2022 and composing 5.6 percent of the country’s gross domestic product. That means we have the resources and opportunity to make this kind of change.  

Funders are facing pressure from leaders and advocates to shift their grantmaking requirements and nonprofits are in a position to push back on funding restrictions. For example, funders can, and should, move away from restricted funding to general operating support, leaving the experts to determine how best to disperse the money they receive within their organizations.

Additionally, nonprofit leaders can approach their budgets differently, prioritizing not only programmatic work but ensuring that the right infrastructure and systems (such as salaries and overhead) are in place to execute the mission effectively. 

Focus on External and Internal Values 

Nonprofits exist to do good work and that mission has to translate to internal operations, too. People get the work done, and to attract, retain, and care for the best talent, nonprofits must pay at least a living wage. We don’t have to choose between doing good work and being able to support ourselves and our family. 

Let’s look away from the for-profit world for solutions and focus inward on the changes our field can make to pay everyone in an organization equitably. Whether it’s shifting the funder paradigm or how leaders approach their budget, it is possible to practice our values in every way. 

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