The Identification and Structure of Nonprofit Organizations and their implications in Human Resource Management

The character of the nonprofit organizations defined and highlighted by their value-driven activities is a focal point in a well-functioning market. Before grappling with the non-profit’s theory and its identification structure, nonprofits have undertaken ways to draw on the social capital welfare built by years of service to conform the social principle of moving people.

By definition, nonprofits are restricted from distributing the net profits to the individuals that are responsible of controlling it (Hansmann, 1980). This emphasizes the whole spectrum of nonprofit’s scope and also stands as a cornerstone of drawing difference parallels between nonprofits and for-profits. As a comparison mean, the “nondistribution constraint” — as the prohibition of distributing the net earnings is the central threshold that divides these two (Hansmann, 1980). In response to this threshold, the nonprofits are categorized differently so as to achieve financial stability in the long run and serve one/more set of purposes. Having two major principal means of raising funds, nonprofits can be “donative”, where the support of one’s activity is done through grant-giving schemes and donations, and “commercial” where charging fees for delivering services is the way to generate a stream of earned income for the nonprofit (Hansmann, 1980). Because the nonprofits financial stability is backed up on the people whose contribution is the source of income (patrons), those controlled by such are mostly known as mutual nonprofits. The ones whose activities are not formally controlled by the patrons are known as “entrepreneurial” nonprofits (Hansmann, 1980). This identification strategy of nonprofits presents a balanced comparison approach between nonprofits and for profits subject to their categorization as mentioned above. But, the push toward efficiency and performance of nonprofits is fueled by their structure and its impact that goes hand-in-hand with promotion and recruitment.

Non-profit organizations are characterized by their service driven mission, in contrast to a profit-driven aim of for-profit organizations (Ridder et al., 2007). This is reflected in their structural such as in hierarchical levels which impact recruitment policies. For example, selection of workers into nonprofit is determined by the employer’s hiring behavior as well as by worker’s preferences (DeVaro et al., 2007). Nonprofit and for-profit workers also differ in their recruitment of new hires. Recruiting campaigns in nonprofits are longer and involve more methods than those in for-profit sector (DeVaro et al., 2007). This is interpreted as nonprofit workers who are sympathetic and motivated to organization mission. It suggests that for a nonprofit a longer search must be conducted and a more intensive screening applied, before finding the right employee (DeVaro et al., 2007). This differentiates employee recruitment in the two sectors, specifically in screening. HR of nonprofits aim to select employees based on congruence of values with the organization’s which is unobservable both pre and post-hiring. For-profits have the advantage of observing employee’s effort post-hiring which is complemented with external rewards or with layoffs, though effort is also unobservable pre-hiring. Such rigorous recruitment methods of nonprofits is integrated throughout its HR policies which is also reflected in its tight promotion procedures and requirements as elaborated below.

Promotion in non-profit is aimed at job assignment instead of an incentive to stimulate worker’s effort as those in for-profits (DeVaro et al., 2007). Employees in non-profits are found to hold their position for a longer period than for-profits (DeVaro et al., 2007) which is reflected in less frequent promotions and strict hiring procedures. Difference in structure is suited to meet differences in employee motivation, where for-profits incline towards external gains through monetary rewards and title. Though there seems to be little correlation between degree of tasks performed and promotion, it is essential that recruitment for both sectors is taken into account as an incentive mean in which employees between the two sectors are utilized. This come into a conclusion that compensating differential exists between nonprofit and for-profit job (DeVaro et al., 2007). Especially, for non-profit workers would accept lower wages in exchange for the opportunity to work toward a more meaningful social mission (DeVaro et al., 2007). HR in for-profits is more unlikely to consider whether employees are deserving of a promotion since task significance hardly change, but instead to satisfy employees’ external motivation to maximize effort level and hence profitability. HR in nonprofits is utilized to ensure employees are suited to organizational values and promotions are used to meet this requirement. However, the non-distributional constraint do not entitle employees to receive compensation according to their degree of commitment or other performance measures and performance of task is done to satisfy internal gains instead. Proportionally, workers in nonprofits are more intrinsically motivated by the organization mission, as the incentives are created when workers accepted to the jobs (DeVaro et al., 2007). Devaro and Birkshire (2007) propose that the employers in nonprofit organization to concentrate more on using promotion to achieve optimal job assignment rather than concentrate to incentive function of promotion. In contrast, for-profit employers to focus on promotion both for incentives and for job assignment.

Differences in incentives among employees in for-profits and nonprofits affects the manner in which rewards are structured which determines HR policies. Employees in for-profits are more motivated by monetary gains than nonprofits (Leete, L. 2001). Nonprofit employees place a greater emphasis in task significance and social contributions their jobs have on the external community (Mirvis, P. H, 1992). However, the cost of effort for workers in nonprofits is lower because there is a lesser tradeoff between wages and performance in nonprofits. In fact, monetary rewards can crowd-out intrinsic motivation of nonprofits because task significance is reduced when it is quantified by a sum of value (DeVaro et al., 2007). We believe it is difficult to assess the degree of intrinsic motivation of the employees have at a particular time or how different employees will respond to external rewards. HR of nonprofits can reduce costs of structuring rewards to motivate employees at a cost of ensuring employee integration into the overall organizational mission, which is unmeasurable. Furthermore, rewards in nonprofits are not divided across functional departments such as those in for-profits which reduces the likelihood of self-maximizing behavior by individual departments. The risk of using financial rewards is they tend to deviate employee motivation away from collective cooperation to a self-benefiting goal for each employee or department. The use of decentralized decision-making is essential in non-profits as it incorporates employee contribution into the organization, at the same time fulfilling their intrinsic motivation by inducing task significance into their job.

Even though the assumption of higher intrinsic motivation among nonprofits hold, it diminishes as we go down the hierarchical level across both for-profits and nonprofits (DeVaro et al., 2007). The extent to which employees’ intrinsic motivation holds depends on the extent to which their task is linked to the organization’s mission (DeVaro et al., 2007). High-skilled workers in both sectors possess more information than their lower-level counterparts and these decisions affect the organization as a whole, compared to a task of minimal effect performed by a janitor which is minute when taken as a whole organisational relevance (DeVaro et al., 2007). Because of a closer link to organizational mission, the variance in intrinsic motivation among high-skilled workers in the two sector is higher with non-profit workers having a significantly higher level of intrinsic motivation than for-profit workers. In fact, nonprofits have a higher variance of intrinsic motivation for lower level workers than for profits, which reflects the lack of attitudes driven by a link to organizational mission. We propose that for situations as these, HR should differentiate incentives for upper and lower level nonprofit employees, specifically imposing monetary rewards for lower-level employees due to a lack of intrinsic motivation of which the crowding out effect is minimal. This requires careful analysis of intrinsic and extrinsic motivation among the two sectors and they should not be assumed upon such structure, because wrong imposition of incentives can negatively affect intrinsic motivation which cannot be recovered after it is crowded out.

Given the incentive and motivational framework of nonprofits, there is an implication of the wage disparity between for-profits and nonprofits. This can be highlighted by higher wages among for-profit employees, however having no statistically significant differences in wage level from an economy wide perspective (DeVaro et al., 2007). Though for-profits do have a higher wage level only in certain industries (DeVaro et al., 2007). Correspondingly, the disparity in the distribution of wages could also be an outcome of other differences, be those motivational-wise and/or systematic-wise. If, by an example nonprofit and for-profit organizations apply and adopt different technologies as a means of delivering the service, this could imply different wage structures among those two, regardless having controlled the occupational differences and their pertaining industries (Leete, 2007). To wash off some of the differences between these fixed wages schemes, some nonprofits have introduced variable compensations to their managers subject to the organization’s fund-raising and their cost improvement processes (Barbeito & Bowman, 1998). However, we believe that having a conditional wage differential for nonprofits on financial measures only fails to conjointly relate the value-driven purpose of nonprofits and their compensation scheme, thus remaining an impractical choice mainly due to moral constraints.

Measurement of performance between for-profit and non-profits also differ significantly. It is hard to measure the output of performance in non-profits because most involve service sectors (e.g. hospitals, university, charity) providing public service which has a higher degree of human and cultural transmission than for-profits (Mirvis, P. H, 1992). The level of performance is dependent on perceived satisfaction among recipients of the service which is the general public. This in turn results in a reduction of transaction costs when performance is hard to measure, mostly because of the nondistribution constraint among the nonprofits which implies that those involved will not necessarily exert less effort regardless the performance measurement strength (Hansmann, 1980). Running alongside, nonprofits should aim to improve their performance tracking systems. Processes like defining, producing and documenting the value-driven outcomes of the nonprofits through better organizational outlook and a psychological well-being of its members can help to further develop standards of performance measures subject to an individual’s own professional and personal improvement, and the greater good of the organization itself (Frumkin and Andre-Clark, 2010). In a comparative analysis with for profits, the latter has the advantage of profit distribution to their residual recipients where employees can be incentivized through pay-for-performance or output-based pay. The intuition for such difference is the motivation underlying employees whether intrinsic or extrinsic. Nonprofits avoid extrinsic motivation to prevent crowding out of intrinsic motivation but there is a cost to ensuring the ‘right’ employees are hired in non-profits (Leete 2007). In cases when nonprofits are able to sort out members who by oneself choose to greatly perform in the organizations because of their intrinsic motivation or their task identification matches the nonprofit’s outcomes, the incentives be those explicit and/or implicit seem redundant. Nonetheless, dependence on intrinsic motivation alone can also result in uncertainty in regards to the output of organizations, leading nonprofits to identify and hire employees who may have a firm intrinsic attentiveness in some tasks, and ignore others, resulting in a multitasking implication (Prendergast, 2008). On our opinion, when analyzing the trade-offs in cost between for-profits and nonprofits, the tighter hiring procedures exist in non-profits because alignment with organizational mission is more crucial. In non-profits, monetary incentives through bonuses or promotions can help to better align employees’ mission to that of the organizations. But this comes with the price of more resources spent on monitoring employees or bonus schemes. The cost incurred in non-profits is hiring policies and balancing wage schemes with that of employees’ intrinsic motivation.

In conclusion, while there are structural differences between nonprofits and for-profits situated in the incompatibility of between sectors and highlighted by their HRM policies, nonprofits have the edge in social sector and welfare, compared to for-profits as revenue-driven machineries. The core driving factor within nonprofits tends to be motivational-wise in terms of performance, recruitment and promotions, highlighted to an uncertain level of measurement of intrinsic motivation within such structure. Such a noisy measurement is associated with external influential factors which may or may not be hand-in-hand with the values of nonprofit organizations. Because there is no definitive scoreboard of best HRM practices for nonprofits, such organizations tend to combine different frameworks into one, so as to adapt to each unique nonprofit activity. This results in higher flexibility operational-wise within the organization and complements the matching profile of nonprofits objectives to its pertaining individuals. Taking this into account, nonprofits are continuously evolving in their HR practices, which serves as a cornerstone of maintaining a high-quality level of performance. Such constant changes, however puts nonprofits at risk of inconsistent HR policies that may be perceived as biased in terms of promotion, recruitment and performance for the employees.

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