Thesis Outline

Chapter 2 proceeds with a literature review, detailing first the growing relevance of PFP plans and then the theoretical underpinnings for the practice. The conceptual foundations upon which the hypotheses were formed are further discussed in

subsequent subsections. Chapter 3 lays out the methods for addressing the hypothesis, utilizing original survey data collected from hypothetical applicants within both the nonprofit and for-profit sectors. The fourth chapter reports the results and analysis of the aforementioned survey. The final chapter provides discussion on the results of the previous chapter, further review of the potential implications of these findings, closing remarks on the limitations of this study, and potential avenues for future research.

Chapter 2:

Literature Review 2.1 Primer on Nonprofit Organizational Characteristics

The third sector is generally distinguished from the others as a space where nonprofits can help overcome market failures by providing essential goods and services without government procurement or for-profit subsidies. Nonprofits in their most potent form can fill in the gaps left by the state and private firms—in some areas existing as the only entities capable of meeting basic public needs. Nonprofits are given special privilege to fill this void primarily through tax exemptions and the unique ability to provide tax-deductions for contributors.¹ Among the advantages associated with these privileges, nonprofit organizations can offer goods and services that may be loss-making for other firms. In this way, some of the more vital needs of society are addressed that might otherwise have been neglected. The term “nonprofit”

is not ipso facto in that these entities cannot make a profit, but contrary to their for-profit counterparts, the law precludes the reallocation of resources away from the public good for personal enrichment. Hansmann’s seminal work in 1980 identifies this “nondistribution constraint” as a commitment device that signals trust and reassurance in a way that entities of other sorts are unable to match.² Nonprofits depend on this competitive advantage because they generally exist in “…service areas characterized by externalities, uncertainty, information asymmetries, adverse selection and consumer trust.”³ According to Frumkin and Keating, nonprofits can attribute much of their success to non-distribution constraint signaling and the apparent preference consumers may have for organizations that are not always

1 Frumkin, Peter, and Elizabeth K. Keating. "The Price of Doing Good: Executive Compensation in Nonprofit Organizations." Policy and Society 29, no. 3 (2010): 271. doi:10.1016/j.polsoc.2010.07.004.

2 Hansmann, 858, 863.

3 Frumkin, Peter, and Elizabeth K. Keating. The Price of Doing Good: Executive Compensation in Nonprofit Organizations. Working paper no. 02-11. Northwestern.edu, n.d. 4. Web. 07 July 2014. 4.

beholden to the profit motive. As nonprofit daycares can attest, “many parents prefer to have their children’s care governed by factors other than the bottom line.”⁴ The Internal Revenue Service (IRS) and most other government agencies worldwide have codified the non-distribution constraint by formally restricting excessive pay for nonprofit employees. IRS statutes maintain that compensation should not go beyond the pay structures of similar entities, “the value that would ordinarily be paid for like services by like enterprises under like circumstances.”⁵ Punishments for

compensation infractions are generally resolved with fines, and in some extreme instances, revoking tax-exempt status.

2.2 Pay-for-performance in the Nonprofit Sector

Nonprofits have traditionally been put off by linking pay to performance outcomes (especially increased earnings) for fear of legal repercussions and

potentially undercutting public trust in the organization. But in the last few decades, incentive compensation has become common in nonprofits as part of a wider trend toward management techniques previously dominated by the private sector.⁶ Many nonprofits have correspondingly taken on something of a for-profit mentality toward the market, reshuffling their organizations to resemble multi-national corporations.

However, the push to professionalize is not solely attributable to changing competitive environments. Governments are likewise responsible for shaping nonprofits. Demanding greater levels of accountability from NGOs, for example, typically means more professionalization. But regardless of what compels nonprofits to engage in institutional isomorphism, the academic consensus converges on a

4 Ibid., 4.

5 "Publication 557." October 2013.

http://www.irs.gov/publications/p557/ch05.html#en_US_2013_publink1000200438.

6 Dart, Raymond. "Being “Business-Like” in a Nonprofit Organization: A Grounded and Inductive

Typology." Nonprofit and Voluntary Sector Quarterly 33, no. 2 (2004): 290. doi:10.1177/0899764004263522.

reality where for-profit management techniques are here to stay in the third sector.⁷ Prescriptive academic literature abound envisions translating business acumen into social utility at the hands of “social entrepreneurs” and more “business-like”

organizational strategies.⁸ Although business practices were never a completely foreign concept to nonprofits, much of the sector is undoubtedly becoming more business-like than ever before. Without delving too far into the voluminous amount of literature dedicated to defining exactly what being “business-like” means,⁹

according to Dart, nonprofit activity broadly defined as “… an interconnected nest of pro-social and voluntaristic values and goals with few references to the means and structures by which these values are enacted” is being infused with business-like practices considered “…to be those characterized by some blend of profit motivation, the use of managerial and organization design tools developed in for-profit business settings, and broadly framed business thinking to structure and organize activity.”¹⁰ Implementing PFP incentives would certainly be categorized as a more business-like shift in organizational motivation techniques, and similar to private firms, nonprofits are well aware of the pressing need to attract high quality human capital.¹¹ In fact, PFP arrangements have become increasingly common in the repertoire of nonprofit human resources management.¹² Nonprofit executives and higher management most often see merit-based pay, though it is not strictly limited to those at the top. Several authors have argued that the best nonprofit workers should be paid with respect to performance outcomes in order to ensure their attraction and retention.¹³ This

7 Ibid., 290.

8 Ibid., 290.

9 Ibid., 292.

10 Ibid., 294.

11 Letts, Christine, William P. Ryan, and Allen Grossman. High Performance Nonprofit Organizations: Managing Upstream for Greater Impact. New York: Wiley, 1999.

12 Theuvsen, 120.

13 Frumkin, Peter, and Elizabeth K. Keating. The Price of Doing Good: Executive Compensation in Nonprofit Organizations. Working paper no. 02-11. 8.

familiar argument borrowed from pay-for-performance and incentive advocates in the for-profit sector rests upon the assumption that linking pay with performance is an effective motivational tool.¹⁴ Frumkin and Keating point out that implicitly equivocating nonprofit and for-profit organizations constitutes a theoretical bridge too far—the motivational merits of which have yet to convince quite a few scholars.

The following section elaborates on the theoretical underpinnings for merit-based incentives and subsequently the trending appearance of PFP arrangements in the nonprofit sector.

2.3 PFP Theoretical Foundations - Microeconomics and Social Psychology Motivation simply defined is having the impetus to do something. An unmotivated individual does not feel compelled to pursue an end, while motivated individuals conversely are active in that respect.¹⁵ It is widely believed that incentives should be used to leverage motivation and typically organizations utilize incentives to stoke motivation, furnish signals for self-selection to the labor force, communicate organizational goals, and channel workers toward those specified goals. PFP policies incentivize individual or group performance through pecuniary rewards. For

nonprofit organizations, PFP measures usually take the form of monetary bonuses for achieving qualitative or quantitative organizational goals. Justifications for PFP plans have surfaced in a wide range of disciplines, but are often based in microeconomic and social psychology theory.¹⁶ Microeconomics traditionally centers on explicit incentives and explains merit-based pay in the language of principle-agency and relative price effects for utility maximizing individuals. According to Speckbacher, tensions in this relationship arise because the desired outcome performed by the agent

14 Theuvsen, 120.

15 Ryan, Richard M., and Edward L. Deci. "Intrinsic and Extrinsic Motivations: Classic Definitions and New Directions." Contemporary Educational Psychology 25, no. 1 (2000): 54. doi:10.1006/ceps.1999.1020.

16 Theuvsen, 120.

impacts the principal’s utility. However, in many cases, the principal has very little information beyond the outcome to judge the agent’s performance. Most of the agent’s actions preceding the outcome are unobservable and the principal must also consider other random environmental variables that could have affected the outcome.

This ambiguity favors the agent because reduced effort is largely undetectable, and it would appear to be in the agent’s interests to shirk making an effort. Therefore, the principal and agent are assumed to have interests that are at odds with one another.¹⁷ Rather than heightening supervision to resolve these tendencies, incentivizing expected outcomes essentially raises the agent’s opportunity costs for undesirable behavior, consequently saving the principal valuable resources and energy in not having to monitor and evaluate agents nearly the extent that they otherwise would have.¹⁸ Incentives are believed to resolve the classic concerns of principal-agent information asymmetry (in which principal is never completely aware of what the agent intends to do without an round-the-clock supervision) because “…much of the work of controlling subordinate behavior can be left up to the subordinate’s [own]

self-interest.”¹⁹ The same goes for the wealth of agency models that emphasize incentive measures designed to induce truth-telling from the agent.²⁰ Accordingly, proponents in economics and management scholarship are bullish about using incentives to overcome principal-agency dilemmas.²¹ However, interpreting

incentives through principal-agent dynamics is not without its detractors,²² of whom often times find the framework wanting without important insights from other

17 Speckbacher, 1008.

18 Theuvsen, 120.

19 Whitford, 214.

20 Speckbacher, 1009.

21 Rynes Gerhard Parks, 581.

22 Kerr, Steven. "On the Folly of Rewarding A, While Hoping for B." Academy of Management Journal 18, no. 4 (1975): 769-83. doi:10.2307/255378.

academic disciplines.²³ For example, as Gibbons notes in “Incentives in

Organizations,” principal-agency models assume that performance outcomes can be observed, quantified and measured. Absent these assumptions, merit-based plans

“can lead to distorted incentives.”²⁴ And indeed, incentive theory scholars are inclined to believe, “the social psychology of compensation is important [as well], because if the principal infers wrong motivations about the agent, compensation packages can be misdirected.”²⁵ Microeconomics is somewhat limited by only distinguishing differing capabilities between individuals, while social psychology considers differing personal qualities.²⁶ The predictive power of agency theory in particular is frequently called into question,²⁷ for which more probabilistic and ideational explanations exist.

2.4 Contributions From Social Psychology Measures of Fit

The social psychology discipline offers a number of theoretical frameworks to explain the empirically observed effects of incentive schemes on work motivation.²⁸ An approach with demonstrable empirical validity, and that which forms the

foundation of this study, is the perceived importance of objective and/or subjective congruence between the individual and the organization. Many have adopted this line of reasoning,²⁹ usually under the auspices of Schneider’s attraction-selection-attrition (ASA) framework, which serves as the most widely employed theoretical anchor for

23 Larkin, Ian, Lamar Pierce, and Francesca Gino. "The Psychological Costs of Pay-for-performance: Implications for the Strategic Compensation of Employees." Strategic Management Journal 33, no. 10 (2012): 1195.

doi:10.1002/smj.1974.

24 Gibbons, Robert. "Incentives in Organizations." Journal of Economic Perspectives 12, no. 4 (1998): 115-32.

doi:10.1257/jep.12.4.115. as cited in Speckbacher, "The Use of Incentives in Nonprofit Organizations."1009.

25 Arnolds, C.a., and Christo Boshoff. "Compensation, Esteem Valence and Job Performance: An Empirical Assessment of Alderfer's ERG Theory." The International Journal of Human Resource Management 13, no. 4 (2002): 699. doi:10.1080/09585190210125868.

26 Gerhart and Rynes, 260.

27 Larkin et al., 1196.

28 Rynes et al., 581.

29 Gerhart and Rynes, 260.

applicant attraction research.³⁰ Billed as part of the interactionist processing

metatheory by Ehrhart and Ziegert,³¹ASA posits a subjective fit between individuals and organizations whereby different types of applicants are attracted to different types of organizations. In other words, “people make the place” according to Schneider.³² The emphasized importance of person-organization (P-O) fit in the attraction process is the defining characteristic in theories of this sort, in which

“…compatibility between people and organizations [] occur[] when (a) there is a similarity or match of some attribute and/or (b) one entity provides what the other wants or needs.”³³ Applicants will self-select into organizations in congruence with their personal values, thereby shaping and eventually perpetuating the behavior of the organization. Employees unable to find the proper fit within the organization self-select themselves out, serving to further preserve organizational values.³⁴ The forerunner to Schneider’s framework is John L. Holland’s eminent theory of vocational personalities and work environments, asserting that vocational choice is relies on the person-environment interaction and that the environment is

characterized by the personalities of those who compose it.³⁵ Prior to Holland’s contribution, Vroom and Tom had already demonstrated the importance of the work environment in attracting individuals. Vroom’s expectancy theory places the

instrumental considerations on the part of individuals as a primary behavioral driver, while Tom’s finding confirmed that people gravitate toward organizations who share

30 The term “attraction research” is employed by Ehrhart and Ziegert (p.907) in Ziegert, Jonathan C., and Karen H.

Ehrhart. "Why Are Individuals Attracted to Organizations?" presumably as shorthand for applicant attraction in the workforce.

31 Ehrhart, K. H. "Why Are Individuals Attracted to Organizations?" Journal of Management 31, no. 6 (2005):

906-07. doi:10.1177/0149206305279759.

32 Schneider, Benjamin. "The People Make The Place." Personnel Psychology 40, no. 3 (1987): 450.

doi:10.1111/j.1744-6570.1987.tb00609.x.

33 Kristof, Amy L. "Person-Organization Fit: An Integrative Review Of Its Conceptualizations, Measurement, And Implications." Personnel Psychology 49, no. 1 (1996): 1-49. doi:10.1111/j.1744-6570.1996.tb01790.x. as cited in Ziegert, Jonathan C., and Karen H. Ehrhart. "Why Are Individuals Attracted to Organizations?" 906.

34 Schneider, 442.

35 Ibid., 441.

a similar “personality” to their own.³⁶ ASA is grounded in the similar epistemological assumptions of Jean Piaget on both cognitive psychology and development—

presupposing the inseparability of individuals and their situation.³⁷ Contrary to the dominant theories of interactional psychology of the late 1960s and early 1970s where circumstances were believed to dictate behavior,³⁸ Schneider maintains that ASA as a continuously reinforcing cycle characterizes the entire lifespan of an individual’s interaction with a chosen work environment:

In reality the way it looks is a result of the people there behaving the way they do. They behave the way they do because they were attracted to that

environment, selected by it, and stayed with it. Different kinds of organizations attract, select and retain different kinds of people, and it is the outcome of the ASA cycle that determines why organizations look and feel different from each other.³⁹

Although the ASA framework is “purposefully vague” in measuring attraction,⁴⁰ Schneider notes that many empirical findings in vocational psychology had already demonstrated the ASA framework at the time.⁴¹ Cable and Judge in a 1996

longitudinal study of 96 job seekers similarly posited a central role for P-O fit in organization attraction and point to a growing body of concurrent empirical work.⁴² Ehrhart and Ziegert’s meta-analysis additionally cite numerous studies in attraction

36 Tom, Victor R. "The Role of Personality and Organizational Images in the Recruiting Process." as cited in Schneider 441

37 Schneider, 439.

38 Ibid., 439-40.

39 Ibid., 440.

40 Ehrhart and Ziegert, 907.

41 Schneider, 441.

42 Cable, Daniel M., and Timothy A. Judge. "Person–Organization Fit, Job Choice Decisions, and Organizational Entry." Organizational Behavior and Human Decision Processes 67, no. 3 (1996): 294.

doi:10.1006/obhd.1996.0081.

research with theoretical components that either directly mention ASA or incorporate a framework under the similarity-attraction paradigm.⁴³

Intrinsic and Extrinsic Motivation

Among the numerous contributions furnished by social psychology, studies revealing the complexities of individual motivation have been indispensible to incentive theory.

In many instances, these insights serve as an extension on the principal-agency tradition by probing to what degree the principal understands how best to motivate the agent.⁴⁴ Bem’s self-perception theory (1967) along with Ryan and Deci’s Cognitive Evaluation Theory (1985) are widely credited as the theoretical foundations emphasizing the vital role of personality types—specifically the

implications of motivation existing in diverse forms. Rynes, Gerhart and Parks find that the influence of Cognitive Evaluation Theory (CET) both in practice and as an important theoretical foundation for other disciplines is growing at an exceptional pace.⁴⁵ The widespread proliferation of this framework and a parallel theoretical development in economics has highlighted the need for considering personality variables in relation to incentive research. Findings on the intrinsic enjoyment individuals feel in performing certain tasks have moved incentive theory beyond the plainly visible—shifting the focus from the traditional emphasis on external cues to questions of how to manage intrinsic motivation and the related desire for inducing motivation through implicit incentives. Behavioral economic models previously assumed that non-incentivized work equated to “effort…at the lowest possible level.”⁴⁶ Since the input of alternative disciplines came to the fore, incentives literature has found overwhelming evidence “that people engage in many tasks and

43 Ehrhart and Ziegert, 906.

44Arnolds and Boshoff, 699.

45 Rynes et al., 576-77.

46 Kreps, D. M. "The Interaction between Norms and Economic Incentives: Intrinsic Motivation and Extrinsic Incentives." American Economic Review 87 (1997): 359-64. as cited in Speckbacher 1010

activities because they enjoy them. Tasks that are inherently satisfying create an intrinsic reward for those performing them.”⁴⁷ Deci and Ryan’s widely employed and empirically substantiated Self-Determination Theory (SDT), a theoretical extension of CET, presupposes that individuals have a wealth of potential for intrinsic

motivation that can either be facilitated or undermined by environmental factors.

Furthermore, the authors found that motivation resembles nothing like “a unitary phenomenon.”⁴⁸ People differ in not only in the quantity of motivation they have, but also the type and how the interplay of those variables affects their performance.

While intrinsic enjoyment is characterized by the inherent enjoyment of performing a certain task, extrinsic motivation, on the other hand, is characterized by

instrumentality, of “attain[ing] a separable outcome.”⁴⁹ And unlike intrinsic motivation, according to Deci and Ryan’s subtheory of Organismic Integration

Theory (OIT), extrinsic motivation is further partitioned into four overlapping and yet distinct forms (see figure 1).

Figure 1

47 Fehr, Ernst, and Armin Falk. "Psychological Foundations of Incentives." European Economic Review 46, no. 4-5 (2002): 687-724. doi:10.1016/S0014-2921(01)00208-2. as cited in Speckbacher, 1010.

48 Ryan and Deci, 54.

49 Ryan and Deci, 60.

The most pronounced distinction between the four is autonomous versus controlled motivation. More autonomously held values tend to fall closest to actual intrinsic enjoyment. The closest form of extrinsic motivation on Deci and Ryan’s continuum is integrated regulation,⁵⁰ although the MAWS (Gagné et al. 2010) subscales used in this study omit measures of integrated regulation because it is apparently difficult to psychometrically distinguish from identification.⁵¹ Congruence between external requirements and one’s personal values and needs necessitates integration of this sort,

“the more one internalizes the reasons for an action and assimilates them into the self, the more one’s extrinsically motivated actions become self-determined.”⁵² However similar to intrinsic motivation this absorption of values may seem, the integration is nonetheless achieved in pursuit of a separable outcome. The instrumentality has yet to be completely removed from the beliefs and actions of the individual. Further along the motivational continuum lies identification—a less autonomous form of motivation. With identification comes the interpretation of values having a personal significance, typically in relation to the pursuit of an end. For example, finding satisfaction in joining a speech club because it may hone one’s public speaking skills for corporate presentations. Falling under the subcategory of more “controlled”

motivations is introjected regulation. Regulation is still internally driven, however, it largely originates from external forms of pressure, such as guilt, anxiety and pride.

motivations is introjected regulation. Regulation is still internally driven, however, it largely originates from external forms of pressure, such as guilt, anxiety and pride.