Does Funding Better Salaries and Benefits Improve Nonprofit Impact? Here’s What We Know

When the nonprofit starvation cycle met the COVID-19 pandemic and subsequent “Great Resignation” and other reevaluations of the role of work among U.S. workers as a whole, nonprofit employees also started leaving in droves, further adding to the burnout of the already-overworked, and still underpaid, staff that was left behind.

That’s a somewhat simplified version of the story, but the past few years have reinforced something those in the sector have intuited for a long time: Poor pay leads to poor outcomes because nonprofits without workers can’t provide services.

You’d think it might be similarly intuitive that providing living wages and benefits like health insurance and paid time off would, conversely, improve nonprofit outcomes. Still, given funders’ affinity for hard numbers, it would be nice if someone were to do a conclusive study measuring the effects of increased pay and benefits on issues like nonprofits’ ability to hire and retain employees and the resulting effects on their missions.

The bad news is that no one has done such a study. The good news is that some academic work that has been done, coupled with anecdotal evidence found during my own reporting, seems to indicate that there really is a commonsense solution that funders can and should apply to help end the nonprofit hiring crisis: Provide grants large enough to allow nonprofits to pay living wages and benefits.

How much should nonprofits spend on overhead? At least 35%

First, let’s look at the latest research on overhead spending overall. In 2022, academic researchers analyzed data from more than 22,000 arts and culture nonprofits from 2008–2018 in an attempt to determine how much such nonprofits need to spend on overhead costs in order to be effective as measured by attendance at the organizations’ exhibits and events. The results? Cultural institutions that spent roughly 35% on overhead had the best attendance.

Of course, that figure’s specific to arts and culture organizations. Direct service nonprofits, whose missions require people who are able to work directly with individuals or small groups, may well need to spend far more. This variation makes sense if we look at the for-profit sector, where I found estimates of what constitutes a reasonable amount of overhead to vary from roughly 20 to 25% for retail and 35% for restaurants to 50% for professional service firms.

Danielle Sielatycki, the CEO of Prevention Works and lead executive for the Michigan nonprofit collaborative HubONE, said she would expect that the overhead needed for organizations like hers, which depend on staff to serve people, would be “much higher” than the research says is necessary for cultural nonprofits. HubONE has made better pay and benefits a top priority, and has tracked some encouraging outcomes.

“We should be investing in the people who are doing the work”

Then there are the several examples I’ve picked up in writing about this topic over the past year or so. To be fair, my sample size of nonprofits paying living wages is minuscule compared to the research on overhead. Additionally, the organizations that reported their experience to me have only been providing better pay and benefits for a few years, not the decade cited in the overhead study.

But even if anecdotal, the evidence is striking. Three of the four direct service nonprofits that make up the HubONE collaborative, which was launched in Kalamazoo in 2018, have compiled the results they’ve achieved thanks to the collaborative members’ ability to raise wages and provide benefits. (The fourth member of the collaborative hasn’t yet reported its numbers.) All three have increased both the size of their staff and the number of their services. Big Brothers Big Sisters Impact alone enjoyed a 100% staff retention rate, was able to hire a dedicated person to focus on program expansion and impact, increasing both programs and services for youth and free activity options for Big Brothers, Big Sisters, and the children they’re paired with as mentors.

Direct service workers aren’t alone in pointing to better outcomes as a result of increased pay and improved working conditions. Santa Cruz Local, a nonprofit news outlet, revised both its pay and employment policies and refined its mission in 2021. The publication’s reforms include “fair pay” — 90% of its budget is dedicated to staff and freelancers — flexible time off, five weeks’ paid vacation, and paid holidays. Kara Meyberg Guzman, the Local’s cofounder and CEO, told me that her publication has retained 100% of the staff they’ve hired since 2019 with the exception of interns and one person intentionally hired for a six-month contract. “I think that's saying a lot in an industry that's been known for its turnover,” Meyberg Guzman said.

Thanks to the staying power of her staff, coupled with the Local’s dedication to focusing on depth and complexity in its coverage, Meyberg Guzman said, the publication’s achievements include winning an award for outstanding coverage for its series on how money is spent on the area’s homeless services, the creation of a voter’s guide read by more than 35,000 people, and the launch of a Spanish language news service for readers in Pajaro Valley.

Again, the above are just four nonprofits. They don’t represent the sector as a whole any more than the results of studying 22,000+ arts and culture organizations can necessarily be extrapolated universally. But here’s something that is definitely known: “The unavoidable truth is that for companies to acquire and retain talent, they must offer competitive pay and benefits,” according to this 2022 article by the international HR corporation Randstad, which probably knows a few things about employment trends. Randstad said that its own research shows that “salaries and benefits remain the number one motivator for workers changing jobs.”

The philanthrosphere likes to believe that nonprofit employees are willing to accept lower paychecks because serving a nonprofit’s mission is much more meaningful than increasing a for-profit company’s shareholder value. And that’s undoubtedly true for most nonprofit employees. At the same time, landlords don’t care how meaningful your job is if you can’t pay the rent.

To sum up: The damage done by the nonprofit starvation cycle and its effect on the nonprofit workforce — and in turn on nonprofits’ ability to serve their missions — is well-documented. On the other hand, as more nonprofits and funders improve their employment and grantmaking practices, as Santa Cruz Local, the HubONE collaborative, and the Walter and Elise Haas Fund have, I’ll bet a week’s worth of my own wages that we’ll see evidence that living wages and other worker-friendly reforms improve nonprofit outcomes.

As the Local’s Meyberg Guzman said, “I think this is probably obvious, but I would think in almost all companies, payroll is your biggest expense. As nonprofit leaders, we should be investing in the people who are doing the work.” It’s those people who will determine whether or not the nonprofit succeeds.

Let’s compile some data together! If your nonprofit has increased pay and/or other benefits and started tracking the outcomes (hiring and retention, impact on services, etc.), or you’re a funder who has started explicitly supporting such practices and can report on your nonprofit partners’ results, email me: dawnw@insidephilanthropy.com.

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