Lower pay is coming at a high price for NFPs – it’s time for change

Brent Kennerley
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Salaries in the Not for Profit sector are notoriously low – and instead of saving money, it’s coming at a high price.

There’s a persistent myth NFPs simply don’t have to pay as much because they’re charitable. There are many reasons for this long-standing underpayment, including their limited funds and understandable cost-saving mindsets, a belief the work provides benefits with value beyond money, and a fear of being seen to spend too much on operations at the expense of the cause.

It’s always been an issue, but now it’s a crisis

Low remuneration throughout the sector has always been an issue. It makes it difficult to recruit the best workers. It makes it easier for the private sector to lure those people away. It also undervalues the outstanding work being done by the people who work in the organisation.

All those problems have now been dramatically magnified by the current labour market. Right now, every business is struggling to find employees, and paying people well below market rates puts NFPs massively on the back foot.

Then there’s inflation and rising interest rates; the higher cost of living is putting pressure on everyone to move into a fair and full-paying job. On top of all that, the pandemic made everyone reassess their priorities, which has sometimes meant early retirement or major lifestyle changes.

The unrecognised cost of low salaries

Findings in our Not for Profit sector survey and audience sentiments at a series of events we hosted to promote the report reveal the same story from so many organisations: “It’s extremely hard to hire people, and retention is a problem too – turnover is much higher than it’s been in the past.”

We’ve often heard about team members being poached by the private and public sectors, tempted away by higher wages and ever-increasing flexibility and work-life balance. And when people do quit, the remaining workers are being overloaded with responsibilities, often without any additional money or recognition.

As someone who sees the numbers behind the organisations, underpaying NFP workers is a false economy. Organisations often don’t appreciate the true unrecognised cost of staff turnover. There are direct time and money costs, like advertising, interviewing, and training new staff members. Then there are indirect costs, which may be even higher. These include the institutional knowledge that’s walking out the door, and the dip in productivity from both the outgoing person who’s halfway out the door, and the new hire who takes six months to get up to speed.

Yet NFPs continue to underpay, and to give pay rises that don’t reflect market rates or inflation.

For example, a charity might offer their valuable worker an annual salary increase of 2%, even though the staff member asked for 8% to keep up with inflation. On an $80,000 salary, that’s an annual increase of $1,600 rather than $6,400, so the NFP has saved itself some money. But in this labour market, if that person feels undervalued and underpaid, they can secure a better-paid role in probably a matter of days, if not weeks. By my back-of-the-envelope calculations, the NFP will incur overall costs of around $40,000 to replace them – a significant loss that might have been prevented with a more appropriate pay rise.

But how can NFPs afford to pay more?

This is crunch time: organisations must pay their people more so they can operate effectively and continue to benefit their cause. We know funding is always the main concern for NFPs, and it’s the primary reason for underpaying across the sector. So how can they find the funds to support these higher salaries?

First, NFPs should consider their reserves. There are some organisations sitting on enormous reserves in the many millions of dollars. Ostensibly, these are for a rainy day, but most NFPs just sit on them. I would argue the rainy day has arrived, and spending to increase salaries and boost staff retention is a good use of those reserves.

For NFPs which don’t have sufficient reserves to spend on payroll, there are other types of benefits that can add value for employees. Attractive employment conditions will attract and retain excellent people. It might be a four-day week or a nine-day fortnight. It might be giving employees six weeks every year when they can work from anywhere around the globe.

There are now opportunities to bring in new workers from overseas if you cannot fill a role within New Zealand. To recruit migrant workers, as well as paying a specified rate, you also need to commit to supporting them in setting up a new life in Aotearoa. The work and time you put into those new employees is a kind of non-monetary benefit that can be a hugely rewarding experience for both your organisation and your new employees.

There are many low-cost alternatives that can give employees immeasurable benefits. NFPs should be diving into these benefits boots and all, demonstrating their agility, and showing they can think outside the square.

NFPs can become trailblazers in the talent market

Salary levels are generally recognised as one of the top three drivers in job satisfaction – and people do their best work when the salary question is resolved and they feel their contribution is valued.

Don’t let your NFP be held back by the idea that you shouldn’t pay market rates. Be a trailblazer – step up to the challenge and pay your team a market rate and/or non-monetary benefits. Your organisation will be an employer of choice in the sector, and you will be able to compete with private and public employers. You’ll have better staff retention and performance, and you’ll build a strong team who can ultimately deliver superior services to support your cause.