Minnesota Attorney General Mike Hatch has an uncanny knack for raising questions that illustrate fundamental issues in economics. His suit against Medica, which goes to mediation today, is a prime example. It involves a core question in economics: What motivates people to work?
The suit involves pay for Medica’s board of directors. Hatch charges the directors “hijacked” the organization and are paying themselves excessive amounts for serving on the board. Board members average $50,000 to $60,000 annually. Medica replies that this is fair for the effort required and on par with other nonprofit HMOs nationally.
Medica is a large organization, with 1.3 million members, thousands of employees and an annual budget of more than $2 billion. If directors of any organization of this size — nonprofit or for-profit — take an active role in its running, they must put in a lot of time and effort.
So what motivates humans to work? Economics assumes that people base all actions on maximizing satisfaction in life. Satisfaction can come from meeting physical needs and wants. It also can come from how others regard you or the simple self-satisfaction involved in many activities, even tiring ones.
Earning money to buy goods or services is an important reason most people work. Adam Smith famously argued, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” Or as a modern bumper sticker puts it, “I owe, I owe, so off to work I go.”
But earning a living is not the only reason people exert themselves. People sweat to achieve a beautiful lawn or dining room. They put in hours organizing a church program or scouting event.
Human willingness to do a job thus depends on the combination of monetary and non-monetary rewards involved. Government and businesses assume that they must pay people for working, although volunteers may do minor things like cleaning parks or roadsides. Wage and salary levels tend to be higher for jobs that are safe, pleasant and socially respected than for those that are dirty and unpleasant.
At the other end of the spectrum, small nonprofit organizations rely on people’s willingness to work hard for no financial reward. Churches, Scouts, service organizations and the like do much good for society with unpaid work. Society respects those who do the work and many find such effort intrinsically satisfying.
Such organizations usually do have some paid staff, depending on size and function. Most churches have paid ministers, though some do not. Many paid positions vary with the size of the organization. A small church I know has three volunteer organists who are paid nothing, except $1,000 split among them to reimburse their purchases of music. A medium-size congregation pays its organist $8,000 a year. A large one has a full-time organist earning more than $50,000.
Many believe that those who work for charitable or nonprofit institutions should accept less money than those doing similar jobs at for-profit businesses. This belief lies at the heart of the attorney general’s suit.
The lines are not clear, however. Managers of nonprofit social service agencies often earn much less than those doing similar work in businesses. The gap for custodians or webmasters is smaller. Accounting and legal firms may charge nonprofits less for their services than they do businesses. But nonprofits typically pay the same price for gasoline, light bulbs and copier paper as everyone else.
And claims processors at nonprofit HMOs earn about as much as their counterparts at comparable for-profit institutions, as do and cardiac surgeons at nonprofit hospitals. So do most other salaried workers with comparable responsibilities.
Why then, one may ask, are board members of very large nonprofits expected to work for less than directors of for-profit organizations with similar responsibilities? Some argue that the non-monetary rewards for serving a nonprofit are greater than those for similar positions in business.
Serving as the director of a major nonprofit, some argue, garners greater respect from the public than does serving on a corporate board. Moreover, the self-satisfaction of serving one’s community should be greater than the self-satisfaction of helping to make money. Finally, many members of an organization such as Medica would be willing to do the job for much less. Why should a privileged clique earn thousands when others would work for less?
Others respond that you get what you pay for. If you want people with the experience and skills to run a large organization, they must find it worth their time, one way or another. Moreover, an inexperienced board is more likely to fall captive to the organizations’ full-time managers. This is a far more common problem in large anonymous member organizations such as Medica or mutual insurance companies and pension funds than overpayment of directors.
© 2005 Edward Lotterman
Chanarambie Consulting, Inc.