Selection Benefits of Below-Market Pay in Social-Mission Organizations: Effects on Individual Performance and Team Cooperation

Abstract

Many organizations whose core purpose is to advance a social mission pay employees below-market wages. We investigate two under-appreciated benefits of below-market pay in these social-mission organizations. In a series of experiments, we predict and find that, holding employees' outside opportunities constant, those attracted to social-mission organizations that pay below-market wages perform better individually and cooperate more effectively in teams than those attracted to social-mission organizations that pay higher wages. The individual performance effect arises because below-market pay facilitates the selection of value-congruent employees who are naturally inclined to work hard for the organizational mission. The team cooperation effect arises because employees expect team members who have selected a social-mission job that pays below market to be more value-congruent and, therefore, more cooperative than those who have selected a social-mission job that pays higher wages. Collectively, we demonstrate that in social-mission organizations, offering below-market pay can yield selection benefits.

Double Bottom Line: The Use of Performance Incentives in Mission-Driven Firms.

“…Theoretical work in multi-task settings also suggests that a fixed-wage contract could ensure a more congruent effort allocation in multi-goal organizations (Holmström and Milgrom 1991). The pursuit of this goal may explain the prevalence of fixed-wage contracts in not-for-profits and social mission organizations (Brüggen and Moers 2007;Chen et al 2019). Consistent with this, the literature's standard prescription for social mission organizations is to match the mission preferences of principals and to select value-congruent employees with prosocial motivation (Dixit 2002;Ghatak 2005, 2017 incentives (Besley and Ghatak 2005) or that extrinsic rewards crowd out employees' intrinsic motivation in the case of motivated agents (Benabou andTirole 2003, 2006), we predict that the positive association between social bonuses and social performance is less pronounced in SEs whose managers have higher levels of prosocial motivation, as stated in hypothesis 4.…”

“…The second precludes organizations that exclusively rely on external support (such as government subsidies or donations) from being classified as SEs. As this legal definition implies, SEs are distinct from both for-profit corporations and non-profit organizations in that they strive to balance profit maximization with the advancement of a social mission (Besley and Ghatak 2017;Chen et al 2019).…”

“…In this paper, we examine the effect of introducing an incentive plan based on social performance in a sample of 188 social mission-oriented firms in Korea. Recently, there has been much interest in "social enterprises" (SEs, hereafter)-organizations that are hybrids of for-profits and non-profits and that strike a balance between maximizing profit and advancing a social mission (Besley and Ghatak 2017;Chen, Pesch, and Wang 2019). Such a balance is sometimes called "profit with purpose" (Besley and Ghatak 2017).…”

“…Third, for organizations that pursue nonfinancial missions, agents often find intrinsic utility from their tasks, and this may dampen the benefits of extrinsic rewards (Benabou and Tirole 2006;Besley and Ghatak 2005). Agents in mission-oriented organizations are often intrinsically motivated to pursue social missions (Besley and Ghatak 2005;Benabou and Tirole 2006;Chen et al 2019). Extrinsic rewards may crowd out intrinsic motivation by over-justifying the rewarded actions (Hamner and Foster 1975;Lepper, Greene, and Nisbett 1973;Ryan, Mims, and Koestner 1983).…”

“…Our evidence is consistent with an incentive scheme that has been carefully designed to enhance difficult-to-measure performance dimensions in turn increasing levels of effort and organizational performance. In describing the social mission organizations, the theoretical literature often emphasizes the role of employees' intrinsic prosocial motivation and the importance of selecting value-congruent employees (Dixit 2002;Besley and Ghatak 2005, 2018Benabou and Tirole 2006;Chen et al 2019). But while matching, screening, and selecting employees based on an organization's social mission may be ideal, such a selection process might not always be practical, especially during tight labor markets (Carpenter and Gong 2016).…”