The Use of Incentives in Nonprofit Organizations

This paper combines research on incentives with nonprofit organization theories to derive three "nonprofit characteristics" that influence the use and effectiveness of incentive mechanisms in nonprofit organizations: the lack of undistorted contractible measures for the organization's overall performance, the relevance of identified employee motivation and the social relationships between the organization and its stakeholders. Building on research from social psychology, the paper argues for a more deliberate use of implicit (i.e. not contractually defines) incentives rather than a shift towards the increased use of performance contracts. Since implicit incentives are often subtle (without the need for formal justification to others) and emergent rather than planned, managers are frequently not aware of these mechanisms, and their deliberate use creates a major challenge.