Looking Beyond Cash to Motivate Employees

At least that’s what many modern-day workers seem to believe. In the U.S., workers have increasingly prioritized purpose and meaning in their jobs over pay. And many American companies have responded in kind, collectively donating $44 billion to prosocial causes in 2024 rather than investing that money back into their business—a 9 percent bump from the prior year. 

The software company Group Elephant offers a striking example of this trend, says Niko Matouschek, a professor of strategy at the Kellogg School. Formerly called EPI-USE, the company completely revamped its brand and business model in 2015, combining its technology services with donations for the conservation of elephants and rhinos.    

“This is a for-profit company,” Matouschek says. “It’s an SAP implementer that has nothing to do with elephants. Then it decides, ‘One percent of our revenue, about $4 million a year, we’re going to donate to elephants.’ And the question is, Why would you do such a thing?”   

For some companies, the answer often centers on motivating their employees.    

“Many companies give so they can win over consumers. Group Elephant points to a different motive for giving: making work more meaningful, which can help companies attract and motivate employees,” Matouschek says.    

Along with Luis Rayo, also a professor of strategy at Kellogg, Matouschek built a theoretical model to examine when companies should use donations, rather than cash alone, to motivate employees, and how they can best do so.   

The economists found there indeed can be significant financial upside for a company that donates more as its workers’ performance rises. Motivating employees in this way can be even more lucrative for a company than the more-common practice of offering employee bonuses—particularly in team settings where employees’ individual and collective performances are closely tethered together.   

“Our results suggest that firm-funded donations are not mere corporate philanthropy layered on top of incentives,” Matouschek says. “They are an integral, public component of the compensation contract.”    

A scale advantage   

Matouschek’s interest in this topic stems from a famous 1970 article by the economist Milton Friedman in The New York Times Magazine. In what became known as “The Friedman Doctrine,” he argued that it’s the social responsibility of a business to increase its profits and maximize shareholder value, not to push policy or support other movements.    

Friedman’s argument raises a challenge for corporate giving aimed at employees. “Even if employees are altruistic, why wouldn’t a profit-maximizing company simply pay them more and let them decide how much to donate—and to which causes?” Matouschek says. “Altruism alone doesn’t justify having a company donate on its employees’ behalf.”   

The model suggests that the answer lies in a simple advantage of donations over cash: scale. A bonus paid to one employee benefits only that employee. A donation to a shared cause rewards all employees who care about it. This can make donations a more-cost-effective reward than pay. In fact, for a large-enough group, “paying with purpose,” as Matouschek and Rayo call it, can be more cost-effective even if employees, individually, do not care very much about the cause. 

“Suppose you have one dollar to reward employees, and each employee values a dollar donated to elephants at 10 cents,” Matouschek says. “If you have two employees, it is more cost-effective to split the dollar between them. Each gets 50 cents of value rather than 10. But if you have 20 employees, the logic flips: donating the dollar gives each person 10 cents of value rather than the five cents they would get if the dollar were split among them.”   

Donations have a scale advantage because they are what economists call a public good. One employee’s benefit from a donation does not reduce the benefit other employees receive from it. Cash, in contrast, is a private good; a dollar paid to one employee cannot also be paid to another.   

Where purpose pays   

The same public-good feature that gives donations their scale advantage, however, brings with it the disadvantage of rewarding both low and high performers.   

“If I reward you by donating to elephants, I also reward everyone else who cares about elephants, even if they did not perform as well,” Matouschek says. “We call that leakage.”    

In weighing the trade-off between scaling and leakage, the economists’ model finds certain circumstances can help make “paying with purpose” beneficial for a company. The first is that donations are best offered as a reward based on group performance rather than on individual performance. In practice, that can mean tying donations to total profits, as TOMS Shoes does; total sales, as Patagonia does; or sales volume, as Warby Parker does. These broad measures require less information than individual performance reviews and fit the logic of donations in that they reward employees collectively rather than one at a time.   

It follows that paying with purpose works particularly well when individual and team goals (and successes) are hard to distinguish from each other, like in the case of a competitive rowing team.   

“In team settings, it can be difficult to disentangle individual contributions,” Matouschek says. “That is where paying with purpose can be especially useful, because in those settings, even money leaks.”   

The model also suggests that companies should set a threshold for performance, below which the firm does not donate at all. That would allow them to avoid donating under low-profit scenarios when performance craters, while potentially offering employees a reason to give more effort the next time around.   

“If team performance is low, many employees likely underperformed,” Matouschek says. “Rewarding them anyway undermines motivation.”   

Even under optimal circumstances, the model’s findings don’t necessarily indicate that donations are always the best way to motivate employees. But it does open the door for companies to try this and similar strategies to support prosocial causes—and inspire their teams—while still coming out on top.   

“We provide an economic rationale for why you would pay with purpose rather than with money alone: purpose can pay, even for a company focused entirely on profit,” Matouschek says. “It’s an answer that I think even Milton Friedman would have to take seriously.”