At least that’s what many modern workers seem to think. In the US, workers have more and more priority target and sense in their jobs overpayments. And many American companies have responded in kind, collectively donating $44 billion to social causes in 2024 rather than investing that money back into their business. 9 percent hit from the previous year.
Software company Group Elephant offers a striking example of this trend, he says Niko Matusekprofessor 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 to elephant and rhino conservation.
“This is a for-profit company,” says Matouschek. “He’s a SAP implementer who has nothing to do with elephants. Then he 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 that?”
For some companies, the answer often centers on the motivation of their employees.
“Many companies give so they can win over consumers. Group Elephant points to a different motivation for giving: to make work more meaningful, which can help companies attract and motivate workers,” says Matouschek.
Together with Luis Rayoalso a professor of strategy at Kellogg, Matouschek created a theoretical model to examine when companies should use donations, rather than cash alone, to motivate employees and how they can best do so.
Economists have found that there can indeed be significant financial upside for a company that offers more money as the performance of its workers increases. Motivating employees in this way can be even more lucrative for a company than the more common practice of offering employee bonuses—especially in team environments where individual and collective employee performance are closely linked.
“Our results suggest that corporate-sponsored donations are not simple corporate philanthropy over incentives,” says Matouschek. “They are an integral, public element of the indemnity contract.”
Advantage of scale
Matouschek’s interest in this topic stems from a famous 1970 article by economist Milton Friedman in The New York Times Magazine. In what became known as “The Friedman Doctrine”, he argued that it is a business’s social responsibility to increase profits and maximize shareholder value, not to push policy or support other movements.
Friedman’s argument raises a challenge to the corporate offering directed at workers. “Even if workers are altruistic, why wouldn’t a profit-maximizing company just pay them more and let them decide how much to donate – and to what causes?” says Matouschek. “Altruism alone does not justify having a company donate on behalf of its employees.”
The model suggests that the answer lies in the simple advantage of donations over cash: scale. A bonus paid to an employee benefits only that employee. A donation to a common cause rewards all employees who care about it. This can make donations a more economical reward than payment. In fact, for a large enough group, “paying for a purpose,” as Matouschek and Rayo call it, can be more cost-effective even if the employees, individually, don’t care much about the cause.
“Let’s say you have a dollar to reward employees, and each employee values a dollar donated to elephants at 10 cents,” says Matouschek. “If you have two employees, it’s more economical to split the dollar between them. Each gets 50 cents worth instead of 10. But if you have 20 employees, the logic is reversed: donating the dollar gives each person 10 cents worth instead of the five cents they’d get if the dollar were shared.”
Donations have an advantage of scale because they are what economists call a public good. An employee’s benefit from a donation does not reduce the benefit other employees receive from it. Cash, by contrast, is a private good. a dollar paid to one worker cannot also be paid to another.
Where purpose pays
The same common-good feature that gives endowments their advantage of scale, however, brings with it the disadvantage of rewarding both low and high performers.
“If I reward you by donating to elephants, I’m also rewarding everyone else who cares about elephants, even if they didn’t perform as well,” Matouschek says. “We call that leakage.”
In weighing the trade-off between scaling and leakage, the economists’ model finds that certain conditions can help make “pay with a purpose” beneficial for a company. The first is that donations are best offered as a reward based on team performance rather than individual performance. In practice, this may mean tying donations to total profits, as TOMS Shoes does. total sales, as Patagonia does. or sales volume, as Warby Parker does. These general measures require less information than individual performance reviews and fit the logic of endowments in that they reward employees collectively rather than one at a time.
It follows that payment by purpose works particularly well when individual and team goals (and successes) are difficult to distinguish from each other, as in the case of a competitive rowing team.
“In team environments, it can be difficult to separate individual contributions,” says Matouschek. “This is where paying with a purpose can be particularly useful, because in these settings, even money leaks out.”
The model also suggests that companies should set a performance threshold below which the company does not donate at all. This would allow them to avoid donating in low-profit scenarios when performance craters, while potentially giving employees a reason to put in more effort next time.
“If the team is underperforming, many employees probably weren’t underperforming,” says Matouschek. “Rewarding them undermines motivation anyway.”
Even under optimal conditions, the model findings do not 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 social causes — and inspire their teams — while still being on top.
“We provide an economic rationale for why you would pay with purpose and not just with money: purpose can pay, even for a company focused solely on profit,” says Matouschek. “It’s an answer that I think even Milton Friedman would have to take seriously.”
