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Innovative Trends in Non-Profit Executive Compensation

Written by: Jennifer Loftus

Article Overview: Non-profit executives earning 50% more than in 2000 and receiving bonuses? See what's driving these trends and if they will continue on their climb.

Innovative Trends in Non-Profit Executive Compensation

Salaries for top executives at nonprofits have climbed 25% to 50% since 2000. A new survey of nonprofits found that among nonprofits with operating budgets over $20 million, 15% more chief executives and executive directors of these organizations earned $250,000 to $350,000 last year. Several factors are boosting pay:

- Greater competition among nonprofits to attract top talent,
- Difficulty in retaining staff and a lack of internal candidates for some important positions, and
- Nonprofits’ desire to lure corporate executives, as the finances of non-profits have become subject to greater government scrutiny.

In addition to higher pay, some nonprofits compensate for the lack of stock options and other corporate extras by allowing flexible work time. Others even pay bonuses, once rare at nonprofits.

However, as noted by the Chronicle of Philanthropy, in a recent survey of executive compensation in the nonprofit world, nonprofits need to be careful when boosting compensation. Donors may worry that a charity could shortchange its mission if it spends higher amounts to recruit and pay executives. Moreover, the Internal Revenue Service has begun examining executive compensation at nonprofits with an eye toward uncovering potential abuse. It issued a report earlier this month that found "significant reporting errors and omissions" about salaries by such groups. Over the last several years, interest in nonprofit compensation has been growing. Understanding the need to recruit and retain quality staff has added to the concern over how to structure compensation policies and programs to be fair and competitive. Incentive plans and other innovative compensation and human resources practices are becoming critical elements in the organizational strategy of many nonprofit organizations.

Innovative compensation practices encompass cash compensation and recognition plans. The following are examples of innovative cash compensation or recognition plan options that are studied in the report.

- Individual incentives
- Team or group incentives
- Bonuses
- Spot awards
- Special cash recognition
- Special non-cash recognition

Some of the findings were the following:

1. Rationale for developing plans

- Nonprofits indicated multiple reasons for creating new programs. More than half of the participants indicated their program objectives included the following: improve morale and/or employee relations; improve employee retention; link pay to performance/improve employee performance; and become more competitive in total compensation (i.e., cash compensation, recognition, and benefits).

2. Types of plans and performance measures

- The most popular types of cash compensation and recognition programs implemented by the participants were bonuses, incentives, and non-cash recognition programs.
- Productivity, financial, and quality measures were the performance criteria most often used as the basis for the respondents’ compensation awards under a variety of programs.

3. Budget and award amounts

- The average variable compensation award payouts typically ranged from 20% - 30% of salary. In some organizations, the targeted payouts ranged from 10% - 20% of the salary range midpoint. Interestingly, in Astron’s confidential database of nonprofit organizations, target incentives levels are as follows:

- Staff / Non-Management: 5% - 10%
- Supervisory Staff: 5% - 15%
- Middle Management: 10% - 20%
- Senior Management: 15% - 30%
- Executive Management: 20% - 40%
- CEO: 30% - 50%

The following are guidelines to be considered by nonprofit organizations which may be interested in implementing an innovative compensation plan.

1. Nonprofit organizations should first conduct an assessment to determine the appropriateness of innovative compensation to their culture and organization. This assessment should focus on the objectives to be achieved through implementing an innovative compensation program, what motivates staff, the opinions and views of members, constituents, and volunteer leaders, and the financial resources available.

2. Any innovative compensation program should be viewed as part of a total approach to compensation and carefully integrated into the design of that program. A market analysis of current compensation levels related to the jobs in the organization should be conducted in the early stages of or prior to developing a program.

3. The innovative compensation program, especially management incentive programs that provide significant opportunities for financial rewards, should be clearly tied to performance. The program should demonstrate the achievement of overall organization objectives in finance, program, development, client service, membership, public affairs, government relations, community relations, and any other areas deemed important to the organization.

4. Organizations should consider pilot testing an innovative compensation program on a selected group of staff before introducing it to all staff. More than one innovative compensation program should be considered, especially in larger organizations. The majority of nonprofit organizations in the survey had implemented at least two types of programs.

5. Innovative compensation programs should be well communicated to staff and used as a vehicle to announce the success of employees, teams, and the organization.

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Article Tags: cash compensation, chief executives, chronicle of philanthropy, compensation policies, compensation practices, critical elements, executive compensation, executive directors, flexible work, government scrutiny, human resources practices, incentive plans, internal candidates, internal revenue service, last several years, many nonprofit organizations, nonprofit world, organizational strategy, quality staff, work time



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