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Concerns in Non-Profit Executive Compensation

Guest Article By:

Michael F. Maciekowich, National Director

Astron Solutions, LLC

A natural concern that many have in the non-profit sector is the compensation of executives. In fact, a 2011 report from the Chronical of Philanthropy highlighted that the median pay of executives in a survey of 132 charities and foundations increased by 3.8% of the prior year. Three years later, Charity Navigator reported that the typical charity CEO’s compensation had increases of just 2.6% over the prior year. Their report surmises that raises have been modest since the recession. However their report also acknowledges that despite this, there are some non-profit leaders that earn “excessive” wages of more than $1 million. Factors involved in enhancing pay include:

  1. Greater competition among non-profits to attract top talent

  2. Difficult in retaining staff and a lack of internal candidates for some important positions

  3. Non-profits desire to lure corporate executives as the finances of non-profits have become subject to greater government scrutiny.

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

In recent years, the Internal Revenue Service has begun examining executive compensation at non-profits with an eye toward uncovering potential abuse. 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 non-profit organizations.

Consider these details when developing a compensation plan for executives in non-profit:

  1. Rationale for developing plans

  Non-profits 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).

  1. 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.

  1. 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 non-profit 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%

In addition, here are some guidelines to consider when implementing a new compensation plan:

  1. Non-profit 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 non-profit 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.

Do you work in the non-profit sector? Is executive pay a concern for your organization? Is there some form of transparency to alleviate those concerns? Are you considering or recently changed your compensation plan? Contact Michael Maciekowich, National Director, Astron Solutions, LLC at 212-792-8886 or michaelm@astronsolutions.com.

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