2018 Compensation Budgeting Forecast Part 3: Trends in Non-Profit Compensation

The world of non-profit compensation continues to see radical changes from the past. Previously, it was assumed that non-profits, due to the limitations placed on their abilities to generate revenue, were in the position of compensating their employees much below the market.  In the past, it was assumed that time off packages and benefits would make up for low wages. But this mindset has changed in the past few years, and will continue to change into 2018. The following are key trends in non-profit compensation design Astronology® readers need to know.

Trend #1: Strategic Planning. The first trend is the increased use of the strategic planning process by non-profits.  What was once considered a normal part of for-profit planning is being adopted by non-profits. According to the National Council on Nonprofits:

A strategic planning process identifies strategies so that a nonprofit will achieve its mission. Ideally, as staff and board engage in the process, they become committed to measurable goals, approve priorities for implementation, and also commit to revisiting the organization’s strategies on an ongoing basis as the organization’s internal and external environments change. Many nonprofits start the process by identifying the nonprofit’s strengths, weaknesses, opportunities, and threats, in what is commonly called a “SWOT” analysis. Looking at external as well as internal factors (such as your own nonprofit’s staff capacity to accomplish its goals) is important.

This is an important change, as having a formal strategic planning process allows for the creation of a formal “compensation strategy” necessary to focus employee efforts in support of the strategic plan.

Trend #2: Compensation Philosophy Statements.  The second trend is the increase in formal compensation philosophy statements at non-profit organizations. With the advent of strategic planning, we are now finding more non-profits establishing a formal “compensation philosophy” that acts as a blueprint in compensation design and administration activities.  According to Payscale,

A compensation philosophy explains the role of compensation in your organization and tells your employees how you believe people should be paid, while your compensation strategy explains how you will achieve this philosophy. There are three things to look for when it comes to creating a strong compensation strategy in the nonprofit sector. Who do you compete with for talent? Nonprofits aren’t only competing with other nonprofits, so consider all of your competitors for talent in your compensation strategy. Think about specific departments and how they might differ. For example, are you drawing talent for your Finance department from the for-profit sector or specific industries? What about your Development team? How competitive do you want to be in your market? Do you want to pay at the median of the market and target the 50th percentile? Or do you want to be an organization leading the market and targeting higher? Consider targeting higher in your market for key departments and areas that are critical to your organization.  Do your compensation philosophy and strategy support your organization’s mission? If your organization’s mission is focused on social justice, yet employees are struggling financially due to low pay, there might be a disconnect between your mission and compensation philosophy. Be sure your pay practices are aligned with your vision & values to attract and retain the best talent.

Astron Solutions finds that the majority of our non-profit clients now have formal compensation philosophies and strategies to ensure compensation programs are aligned with organizational strategic initiatives.

Trend #3: Creative Compensation. The third trend is the increase in creativity in pay-for-performance and incentive compensation strategies. Many non-profit boards have concerns regarding providing incentives to employees and leadership, in that these programs may be taking funds away from the services provided by the non-profit to its constituents. The IRS provides clear guidelines regarding the use of incentives in non-profit organizations:

A 501(c) tax-exempt organization may award a bonus to an employee if the employee’s total compensation package:

• Is established by an independent board of directors or by an independent compensation committee;

• Is reasonable in terms of the employee’s specialty and geographic locale

• The result of arms’ length bargaining

• Includes a ceiling or reasonable maximum

• Does not have the potential to reduce the charitable services or benefits the organization would otherwise provide

• Takes into account measures of the employee’s performance

• Keeps the organization within budget without charging more for services

• Does not transform the principal activity of the organization into a joint venture between it and the employee

• Is not merely a device to distribute all or a portion of the organization’s surplus to persons who are in control of the organization

• Serves a real and discernable business purpose of the exempt organization

• Does not result in abuse or unwarranted benefits

• Rewards the employee based on services the employee actually performs 

In establishing an incentive plan in a non-profit organization, Astron Solutions recommends that

1. The program be self-funded, with the maximum potential incentive payout part of the compensation budget for the entire fiscal year.
2. The program incorporate a “balanced scorecard approach,” in which key elements of the strategic plan be assigned a value weight and the portion of the incentive payout.
3. Each strategic objective be measured based on a threshold measure (50% payout), target measure (75% payout), and optimum measure (100% payout).

Trend #4: Sophistication Surrounding Executive Compensation.  The fourth trend is the sophistication of Boards and Compensation Committees as related to executive compensation. For years, non-profit boards ignored IRS regulations regarding executive compensation.  However, the IRS tells us that

A key to intermediate sanctions compliance is to create a “rebuttable presumption of reasonableness.” In short, if the organization creates this presumption, then the burden of proving that compensation is unreasonable falls back to the IRS and includes the following: Generally, all compensation transactions for disqualified persons must be approved by an authorized body of the organization (or an entity it controls) which is composed of individuals who do not have a conflict of interest concerning the transaction. Prior to making its determination, the authorized body obtained and relied upon appropriate data as to comparability, and adequately documents the basis for its determination concurrently with making that determination. The authorized body, or its representative, then needs to sufficiently document, including a listing of persons present during deliberations and signatures of those authorized to approve the decision.

Astron Solutions’ Perspective
Astron Solutions will continue to monitor these four trends in non-profit compensation throughout 2018. As non-profits find themselves in a battle for talent with the for-profit market, there will be increased pressures to find ways to be creative with the compensation programs needed to compete for essential talent, and to maintain compliance with financial & regulatory restrictions.