Concerns Surrounding Non-Profit Executive Compensation

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

• Greater competition among non-profits to attract top talent.
• Difficultly in retaining staff, and a lack of internal candidates for some critical positions. 
• Nonprofits’ desires 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 in the sector 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 & programs to be fair and competitive, without crossing the fiscally abusive line. Incentive plans and other innovative compensation & human resources practices are becoming critical elements in the organizational strategy of many non-profit organizations.

A previous Astronology® highlighted details to consider when developing a compensation plan for non-profit executives:

1. Rationale for developing plans

Surveyed 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).

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 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%

Beyond these details, following are guidelines to consider when implementing a new compensation plan:

1. Nonprofit organizations should first conduct an assessment to determine the appropriateness of innovative compensation to their cultures and organizations. This assessment should focus on the following:

• the objectives to be achieved through implementing an innovative compensation program,
• what motivates staff,
• the opinions and views of members, constituents, & 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 innovative compensation programs on a selected group of staff before introducing the programs to all staff. More than one innovative compensation program should be considered, especially in larger organizations. Many non-profit organizations have 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.

Is non-profit executive pay a concern for your organization? Is there some form of transparency in place to alleviate those concerns? Are you considering changing or have you recently changed your compensation plan? Please share your thoughts with Astronology®. We may feature your response in a future article!

2017 Compensation Budgeting Outlook

Election years bring about a certain level of anxiety and unpredictability in terms of the results’ impact on the U.S. economy and compensation budget planning. So as we collectively begin the annual ritual of compensation budgeting, let’s start with a quick analysis of the projected economic climate for 2017.

The U.S. Economic Outlook for 2017
In a recent report, the Congressional Budget Office (www.cbo.gov) stated the following:

“Under the assumption that current laws governing federal taxes and spending will generally remain in place, the agency projects that real GDP will grow by 2.7 percent in 2017, as measured by the change from the fourth quarter of the previous year. According to CBO’s projections, the unemployment rate will fall to 5.0 percent in the fourth quarter of 2017. As slack in the labor market diminishes and firms must increasingly compete for a shrinking pool of unemployed or underemployed workers, growth in hourly compensation is expected to pick up.”

Of note is the CBO’s differing projection on the unemployment rate vis-à-vis figures from the US Department of Labor (DOL). As of August 4, 2016, the DOL reports the current US unemployment rate is 4.9%. The difference in statistics between the CBO and DOL stems from their calculation methodologies. The CBO figure is based overall economic trends and climate, while the DOL’s figure is based on the percent of individuals still looking for a job. As such, CBO is considered more conservative and realistic.

The key point here is that if unemployment continues to drop, the labor pool will shrink. This shrinkage will place additional pressure on organizations to compete for talent. This assessment will be especially true in recruiting and retaining “mission critical” positons. Thus, compensation budgeting will become more decentralized, making compensation budgets more difficult to predict in the future.

A U.S. and Canada Perceptive
The Economic Research Institute (www.erieri.com) has published “Planning Global Compensation Budgets for 2017.” From ERI:

“Salary increases are projected to remain stable at 3.0% in the United States and Canada from 2016 to 2017. Minimal change is also expected in unemployment over the same time period with Canada increasing slightly from 7.3% to 7.4%, and the United States decreasing from 4.9% to 4.8%.”

U.S. 2017 Compensation Budgeting – A 30,000 Foot Review

In recent months Astron Solutions consultants reviewed annual compensation budget planning survey results from a number of associations and consulting firms. The following is a brief summary from two of the premier organizations in this area: WorldatWork (www.worldatwork.org) and The Conference Board (www.conference-board.org).

WorldatWork: Total U.S. Salary Budget Increases by Employee Category



Source: WorldatWork 2016-2017 Salary Budget Survey

The Conference Board:
The Conference Board is projecting that median U.S. salary increase budgets for 2017 will be 3 percent. This is the same as the median increase The Conference Board has reported for the previous six years. The Conference Board expects this 3 percent salary increase to hold steady across all employment categories (nonexempt hourly, nonexempt salaried, exempt, and executive), again equal to actual 2016 increases.

Unknown # 1 – Impact of Recent Minimum Wage Changes

The push for the $15.00 national minimum wage is starting to appear in various states across the country. This contiunues to be a highly debated issue with a dramatic impact on compensation budgeting. However, this push often is not reflected in general compensation budgeting surveys. Increases in the minimum wage have a domino effect in setting formal pay ranges and often create compression in employee pay rates. The compression, in turn, requires additional compensation adjustments to effectively address. Here are a few perspectives to consider on this hot compensation topic. Please keep in mind that while our review of the matter takes a national perspective, be sure to check your state and local Departments of Labor for the latest minimum wage requirements in those jurisdictions.

1. Impact on Nonprofit Organizations
According to the Non Profit Times (www.nonprofittimes.com), "some 92 percent of non-profit leaders claim that their organizations’ financial sustainability would be in jeopardy due to minimum wage increases. In a recent survey, 30 percent responded that employee benefits would be reduced due to minimum wage increases. According to New York Council of Nonprofits CEO Doug Sauer, “you can raise the wage, but if government doesn’t want to pay it and donors say ‘we want more bang for the buck,’ it’s not a stable workforce. We’re squeezed.” A bump in government contracts would not finance a minimum wage increase for many agencies. Fundraising for increased operating costs such as employee wages is not a realistic target."

 2. Impact on the Economy
In a recent survey conducted by the Employment Policies Institute (www.epionline.org), "166 economists provided feedback on the economic impact of minimum wage increases. Nearly three-quarters of these US-based economists oppose a federal minimum wage of $15.00 per hour. 

The majority of surveyed economists believe a $15.00 per hour minimum wage will have negative effects on youth employment levels (83%), adult employment levels (52%), and the number of jobs available (76%). 

When economists were asked what effect a $15.00 per hour minimum wage will have on the skill level of entry-level positions, 8 out of 10 economists (80%) believe employers will hire entry-level positions with greater skills. 

A majority of surveyed economists (71%) believe that the Earned Income Tax Credit (EITC) is a very efficient way to address the income needs of poor families. Only five percent believe a $15.00 per hour minimum wage would be very efficient in addressing this need."

Unknown # 2 – Impact of FLSA Minimum Salary Threshold Changes for Exempt Status

Sibson Consulting (www.sibson.com) has identified two areas of concern with the recently approved changes in FLSA exemption salary levels.

1. Financial. These changes will impact a variety of areas, including the following:

• Salary increases for affected exempt employees to meet or exceed the proposed salary level  Overtime payments to newly classified non-exempt employees 
• Hiring of additional staff due to financial and resource constraints 
• Costs associated with layoffs for certain employees 
• Benefit costs given reclassification of employee jobs 
• Salary adjustments to ensure internal equity and prevent wage compression

2. Employee Relations. The following considerations can result in decreased employee morale and increased employee turnover, leading to negative bottom line organizational impacts. 

• Perceived loss of prestige and credibility following a change from exempt to non-exempt status
• Changes in job: diminished job autonomy with loss of independent discretion and decision making, less flexibility in work hours, and decreased opportunity for career development or advancement
• Change in level and type of benefits (e.g., vacation, tuition reimbursement)
•  Reduction in merit-based compensation to offset FLSA adjustments

Final Thoughts
So where do we go from here? In general, compensation budgeting continues to remain flat, averaging 3% again for 2017. Aggressive minimum wage and FLSA salary requirement changes will have a “hidden” impact on compensation budgeting. These hidden impacts will create potential artificial salary adjustments and employee compression correction scenarios not accounted for in the standard compensation budgeting process. As such, proactive and progressive employers will continue to move to a decentralized compensation planning process. A decentralized compensation planning process means that “mission critical” positions will have higher compensation budgeting percentages than non-mission critical positons, sometimes as much as two times the typical projected compensation budget levels.

Living Wages in 2016 – How Do Employers Respond?

Seven months have passed since New York State’s minimum wage increased to $9.00 per hour, while the “fast food” minimum wage increased to $9.75 across most of the state, and to $10.50 in New York City. If you do not work in the restaurant industry, or in New York State, you may think this change doesn’t affect you. However, an increasing number of industries are concerned that these pay increases will have a negative domino effect on their organizations. In this issue of Astronology®, Astron Solutions discusses the challenges these new increases present to employers outside the fast food industry.

Last year, a New York Times online article expressed that the decision to raise the minimum wage for fast food workers “thrust(s) New York State to the forefront of the current experiment.” The article goes on to state that “based on projections from government data, the proposed $15 minimum wage for fast-food workers could represent more than 60% of the wage of a typical New York City worker when it takes effect at the end of 2018...” The New York Times online article highlights the 2003 minimum wage increase in Santa Fe, New Mexico, to compare and predict New York’s possible future. Despite a concentrated analysis with current modern tools, economic analyses of the Santa Fe increase suggest it had little effect on employment.

Last year when news broke on the $15 minimum wage legislation, Astron Solutions’ Michael Maciekowich noted that the impending changes caused quite a stir. According to Mike, “numerous Astron clients in New York State called, concerned that the ‘fast food’ minimum wage would in essence become the new state minimum wage, in that these organizations compete for entry level staff with the fast food industry. As the ‘fast food’ minimum wage increases to $15.00 over the next three to five years, organizations that compete for staff with this industry will have no choice but to raise their minimum wages to compete. This will also have a domino effect, in that this increase in the entry wage will create pay compression with coordinators and supervisors in the same work units. This compression will add unforeseen additional budgetary impact. For non-profit organizations, this will just add to concerns of how to address increasing pay expenses with already shrinking revenue dollars."

In accord with Mike’s thoughts, in April, New York Governor Cuomo signed a $15 minimum wage plan that will

• Give New York City workers in businesses with at least 11 employees a $2 yearly minimum wage increase, starting with the minimum wage set at $11 at the end of 2016. A $15 minimum wage would be reached on 12/31/2018.
• Give New York City workers in businesses with 10 or fewer employees a minimum wage increase to $10.50 at the end of 2016, then $1.50 each year. A $15 minimum wage would be achieved by 12/21/2019.
• Workers outside of Nassau, Suffolk and Westchester Counties would have an increase to $9.70 at the end of 2016, with $0.70 year increases annually until reaching $12.50 on 12/31/2020. Afterward, the wage will increase to $15 via an indexed schedule set by the Director of the Division of Budget.
• Workers in Nassau, Suffolk and Westchester Counties will have their minimum wage increased to $10 at the end of 2016, with $1 increase each year. A $15 minimum wage will be reached on 12/31/2021.

While some organizations are wondering if they can really afford the continual increases, other organizations seem to be slowly addressing this concern by creating their own solutions. This month, Jamie Dimon wrote an Op-Ed in The New York Times about JP Morgan’s plan to raise its minimum wage for 18,000 employees to between $12 and $16.50 per hour, with geographic and market factors considered.

Meanwhile, a Fast Company online article last year examined the popular fast food chain Chipotle, and how they could address the living wage issue. Chris Arnold, a Chipotle spokesman, mentioned in an e-mail to Fast Company that “we have never taken a position on the minimum wage and believe that a minimum wage or starting wage tells only part of the story; We already pay above minimum wage and offer benefits that are more than competitive.” Some of those benefits include paid sick & vacation days and tuition reimbursement. The Fast Company Online article explained that even if the company had the CEOs’ paychecks reduced to $1 per year and divided the compensation among the current employees, it would result in only a $0.55 increase per hour for an employee working 40 hours per week. So what can they do? Consider that in San Francisco, the minimum wage increased to $12.25, and will increase to $15 by 2018. Coincidentally, it had been noted that Chipotle raised its menu prices in the city by 10%. Such a move sends the message that customers have to share in the responsibility of lifting minimum wages. In short, if you can afford an $11 burrito, then you can probably pay for the same burrito with the cost increased by $1. Time will tell if this will work.

Could you adopt this approach if your organization is affected by minimum wage increases? Would you consider adopting this approach proactively? Have you prepared other solutions to address the minimum wage issue? Write to Astronology. We’d love to hear your input!