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.

2018 Compensation Budgeting Forecast Part 2: Trends in Incentive Compensation

Astron Solutions has been tracking the increase in organizations instituting short- and long-term incentive plans among our client organizations over the past year. This trend is in direct response to the frustration with and the failure of traditional merit pay programs to impact employee behavior. In addition, organizations are discovering that traditional merit pay programs have little or no impact on retaining and motivating their new millennial workforce.

Employee Engagement and its Impact on Total Rewards
Of most importance to organizations today is the need to have better reward systems to enhance employee engagement. The following is from a 2017 study conducted by Deloitte on the concern of employee engagement:

• Organizational culture, engagement, and employee brand proposition remain top priorities in 2017; employee experience ranks as a major trend again this year.
• Nearly 80 percent of executives rated employee experience very important (42%) or important (38%), but only 22% reported that their organizations were excellent at building a differentiated employee experience.
• Fifty-nine percent of survey respondents reported they were not ready or only somewhat ready to address the employee experience challenge.

A key total rewards strategy is to develop short- and / or long-term incentives that focus on employee behaviors exemplifying the organization’s values.

Current Use of Bonus / Incentives
According to BLR’s recently published 2017–2018 Pay Budget and Variable Pay Survey, incentive / bonus practices in 2017 and projected for 2018 appear as follows:

For 2017:

• On average, 50.4% of organizations paid bonuses to their exempt employees in 2017, down from 54.3% last year.  18.4%, up from 15.7% last year, offered amounts of 5% or less.  31.2% awarded amounts greater than 5%.
• On average, 31.5% of those surveyed awarded bonuses to their hourly workers, down from 37.9% last year.  21.6% offered 5% or less.  9.9% awarded amounts above 5%.
• On average, 30.8% gave their senior management team members bonuses above 10% of base pay, down from 37.2% of organizations last year.  21.2% awarded the remainder of their management team members at that level, down from 24.5% of organizations last year.  8.6% rewarded their non-management exempt employees with bonuses at the same level, down from 10.6% of organizations last year.
• Only 3.4% awarded their hourly office employees bonuses above 10%.  2.4% of survey participants who answered the question awarded their hourly nonoffice employees bonuses above 10% of their base pay.
• 40.4% paid bonuses in addition to salary increases, up from 38.9% of organizations last year.  In 2017, 21.0%, down from 24.5% last year, awarded some of both, depending on employee pay type.
• Though the majority (56.9%) isn’t providing them in 2017, lump sum payments are an option for some employers.  13.1% offer up to 5% of base pay.  Another 3% offer from 5.01% to 10% on average across all employee groups.

Projected for 2018:

• A little over one-third (34%) of survey participants provided information regarding their plans for bonuses in 2018. Of those who did, on average across all employee types, 8% plan to offer bonuses of up to 2.5% of base pay.  Another 9.8% plan to offer 2.51% to 5%.  Another 6.9% plan bonus amounts in 2018 of 5.01% to 10%.  Bonus amounts of 10.01% to 25% are planned for an average of 10.1% of the survey participants who answered this question.
• Senior management will receive bonuses of 10.01% to 30% of base pay at 19.5% of organizations.  9.2% will receive bonuses of 30% or more.
• Though 5.5% plan to award bonuses in lieu of pay increases, 36% will award bonuses in addition to salary increases.  23.5% plan some of both, depending on employee type.
• Although 81% have no plans to offer them in 2018, lump sum payments are on tap for some employers.  12.3% plan to offer up to 5% of base pay.  1.9% plan to offer from 5.01% to 10% on average across all employee groups.

Incentive / Bonus Budgeting for 2018

Regardless of how an organization decides to design its incentive / bonus program, there remains the question of how to budget and account for this variable salary expense.  For not-for-profits, the issue is clearer in that in order to retain nonprofit status in the eyes of the IRS these organizations are required to pre-budget the maximum potential payout.

However, there is still the issue of accounting for this expense. From Accounting Tools, we find the following general recommendations:

• Historical-basis bonus. If a bonus is essentially a roll-forward of the organization’s performance from the preceding period into the budget period, the recipient of the bonus plan presumably only has to copy existing performance to achieve the bonus. In this case, the payment is probable, so you should budget for the bonus expense.
• Attainable bonus. If the bonus is based on an improvement in the organization’s present performance, you should base the decision to record the bonus on a qualitative estimate of how difficult it will be to attain the bonus. If it is more likely than not that the recipient of the bonus plan will be paid the bonus expense.
• Theoretically attainable bonus. If the bonus is only paid if one or more extremely difficult targets are met, then do not budget for the bonus expense. In these cases, the bonus is based on the achievement of targets that may only be theoretically possible, such as running a production facility at 100% of its capacity. Given the low probability of success, there is no reason to budget for the bonus expense.

Astron Solutions’ Perspective
Astron Solutions finds that our client organizations are focusing more on how to enhance employee engagement through their total rewards programs, rather than specific compensation plan elements. Most clients now find that traditional “merit” and / or “pay for performance” programs are inadequate in reinforcing the behaviors expected of employees, in terms of both employee engagement and meeting strategic objectives. Client organizations now look to variable compensation programs as a more effective answer.

2018 Compensation Budgeting Forecast Part 1: Base Pay Adjustments

As we move towards Labor Day, Astron Solutions is getting more and more requests for information regarding 2018 compensation budgeting. This is part one of a three part review of 2018 compensation planning projections.  Part 1 focuses on base pay, and includes a review of the impact of 2018 minimum wage changes.

2018 U.S. Economy
It is always important to put into perspective compensation adjustment projections given general economic predictions for the same time period.  According to the Economic Research Institute (http://www.erieri.com/), the following are projections on key economic indicators for 2018:

• Gross domestic product in the U.S. is expected to increase by 2.5 percent next year, up from 2.3 percent in 2017 and 1.6 percent in 2016 — an improvement, but below the Trump administration’s goal of 3 percent growth for the economy.
• Inflation is forecast to slow to 2.4 percent, down from 2.7 percent this year but higher than the 1.3 percent reported for 2016.
• The unemployment rate is predicted to fall slightly to 4.6 percent, down from 4.7 percent this year and 4.9 percent in 2016.

2018 Minimum Wage Changes
Will your organization’s operating location(s) experience a minimum wage change in 2018?  Following is a summary of anticipated changes in the coming year (www.thebalance.com/2017-federal-state-minimum-wage-rates-2061043).  Note that states, cities, or territories following the Federal minimum wage of $7.25 are not listed in this summary.

• Alaska: $9.80 (Annual indexing has begun)
• Arizona: $10.00 (Raised to $12.00 through Indexed Annual Increases between 1/1/2018 to 1/1/2020)
• Arkansas: $8.50
• California: $10.50  ($11.00 to $15.00 in $1.00 Indexed Annual Increases between 1/1/2018 to 1/1/2022)
• Colorado: $9.30* ($9.30 to $12.00 in $0.90 Indexed Annual Increases between 1/1/2018 and 1/1/2020)
• Connecticut: $10.10
• Delaware: $8.25
• District of Columbia: $12.50 (Increases to $15 with Indexed Annual Increases between 7/1/2018 and 7/1/2020)  Florida: $8.10*
• Georgia: $5.15 if not covered by Federal Regulations otherwise $7.25 (Federal Minimum Wage)
• Guam: $8.25
• Hawaii: $9.25, $10.10 by 1/1/2018
• Illinois: $8.25
• Chicago $11.00 July 2017, $12.00 July 2018, $13.00 July 2019
• Maine: $9.00 ($10.00 to $12.00 in $1.00 annual Increases between 1/1/2018 to 1/1/2020) (Indexed annual increases will begin on 1/1/2021)
• Maryland: $9.25,  Increases to $10.10 7/1/2018
• Massachusetts: $11.00  ($3.75 for tipped employees), $16.50 per hour for working on a Sunday
• Michigan: $8.90, $9.25 by 1/12018 (Indexed annual increases will begin on 4/1/2019)
• Minnesota: Large employers are required to pay workers $9.50/hour and small employers (less than 500k in annual sales) $7.75 (Indexed Annual increases will begin on 1/1/2018)
• Missouri: $7.70
• Montana: $8.15 ($4.00 for businesses with gross annual sales of $110,000 or less) (Annual indexing has begun)
• Nebraska: $9.00
• Nevada: $8.25 Nevada’s minimum wage is set at $1.00 above the federal minimum wage for firms not providing health insurance. The minimum may be increased more than $1.00 above the federal minimum wage if cumulative inflation, as measured by the CPI-U, is larger than the percentage change in the federal minimum wage since December 31, 2004.
• New Jersey: $8.44 (Annual indexing has begun)
• New Mexico: $7.50
• New York: $9.70 ($10.40 by 12/31/2017 with $0.70 Indexed Annual Increases from 12/31/2017 to $12.50 by 12/31/2020. Starting 1/1/2021, the rate will be adjusted annually for inflation until it reaches $15 an hour)
• More information on New York minimum wage increases.
• Ohio: $8.15* ($7:25 for employers with gross sales of $283,000 or less) (Annual indexing has begun)
• Oregon: $10.25  (From $10.75 to $13.50 from 7/1/2018 to 7/1/2022)
• Rhode Island: $9.60
• South Dakota: $8.65  (Annual indexing has begun)
• Vermont: $10, $10.50 by 1/1/2018, Annual indexing begins 1/1/2019
• Virgin Islands: $9.50($4.30 for employers grossing $150,000 or less), $10.50, 6/1/18
• Washington: $11.00 (From $11.50 to $13.50 from 1/1/2018- 1/1/2020)
• West Virginia: $8.75

Remember to follow and account for current minimum wage legislation changes in your location(s), as the cost of minimum wage adjustments often are not included in compensation budgeting projections.  These changes may very well have a domino effect throughout an organization’s formal pay structure.

Summary of 2018 Projections
The following is a summary of compensation budgeting projections from the Economic Research Institute (www.erieri.com) and WorldatWork (www.worldatwork.org).

Economic Research Institute:

WorldatWork:

Total U.S. Salary Budget Increases by Employee Category

Employee Category	Actual 2017 Mean	Actual 2017 Median	Projected 2018 Mean	Projected 2018 Median
Nonexempt Hourly Non-Union	3.0%	3.0%	3.1%	3.0%
Nonexempt Salaried	3.0%	3.0%	3.1%	3.0%
Exempt Salaried	3.0%	3.0%	3.2%	3.0%
Officers/Executives	3.0%	3.0%	3.2%	3.0%
All	3.0%	3.0%	3.1%	3.0%

Astron Solutions’ General Conclusions

1. It appears that we are continuing with an approximate 3% compensation budgeting factor moving into 2018.
2. All organizations need to be cognizant of their state and / or local minimum wage changes, and build into their budgets the direct & indirect impact of these legislative changes.
3. Astron Solutions has noticed a marked increase in career path development to meet the retention needs surrounding millennials in the workforce. These career-based promotions also need to be incorporated into base pay compensation adjustments. Astron recommends moving these positions out of the mainstream salary structure, in order to better track the impact(s) of career-based adjustments.
4. Organizations also need to be aware of potential federal and approved state minimum pay for overtime exemptions, and the potential budgetary impact of making additional adjustments in exempt / non-exempt classification.
5. Organizations also need to be sensitive to the impact of recruiting and retaining “mission critical” positions, and isolate these positions in order for appropriate compensation levels to be accounted for in the 2018 budget.

Please stay tuned for more!  Our next issue of Astronology® explores trends in incentive compensation in 2018.