Compensation Strategies and Best Practices for Nonprofit Organizations – Part One

Compensation decisions for nonprofits can be difficult because organizations are often balancing twin aims of recruiting and retaining highly skilled and highly valued individuals, and complying with laws that prevent unfair or unreasonable compensation. Recently, I participated in two events regarding nonprofit compensation that address these dual concerns. Below are some of the tips that may be useful for your organization.

“Compensation Strategies for Nonprofit Organizations”

The concept of “compensation” can alone be challenging even before adding the various layers of laws and regulations. Understanding compensation was a focal point at an informative seminar I attended earlier this month, “Compensation Strategies for Nonprofit Organizations,” hosted by Burr, Pilger, & Mayer as part of the Nonprofit Roundtable Series for Fall 2010 with presenter Brooke Green, a founding Principal with the compensation consulting firm Presidio Pay Advisors, Inc. Based on her experience working with both for-profit and nonprofit organizations, Green explained recent compensation trends, addressed various compensation philosophies, and provided useful tips on compensation strategies for nonprofits from hourly wages to executive salaries.

Some of the takeaways included:

  • Compensation strategies have two main steps. First, look at the actual job being asked of to determine the salary range (e.g., an executive director role with x, y, z responsibilities). Next, look at the actual employees performing those roles and ask whether their position in the salary range makes sense (e.g., Who is being paid at the higher end of the salary range of their job position and why? Are high performers earning less than low performers?). Green openly advocates for considering pay structures linked to performance.
  • What is your definition of “fair”? Does “fair” mean everyone is treated the same (i.e., pay is not linked to performance)? Does that definition of “fair” ever lead to inequitable results (e.g., low performing individuals being paid more than high performing individuals; employees being paid the same wage despite being located in different geographic regions)? 
  • Green suggests comparing the organization’s competitive pay with at least 15 other organizations (and a range of up to 25 organizations). [Ed. This comparison is to determine competitiveness, not reasonableness, which typically requires far fewer comparables.] If the organization is using data from for-profits, keep the market data from for-profits and nonprofits separate.
  • When seeking comparables, remember that some nonprofit positions will not have for-profit counterparts (e.g., development director). 
  • Keep in mind that cost of labor is not the same as cost of living. Cost of labor reflects local demand and supply of labor. Cost of living is determined by local supply of goods and services. Competitive marketplace salaries do not always completely offset cost of living.
  • Positions with hourly wages usually compete with local employers’ wages. Positions at or above the Vice President level are typically considered to be a national pool of applicants and therefore not adjusted for location.
  • Pay is only one element of the “Total Rewards Strategy.” If there are salary pay cuts or freezes, think of other options to build value: benefits, work-life balance, performance and recognition, and development and career opportunities. (The WorldatWork Total Rewards Model). For example, a recent Watson Wyatt study citied a lack of career path visibility as the number one reason people leave their jobs.
  • There are many impetuses for rethinking compensation strategies other than an annual review. For example, high turnover can indicate a deficiency in pay while no turnover can indicate over paying.
  • Even for pay structures linked to performance, Green recommends de-coupling performance conversations and pay conversations with employees when appropriate so that discussions about performance do not necessarily lead to premature or uncomfortable discussions about pay or demands for increased pay (e.g., performance evaluations every six months; a pay evaluation based on performance annually).


Part Two of this post "Best Practices in Nonprofit Compensation" can be found here.

Previous blog posts regarding compensation excess benefit rules and the rebuttable presumption of reasonableness include “Executive Compensation” and “Nonprofit Executive Compensation.”

Green recommends the white papers, “Salary GPS,” and “Merit Manager” free downloads from the Presidio Pay Advisors, Inc. website “Tools and Resources” section as additional compensation resources.

The Fall 2010 Roundtable Series for Nonprofit Organizations is hosted by Burr Pilger Mayer, Coblentz, Patch, Duffy, & Bass LLP, Essex & Drake Fund Raising Counsel, and Rusher Loscavio Executive Search. The schedule and registration can be accessed here