COMPENSATION PRACTICES IN NONPROFIT ORGANIZATIONS
Over the last several years, interest in nonprofit compensation has been
growing. This growth is partially in response to controversies regarding
excessive compensation, such as the widely publicized United Way of America
National Director scandal, and the 1993 series of articles in the
Philadelphia Enquirer entitled "Warehouses of Wealth." Further, the growing
understanding of 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 nonprofit organizations.
In 1990, the Applied Research and Development Institute International (ARDI)
conducted a national survey of nonprofit organizations to identify their
management assistance needs. The survey results indicated human resource
management was the number one topic, with compensation issues rated highest
within this topic. Several nonprofit wage and benefit surveys have been
published; however, in ARDI's search for resources, no resource had been
identified which helps nonprofits learn about innovative compensation
Innovative compensation practices encompass cash compensation and
recognition plans. The following are examples of innovative cash
compensation or recognition plan options that are studied in the report.
- Individual incentives
- Team or group incentives
- Spot awards
- Special cash recognition
- Special noncash recognition
The study includes information obtained from surveys and interviews with
nonprofits, a literature review of existing publications, and case studies.
Some of the findings were:
1. Rationale for developing plans
Nonprofits 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; become more
competitive in total compensation (i.e., cash compensation, recognition, and
The mandate to introduce innovative compensation plans usually came from top
management. Fourteen of the 18 participants indicated top management was the
initial champion or sponsor for this change.
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 noncash
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. Communication and timing
The time required for designing an innovative cash compensation plan
depended on the type of program, with management incentive plans requiring
the longest time (four to six months) and noncash recognition programs the
shortest time (one to two weeks).
Information regarding the innovative compensation plan was usually
communicated to plan participants by top management and was usually
communicated each time awards were paid, since the payout was indicative of
The nonprofit organizations surveyed used a combination of methods to
communicate information, including newsletters, memos, and meetings.
4. Budget and awards amounts
Respondents indicated their innovative cash compensation plan payouts range
from 1.5% to 6% of total payroll.
The average award payouts typically ranged from 2% - 5% of salary. In one
organization, targeted payouts ranged from 4% - 10% of the salary range
midpoint. For Management Incentive Plans, payouts are usually higher,
typically ranging from 10% - 20% of salary. Other nonprofits indicated flat
dollar amounts, such as $50 - $250 for spot awards, and $250 for cash
The following guidelines provide considerations for nonprofit organizations
which may be interested in implementing an innovative compensation plan.
1. Nonprofit 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, 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 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
4. The innovative compensation program should include both quantitative and
5. 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 nonprofit organizations
in the survey had implemented at least two types of programs.
6. Innovative compensation programs should be well communicated to staff and
used as a vehicle to announce the success of employees, teams, and the
If a formal management incentive program is not an option because of your
size or limited budget resources, you may wish to consider the adoption of
certain innovative compensation programs which are not very costly and can
have a beneficial impact on employee morale. These include noncash
recognition programs, cash recognition programs such as spot awards,
flextime/staggered hours, and a flexible spending account. Based on our
experience, many of these programs are highly valued by employees since they
provide flexibility. These plans incur little or no cost to the
organization. Expert compensation and legal advice may be needed and should
be considered by nonprofit organizations before implementing innovative
*James E. Rocco Associates, Inc. is a Compensation Consulting Practice
based in Rye New York, specializing in working with Non-Profit
Organizations. They have extensive experience in conducting a wide range of
studies in the compensation / human resource field and in designing
innovative compensation plans for both staff and executives. James E. Rocco
can be contacted at 914 925-3402.