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INNOVATIVE COMPENSATION PRACTICES IN NONPROFIT ORGANIZATIONS

Prepared by James E. Rocco, James E. Rocco Associates, Inc.* and Jay Bowman, Applied Research and Development Institute International (ARDI).


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 practices.

Types of Innovative Compensation Practices

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
  • Bonuses
  • Spot awards
  • Special cash recognition
  • Special noncash recognition

Findings

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 benefits.)

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 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. 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 performance level.

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 recognition awards.

Guidelines for Implementing Innovative Compensation Plans

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 organization.

4. The innovative compensation program should include both quantitative and qualitative criteria.

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 organization.

Conclusion

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 compensation plans.



*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.