COMPENSATION STRATEGIES FOR NONPROFITS

October 30, 2008

Bay Area Nonprofit HR Network

San Francisco, CA

Todays Discussion

Introductions Total Rewards Model

Compensation Challenges and Solutions

Wrap-Up and Questions

Total Rewards Model

Elements of Total Rewards

WorldatWorks model includes five elements:
1) Compensation 2) Benefits

3) Work-Life
4) Performance and Recognition 5) Development and Career Opportunities

What is your Compensation Philosophy?

How do you look/act different from competitors? How does compensation fit with other Total Rewards? How does pay link to business strategy? How much you value individual performance and differentiate pay as a result?

Compensation Challenge #1
Managing a tight salary budget
Competing for Talent in the For-Profit World

Competing with equity grants Driving performance without a bonus plan

Possible Solutions
Managing a tight salary budget

Manage pay with a market-based salary structure

Differentiate salary increases based on a merit matrix

Take a Total Rewards approach to marketing

Solution #1: Market-Based Salary Structure

What is a salary structure?

Defines the base pay opportunities for jobs in an organization or company

Made up of grades and corresponding salary ranges developed from data about pay patterns in the market
Used to establish and maintain the internal and market value of the positions in an organization

Solution #1: Market-Based Salary Structure

Below Market Above Market

$ Minimum Salary

$ Market Midpoint

$ Maximum Salary

Start with competitive survey data for an individual position

Determine the market rate for the job, which becomes your midpoint
Put a min-to-max range around midpoint
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Solution #1: Market-Based Salary Structure

Nonprofit Compensation Surveys

PRM Consulting GuideStar

Council on Foundations
Watson Wyatt Data Services Abbot, Langer Salary Surveys

ERI Nonprofit Comparables Assessor

CompAnalysis
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Solution #1: Market-Based Salary Structure

Grade 7 min Grade 6 min Grade 5 min Grade 4 min Grade 3 min Grade 2 min Grade 1 min max max max max max max max

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Solution #1: Market-Based Salary Structure

Salary Grade 10 9 8 7 6 5 4 3 2 1 Total Midpoint Progression 25% 25% 20% 20% 20% 19% 17% 15% 15% Range Width Base Salary Range Low High Minimum Midpoint Maximum 20.0% 20.0% $134.3 $179.1 $223.9 20.0% 20.0% $107.4 $143.2 $179.0 20.0% 20.0% $91.6 $114.5 $137.5 20.0% 20.0% $76.4 $95.5 $114.5 15.0% 15.0% $67.6 $79.5 $91.5 15.0% 15.0% $56.3 $66.3 $76.2 15.0% 15.0% $47.3 $55.7 $64.1 10.0% 10.0% $40.5 $47.6 $54.8 10.0% 10.0% $35.2 $41.4 $47.6 10.0% 10.0% $30.6 $36.0 $41.4 Number of Positions 1 6 4 10 9 5 4 8 5 2 54

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Solution #2: Merit Increase Matrix

Performance Rating Meets Some, Meets Meets All, Exceptional Not All Requirements Exceeds Some Performance % Increase % Increase % Increase % Increase 3.0% 1.5% 0.5% 5.0% 3.5% 2.5% 7.5% 5.0% 3.5% 10.0% 7.0% 5.0%

Position In Salary Range Bottom Third Middle Third Upper Third

Does Not Meet % Increase 0.0% 0.0% 0.0%

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Solution #3: Total Rewards Approach

Total Rewards Statements show employees what the organization spends on them each year

Using a software program, statement itemizes: Compensation Benefits costs paid by organization Retirement contributions

Value of other perks

Often-missed marketing opportunity for HR

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Possible Solutions
Competing with equity grants

Beef up retirement plan offerings

Offer (real) work/life balance

Emphasize generous benefits

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Possible Solutions
Driving performance without a bonus plan

Formalize performance assessment and goal-setting process

Differentiate salary increases based on individual performance

Develop career paths

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Compensation Challenge #2
Offering competitive pay package Not attracting unwanted scrutiny Linking pay and performance

Recruitment and Retention of

Top-Tier Executive
Talent

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Possible Solutions
Offering competitive pay package

Research competitive pay

Think about retirement (because executives are)

Be creative with soft stuff

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Solution #1: Research Competitive Pay

Understand the Executive Position

Position descriptions: Make sure the executive has recently reviewed their own job description Executive interviews: Meet with incumbent to understand scope of the job and market match Look for market match: Very few executive positions have no competitive comparable

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Solution #1: Research Competitive Pay

Determine the Competitive Marketplace

What is the broad industry? Ex: Healthcare, social services, environment

Then narrow it down within the industry Hospital or outpatient clinics

Job training for low-income population

Animal welfare and protection

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Solution #1: Research Competitive Pay

Determine the Competitive Marketplace

Executive pay is closely correlated with company or organization size Most common measurement is annual revenue Additional measures include Budget # of employees

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Solution #1: Research Competitive Pay

Determine the Competitive Marketplace

With whom do you compete for talent? Is there an organization that recruits the same people you do? Anyone that consistently steals employees from you? Use the next best offer method

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Solution #1: Research Competitive Pay

Establish a Peer Group Using the narrowed down peer group characteristics, look to the competitive marketplace for relevant information. Competitive market defined through two data sources: 1. Published compensation surveys 2. Publicly available IRS form 900 disclosures from a targeted comparator group

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Solution #1: Research Competitive Pay

Establish a Peer Group

Casting a wide net helps eventually create a solid group (may start with hundreds) Then follow these steps to arrive at peer group:
Types of Organizations
What types of organizations are like enterprises or offer like services?

Filter #1: Operating Budget

How many organizations have similar operating budgets?

Filter #2: Employees

Of the remaining organizations, how many have a comparable headcount?

Comparator Group
Arrive at a Comparator Group of 15 to 25 organizations

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Solution #1: Research Competitive Pay

Analyze Competitive Total Cash

Published surveys report actual and target total cash amounts We analyze base salaries and annual bonuses separately Then look at actual cash compensation paid in last fiscal year, updated to the current date Dont use target total cash, because target bonuses can be misleading if actual bonus paid varies significantly from the target
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Solution #1: Research Competitive Pay

Analyze Competitive Total Cash

IRS 990 Disclosures aggregate base salary and bonuses into a Total Compensation column Can make it difficult to determine what was base salary and what was bonus

Once we settle on the market rate for a job, we put a range around that number Typically +/ 20% for executives May be a smaller range for nonprofits
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Solution #2: Think About Retirement

Model the impact of your current retirement programs on key executives and employees under a variety of assumptions

It may be less expensive to make your retirement plans more generous than to increase compensation levels

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Possible Solutions
Not attracting unwanted scrutiny

Make sure you offer reasonable compensation Use independent 3rd party to conduct pay analysis

Follow good compensation governance guidelines

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Solution #1: Reasonable Compensation

Reasonable comp. is the amount ordinarily paid for: 1. Like services 2. By like enterprises (whether taxable or tax-exempt) 3. Under like circumstances

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Solution #1: Reasonable Compensation

1. Like Services

Type of work National position or local in scope Number of employees managed Budget or assets managed

Multiple functions, departments or locations managed

Full-time or part-time
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Solution #1: Reasonable Compensation

2. Like Enterprises

Size budget, revenues, # employees Same business type Could be a mix of nonprofit and for-profit as long as scoped appropriately Entities that compete for same pool of talent

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Solution #1: Reasonable Compensation

3. Like Circumstances

Comparators must consist of similar mix of compensation elements Include all compensation, whether taxable or not Similar geography (cost-of-living)

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Solution #1: Reasonable Compensation

Good Compensation Governance

Systematic procedures set and followed Responsible effort to determine reasonable levels All taxable items reported accurately Board of Directors maintain appropriate oversight

Executive does not make decisions related to his/her own pay

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Possible Solutions
Linking pay and performance

Formal executive performance assessment and development

Goals and progress-to-goals linked to salary increases

Annual incentives paid based on achievement of stretch goals

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Other Points of Discussion

Geographic pay differentials

Employee communications Market movement for certain hot job families

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Questions
If you have any questions about this presentation or other compensation issues, please feel free to contact me: Brooke Green Principal Presidio Pay Advisors, Inc. 850 Montgomery Street, Suite 150

San Francisco, CA 94133

(415) 438-3403 brooke@presidiopay.com
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