Understanding Executive Compensation in the Unique World of Non-Profits

by Carey Klosterman on April 10, 2017

in Benefits,Nonprofit

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Non-profits face many unique challenges when establishing executive compensation which oftentimes deals with issues like regulatory compliance, board governance, limited budgets and equitable pay across the organization. Non-profits typically have a Board of Directors who have a financial responsibility when setting executive pay to ensure that it is “reasonable and not excessive.” This poses an ongoing challenge for many boards who are trying to be reasonable while either recruiting for top/key talent or retaining qualified and knowledgeable Executive Directors in non-profits, where the area of expertise is oftentimes very specialized.

Past vs. Present: It used to be that Executive Directors in a non-profit were typically paid much less than their counterparts (CEO/President) in for-profits, but over time that gap has gotten much smaller. While there is an obvious difference in what drives a for-profit vs. non-profit, non-profits are recognizing that in order to be successful, they have to employ talented individuals and that comes at a much higher price tag. Research shows that non-profits are being compensated competitively (base salary) compared to that of for-profits, yet the greatest disparity exists in total compensation which may include healthcare, deferred compensation, incentive pay and any other perks that may be prevalent in the for-profit sector.

A good way to overcome some of the challenges when establishing executive compensation is to have a formal philosophy and strategy created and implemented. This philosophy/strategy is oftentimes developed by the board and will include how pay decisions are made (the process and who will be involved), when adjustments will be made, and the basis of salary vs. total compensation (healthcare, deferred compensation, performance, etc.).

Performance of EDs, which is tied to incentive compensation, can be a grey area. It isn’t uncommon for a non-profit to be scrutinized for rewarding Executives with additional compensation for a job well-done. As the mission of most non-profits is purpose driven, many feel that any additional cash flow should go to the purpose and mission itself rather than in the pocket of the Executive.

That being said, if the success of the non-profit has surpassed far and above the budgets of earlier years, it is likely due to the efforts of the Executive providing exemplary leadership to the organization. So why shouldn’t they be rewarded (as long as it is reasonable and not excessive)? As mentioned earlier, many EDs have a specialized set of credentials, and if they are successfully leading the organization, it is best to retain this key talent to solidify more successful years to come.

It is prudent to tie any sort of incentive pay to overall performance of the organization whether it be based on things like revenue/budget growth, net income/operating surplus, customer service/quality, etc. However, the overall make-up of the organization should never be overlooked.

Total budget, total number of employees/personnel costs, overhead costs, etc. should always be taken into consideration when establishing total compensation whether or not it includes any form of incentive pay, and different scenarios should be run and evaluated regularly to establish a plan that will benefit all parties involved.

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