COMPENSATION STRATEGIES FOR NONPROFITS

October 30, 2008

Bay Area Nonprofit HR Network

San Francisco, CA

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Today’s Discussion

Introductions

Total Rewards Model

Compensation Challenges and Solutions

Wrap-Up and Questions

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Total Rewards Model

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Elements of Total Rewards

WorldatWork’s model includes five elements:

1) Compensation

2) Benefits

3) Work-Life

4) Performance and Recognition

5) Development and Career Opportunities

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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?

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Compensation Challenge #1

Competing for Talent

in the

For-Profit World

Managing a tightsalary budget

Competing withequity grants

Driving performancewithout a bonus plan

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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

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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

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Solution #1: Market-Based Salary Structure

$ $Minimum Market Maximum

Salary Midpoint Salary

Below Market Above Market

$

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 7min max

Grade 6min max

Grade 5min max

Grade 4min max

Grade 3min max

Grade 2min max

Grade 1min max

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Solution #1: Market-Based Salary Structure

Salary Midpoint Range Width Base Salary Range Number ofGrade Progression Low High Minimum Midpoint Maximum Positions

10 25% 20.0% 20.0% $134.3 $179.1 $223.9 19 25% 20.0% 20.0% $107.4 $143.2 $179.0 68 20% 20.0% 20.0% $91.6 $114.5 $137.5 47 20% 20.0% 20.0% $76.4 $95.5 $114.5 106 20% 15.0% 15.0% $67.6 $79.5 $91.5 95 19% 15.0% 15.0% $56.3 $66.3 $76.2 54 17% 15.0% 15.0% $47.3 $55.7 $64.1 43 15% 10.0% 10.0% $40.5 $47.6 $54.8 82 15% 10.0% 10.0% $35.2 $41.4 $47.6 51 - 10.0% 10.0% $30.6 $36.0 $41.4 2

Total 54

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Solution #2: Merit Increase Matrix

Performance RatingPosition Does Not Meets Some, Meets Meets All, Exceptional

In Meet Not All Requirements Exceeds Some PerformanceSalary Range % Increase % Increase % Increase % Increase % Increase

Bottom Third

Middle Third 1.5%

Upper Third 0.5%

0.0% 3.0% 10.0%5.0% 7.5%

0.0%

0.0% 5.0%

3.5%

2.5% 3.5%

5.0% 7.0%

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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

Recruitment and

Retention of

Top-Tier Executive

Talent

Offering competitive pay package

Not attracting unwanted scrutiny

Linking pay and performance

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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:

What types of organizations are

“like enterprises” or offer “like

services”?

Arrive at a Comparator Group

of 15 to 25 organizations

How many organizations have similar operating

budgets?

Of the remaining organizations, how

many have a comparable headcount?

Types of Organizations

Filter #1: Operating Budget

Filter #2: Employees

Comparator Group

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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

– Don’t 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