NPL 473  Nonprofit Leadership

Total Rewards Programs in Nonprofit Organizations


I.                   Total Rewards:  Integral to Organizational Strategy

a.      Compensation strategy and organizational mission

                                                              i.      Require individual employees to set performance objectives that are based on department goals

                                                            ii.      Workers should be paid for what the organization wants to reward

b.     Need for a Rewards Policy—simple, short statement of how organizations plans to reward people, including

                                                              i.      Pay, benefits, work environment

                                                            ii.      Design & maintenance of system

                                                          iii.      Philosophy of what rewards are supposed to accomplish

                                                         iv.      Statement of treating everyone equitably

c.     Using consultants

                                                              i.      Wide range of experience

                                                            ii.      Access to vast amount of salary and benefits survey data

                                                          iii.      Objectivity

                                                         iv.      Consider certification program of WorldatWork (formerly American Compensation Association)

II.                Traditional Base Compensation Principles

a.      Job- or Person-Based Systems

                                                              i.      Needs to be determined organization-wide

                                                            ii.      Few have completely abandoned convenience of “the job”

b.     Job or Work Analysis

                                                              i.      External competitiveness & internal equity

                                                            ii.      Process: 

1.     interviews

2.     observations

3.     checklists

4.     open-ended questionnaires (usually defined to fit values and goals of organization)

c.     External competitiveness

                                                              i.      Has moved to front of line in pay system design

                                                            ii.      Includes competition with for-profits (relevant labor markets)

                                                          iii.      Benchmark data (from comparable organizations)

1.     data easily found in other organizations

2.     stable

3.     represents all levels within organization

4.     vary in levels of compensable factors

5.     multiple incumbents

6.     should include jobs which have been difficult to recruit

                                                         iv.      Salary data (from published surveys or original data)

1.     should report average salary, weighted average, minimum, maximum, median (weighted average most useful); and effective date of survey

2.     any large discrepancy among these measures could indicate a skewed (and therefore unrepresentative) sample

3.     role” analysis defies salary survey.

d.     Internal equity—perception of fairness in pay for various jobs throughout the organization.  Established through “job evaluation”

                                                              i.      Slotting

                                                            ii.      Point-factor job evaluation

1.     identify and weight a set of factors that uniquely describe each job

2.     Establish levels within each factor and assign points to each level

3.     Compare each job to the factors and assign points appropriate to each factor level

                                                          iii.      4 basic concepts (skill, effort, responsibility, working conditions)

                                                         iv.      Top management and Board should be involved in choice of factors

                                                           v.      Levels should be identified with “or equivalent”

1.     permits flexibility in staffing

2.     provides some protection from legal liability

                                                         vi.      Benchmark jobs are evaluated first

                                                       vii.      Resulting hierarchy of jobs should be reviewed with department manager (although not the points) to verify placement

                                                     viii.      Regular system of review should be  established

e.      Building externally and internally equitable salary structure

                                                              i.      Reconcile contradictions between data

                                                            ii.      Pay level policy

                                                          iii.      Structure the structure

1.     minimum, maximum, control point [midpoint]

2.     control point is salary range that is keyed to organization’s response to the market

3.     employee who meets expectations for the job should receive the value of that job on the market

4.     control point allows organization to control costs around its policy toward the salary market

                                                         iv.      Range spread:  traditional vs broadbanding

1.     broadbanding allows more flexibility

2.     broadbanding does not have control points (although “shadow ranges” within bands may be described)

                                                           v.      Constructing grades or bands (“Control point progression,” as a percent of the lower grade’s control point)

                                                         vi.      Maintaining the structure (market must be checked annually)

                                                       vii.      Common issues

1.     “red circle” employees—paid well above market; pay may be frozen (supplemented with lump-sum performance bonuses)

2.     “green circle” employees—paid well below market; bring rate up to new minimum ASAP

3.     may create severe inequity for long-term employees

                                                     viii.      Other salary administration policies

1.     salary impact of transfers

2.     promotions

3.     demotions

4.     reclassifications

5.     merit systems, pay-at-risk plan

f.       Communicating Salary Plans

                                                              i.      Job description & how obtained

                                                            ii.      Method by which jobs are evaluated

                                                          iii.      How market data are collected and analyzed

                                                         iv.      How performance relates to pay

                                                           v.      How performance is measured and appraised

                                                         vi.      Administrative policies and procedures

                                                       vii.      Benefit plans

III.             Incentive pay in Nonprofits

a.      Initial principles

                                                              i.      Incentives should be used only if they can be based on improvements to the organization’s financial condition, either generating revenue or enhancing cost savings

                                                            ii.      Incentive performance should be measurable and achievable, and should include nonfinancial measures

                                                          iii.      Amount of incentive must be enough to “make a difference”

                                                         iv.      Incentives should be awarded only to employees whose performance is above average

b.     Types of incentives

                                                              i.      Short-term bonus

                                                            ii.      Spot awards

                                                          iii.      Gainsharing programs

c.     Nonfinancial incentives

                                                              i.      Flextime

                                                            ii.      Awards

                                                          iii.      Clothing/items with organizational insignia

IV.            Executive Pay in Nonprofits

a.      External competitiveness plays larger role

b.     Link bonuses to

                                                              i.      Operational cost savings

                                                            ii.      Program ratio (amount spent on delivery of service to total expenses)

                                                          iii.      Balanced scorecard approach

V.               Benefits

a.      Initial considerations

                                                              i.      US average is 39% of total payroll

                                                            ii.      Must consider what types and levels of benefits the employees want—use surveys or other data

                                                          iii.      Flexible benefits (“cafeteria plans”) may be useful.

b.     Health Care

                                                              i.      May provide pro-rated coverage for part-timers

                                                            ii.      Managed care programs (HMOs, PPOs, POSs)

                                                          iii.      Cost containment strategies (copayments & deductibles, preventive care, accurate billing, second opinions)

                                                         iv.      New strategies (purchasing coalitions, vendor information, flexible benefits plan, negotiating with providers, preadmission certification)

                                                           v.      Defined contribution plans

c.     Retirement Plans

                                                              i.      In past, 50-70 percent of pre-retirement income; now 80-100 percent

                                                            ii.      Coordination with social security is part of the planning—and insecurity

                                                          iii.      Defined-benefit plans

                                                         iv.      Defined-contribution plans

d.     Paid time Off (demographics of employee base may play a role)

e.      Tuition reimbursement (gear to a career development philosophy  that helps accomplish organization’s hr strategy)

f.       Communication of benefits to employees

                                                              i.      ERISA requires annual summary of plan description covering retirement benefits

                                                            ii.      Listen to employees

                                                          iii.      “events-centered” communication to employees

                                                         iv.      Build understanding—personalized reports, use graphics & illustrations, communicate face to face regularly

                                                           v.      Gain employee trust

                                                         vi.      Ensure that benefits communication budget is adequate (2-3% of total cost of benefits)

VI.            Justifying Rewards Costs to Directors





© 2004 A.J.Filipovitch
Revised 2 October 2005