Getting pay right for key employees is important for any business. For nonprofit organizations, it’s crucial. Talented leadership can mean the difference between success and stagnation. Nonprofit organizations often have to operate with limited funds and resources. As an additional challenge, they must endure additional levels of scrutiny that commercial ventures do not have to face.
Multitude of Stakeholders
Presenting financial data to shareholders can be a daunting task. Now just imagine having to justify compensation decisions to groups of inquisitive donors as well. Moreover, for charitable nonprofit organizations, there are “watchdog” organizations and publications that evaluate and publish information about the efficiency of dollars and cents being used simply to run an organization.
On top of all those challenges, nonprofits still have to balance recruiting and retaining top talent with maintaining trust among donors that their money is being spent wisely. It is for this reason that pay practices at nonprofit organizations are significantly different from for-profit organizations.
At for-profit organizations, large bonuses and long term incentives are a crucial part of an executive’s compensation package. Nonprofit executives are typically not given incentives to this degree. In general, candidates at all levels at nonprofit organizations simply do not have the same financial opportunities that candidates at for-profit companies have.
It’s a sobering fact that compensation managers must compete with ALL organizations in the marketplace for certain jobs. Yet they still need to be reasonably competitive with their compensation.
Passions Run Deep
At some organizations, overly-exuberant board members and donors may wonder why people need to be paid at all. Shouldn’t they be so dedicated to the cause that they just work for free? Well, despite this optimistic naivete, people still have living expenses to cover.
Becky Wood, a director at PayScale, recalls the story of a comp colleague who had a unique situation. Someone who was hired as a part time administrative assistant would come in a 7 am and work until 5 pm, when her work hours were actually 12 – 4 pm. When confronted with the fact that she could only be at her desk at noon, and quit working at 4, she smiled and said, “just consider the rest of my time as a donation to this fabulous cause.” And she meant it. When the colleague explained that the law (FLSA) and organization policy (can’t afford a FTE) dictated that she can’t be at her desk doing work except when she was scheduled to work and that she can’t “donate” her time, the employee wouldn’t take no for an answer. They actually had to fire her to avoid violations.
Unique Tax Considerations
The IRS also keeps a close eye on excessive compensation at nonprofits. Nonprofits offering executive compensation that is unreasonable or excessive may be liable for IRS tax penalties. One of the main ways to determine reasonable pay is by looking at what similar organizations are paying for similar work. The IRS requires most nonprofits to file a Form 990 every fiscal year. Form 990 provides the public with financial information about the nonprofit, including the compensation of key employees. In order to help our customers avoid public outcry and IRS scrutiny, we have collected the compensation information from nonprofit key employees as reported on Form 990. This dataset, PayScale Nonprofit Key Employee Data, collects data from more than 22,000 nonprofits and reports compensation for more than 200 jobs.
One approach many nonprofit organizations have adopted is a blended compensation market pricing strategy. For example, a large charitable nonprofit organization uses the 75th percentile of surveys of nonprofit jobs and the 50th percentile of general surveys (national or local but not nonprofit specific) when matching jobs that exist in all companies (accounting, finance, legal, HR, IT etc.). Additionally, they only use nonprofit surveys for jobs that are specific to nonprofits (donor relations, major gifts, development etc.)
Transparency and Data are Important
It’s paramount to have confidence in your data. A robust dataset can help solidify that confidence. After 15 years in the compensation space, PayScale has a deep understanding of how to deal with normalizing job titles across organizations. Across the 22,000 nonprofits, there were about 10,000 unique job titles.
We used a combination of compensation experts and machine learning to identify a job title’s job function (i.e. Information Technology) and level (i.e. Director). In the end, we were able to distill the 10,000 titles to about 200, making it easier to match job titles.
This simplification of data can help your organization be more transparent about its pay structures. Ultimately, this transparency in what nonprofit organizations pay their key employees is essential for public trust.