How Non-Profits Use Compensation to Incentivize Performance
Incentivizing performance can be a powerful tool for attracting and retaining top talent. In fact, more than 80 percent of top executives in the private sector participate in incentive plans.
Like their counterparts in corporate America, non-profits are realizing that incentivizing staff is just good business. Recent studies have found that nearly a quarter of non-profit organizations are now tying pay to performance.
Yet, there’s no magic formula for creating an effective incentive plan. And laws regarding non-profit compensation include severe penalties for non-compliance.
Start with a Competitive Salary
Of course, attracting and retaining top talent starts with offering a competitive salary. Compensation experts recommend comparing your organization’s pay structure with at least 15 other organizations to determine competitiveness. Good sources of salary data include:
- Barnes Dennig’s Compensation & Benefits Benchmarking Report of local non-profits, co-sponsored by Hauser Insurance
- Compensation surveys published in Chronicle of Philanthropy and Non-Profit World.
- The annual Survey of Association Executives’ Compensation from the American Society of Association Executives.
- Management Compensation Report for Not-for-Profit Organizations, published by PRM Consulting Group.
- IRS Publication 1053, Corporation Source Book of Statistics of Income.
- Executive Compensation Reports, published annually by the Research Institute of America.
- Surveys of executive compensation published annually in Bloomberg Business Week and Forbes.
- Charity Navigator’s CEO Compensation Study
Consider the Three Cs
Ultimately, an effective incentive plan must be carefully designed, conscientiously administered, and it must conform to the culture of the organization. Consider these key steps in formulating a plan that incentivizes top performance:
- Limit the plan. Start out by including only senior positions (CEO, senior vice president, vice president) in the plan. It is easier to add positions (like middle management groups) to the plan later than to withdraw them. Have your CEO and/or compensation committee select incentive-eligible positions based upon a detailed review and analysis of the organization’s objectives and other relevant criteria.
- Clarify award levels. State the minimum award, target award and maximum award levels, expressed as a percentage of base salary. For example, your executive director might be eligible for a target award of 15 percent of base salary and maximum award of 30 percent, while senior executives would be eligible for a target award of 1O percent and maximum award level of 20 percent. The award for meeting the minimum standards of the incentive might be set at 1O percent.
- Establish performance measures. To be effective, an incentive plan should focus on three to six performance measures. These measures should feature a mix of organizational and individual objectives.
Organizational performance criteria might include:
- Income growth
- Increased funding
- Cost savings
- Publicity/ public awareness campaigns
- Staff utilization
- Program development
Individual performance criteria might include:
- Quality of work
- Client satisfaction
- Personal productivity
Because executive-level positions typically have a more direct impact on an organization’s performance, incentives for a CEO should be strictly based on achieving organizational objectives.
Because executive-level positions typically have a more direct impact on an organization’s performance, incentives for a CEO should be strictly based on achieving organizational objectives. Moving down the organizational ladder, greater emphasis should be placed on individual goals.
Develop true incentives. The incentive award must be seen as a true reward for outstanding performance – not a normal and expected payment. If performance criteria are not met, there should be no award. At the same time, make sure the incentive is not so large that participants are encouraged to set unrealistically low goals or even finagle the numbers to hit their targets.
Proceed with Caution
Incentivizing performance requires careful planning and implementation. A poorly conceived incentive plan can result in either excessive payouts by your organization or performance goals that are unattainable. A Barnes Dennig Non-profit team specialist is available to answer questions you may have about compensation. Have us contact you here.