compensation & benefits workshop: best practices for setting nonprofit compensation maryland...
TRANSCRIPT
COMPENSATION & BENEFITS WORKSHOP:Best Practices for Setting Nonprofit Compensation
Maryland Community Action Partnership:
2015 Human Services Conference
Ellicott City, MD
May 14, 2015
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Agenda The Challenges of Compensation
Keys to a Successful Compensation Review
Compensation Review Process
Defining the External Market
Setting Compensation
Employment Contracts
Final Considerations
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The Challenges of Compensation
Lack of reliable information
Too much anecdotal information
Not enough “comparable” organizations
Difficult to decipher publically available information
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The Challenges of Compensation
Optics and public scrutiny
Diverse group of stakeholders
Everyone has a personal opinion about compensation
Pressure on board members
Greater transparency
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Keys to a Positive Compensation Review
Understand your stakeholders
Understand your marketplace
Understand your immediate audience
Include all appropriate stakeholders
Educate yourself and your board
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Setting Nonprofit Compensation Specific Steps
Follow a sound process and include appropriate stakeholders
Define and research the external market
Design a straightforward compensation plan
● Internal compensation factors (targeting compensation levels within boundaries)
● Basic elements to consider
● Retirement and deferred compensation
● Benefits to be cautious with
Trends & other considerations
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Governance Process & Structures Who’s involved in setting compensation levels?
Setting Executive Compensation:
Executive committee or compensation committee
CEO/Executive Director
Independent third party compensation expert
Internal staff liaison
Setting Staff Compensation:
CEO/Executive Director
Executive committee or compensation committee (review and approval, only) – merit increase budget
Staff engagement
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Process: Board Representation Executive or Compensation Committee (for CEO/Exec. Director)
Committee of 3 to 5 independent board members is ideal
Committee should reflect the diverse backgrounds, opinions, and views of the board (regarding the organization and CEO/Exec. Director)
Ensure no conflict of interest (especially in related party situations)
The compensation committee can often be the executive committee
Role and Responsibility:
Determine the organization’s approach to compensation or “compensation philosophy”
Agree on the relevant marketplace
For staff below the CEO/Exec. Director, the committee should review and approve compensation levels (and incentive awards) based on CEO/Exec. Director’s recommendations
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Process: Executive Input Chief executive on his/her own compensation
Involve at the beginning of the process to create buy-in
● Market selection criteria
● Helps board understand what is important to the executive (not dispositive, but their views should be considered)
o Balance of base vs. other benefits
o Retirement needs
Chief executive on staff compensation
Shares sufficient information to ensure board meets oversight responsibility
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Process: Independent third party expert Familiar with navigating the process
Familiar with the structure of your organization and related entities
Understands the various sectors within the nonprofit universe
Experience helping you to define the market in multiple ways
Access to current and relevant market data
Well versed in IRS regulations on not-for-profit executive compensation
Independent and objective
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Process: Internal Staff Liaison Where appropriate, an internal staff liaison can:
Coordinate the review process
Provide information to the various parties (committees, consultant, etc.)
Confirm documentation and compliance with internal procedural requirements (organization by-laws) and external procedural requirements (IRS intermediate sanctions safe harbor)
Manage scheduling and timelines
Liaison is often the organization’s CFO, top administrative position, or head of HR
The individual has to be capable and organized – a dependable project manager
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Defining the External Market: Watchdogs and Stakeholders
IRS
Staff below the CEO/Exec. Director
Donors
The Baltimore Sun Test (Media, Public, etc.)
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Defining the External Market: Factors the IRS Prefers Size of the organization
Annual revenues and annual operating budget
Staff size (how much management responsibility does the exec have)?
Real estate / assets
Scope of the organization City
County
Region
State
Multi-state
Geographic Area (urban, rural, suburban, etc.)
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Defining the External Market: Other Factors to Consider Organization structure
Revenue sources (individual donations, grants, government, etc.)
Pass-through entities
Identify organizations other than CAAs that are comparable in management responsibility, program areas, etc.
Community health and rehabilitation centers
Employment and workforce development organizations
Community foundations
Shelters and homelessness organizations
Youth organizations
Local affiliates (e.g., Goodwill, Easter Seals, Salvation Army)
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Defining the External Market: Recruitment & Labor Markets Understand the qualities and competencies that are critical for the
role
Does the CEO/Exec. Director of a CAA need to have previous nonprofit experience? Government experience?
Would he/she be recruited locally or from a broader marketplace?
Recognize that different peer groups may be used for different levels or positions within an organization
CEO/Exec. Directors typically have a more specific marketplace than lower level staff positions.
The broader marketplace may be more relevant for staff positions in administration/operations.
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Defining the External Market: Market Data Data sources
Form 990 - readily available but dated and difficult to decipher
Third party publicly available compensation surveys – tend to be generic with broad groupings of data
Private or restricted surveys – often limited to just base salary or total cash compensation
Specially commissioned surveys – expensive and administratively burdensome
IRS strongly prefers specific comparators rather than survey data
Broad surveys often provide an inadequate blend of IRS’s key factors (size, scope, and geographic area)
Surveys often do not address total remuneration, which the IRS looks at for purposes of determining reasonableness
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Defining the External Market: Market Data Using compensation surveys
Compensation surveys can include a wide range of organizations
It is important to have “cuts” of the survey data that group the participants by factors including:
● Staff size
● Budget size
● Location
Different cuts of the survey data can be useful for different positions
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SAMPLE
Defining the External Market: Market Data Using compensation surveys
n 25th %ile Median 75th %ile n 25th %ile Median 75th %ile n 25th %ile Median 75th %ileTotal SurveyTotal Survey 60 $68,200 $90,000 $111,400 54 $51,200 $68,900 $84,100 78 $28,900 $38,400 $51,300By Staff Size0-10 Staff 16 $66,800 $83,500 $100,200 8 $42,900 $49,000 $58,800 14 $42,900 $41,600 $49,90011-50 Staff 11 $73,000 $91,200 $109,400 18 $48,300 $60,400 $72,500 26 $30,000 $37,500 $53,20051-150 Staff 22 $70,100 $87,600 $105,100 22 $59,200 $74,000 $88,800 28 $27,900 $40,000 $48,000151+ Staff 11 $85,100 $106,400 $127,700 6 $75,200 $94,000 $112,800 10 $35,700 $44,600 $53,500By Budget Size$0-$500,000 10 $54,800 $68,500 $82,200 10 $42,900 $58,000 $69,600 10 $42,900 $42,100 $50,500$501,000 - $5M 22 $69,800 $87,200 $104,600 22 $54,100 $67,600 $81,100 22 $29,000 $36,200 $53,200$5.1M - $15M 18 $76,800 $96,000 $115,200 18 $55,200 $69,000 $82,800 18 $35,300 $44,100 $52,900$15.1M+ 10 $92,800 $116,000 $139,200 4 $61,000 $76,200 $91,400 28 $30,400 $38,000 $45,600By LocationWashington, D.C. 16 $75,200 $94,000 $112,800 12 $55,400 $69,200 $83,000 25 $37,000 $46,200 $53,200D.C. Metro Area 34 $64,000 $91,500 $109,800 34 $57,000 $71,300 $85,600 34 $32,600 $40,800 $49,000Other Maryland 10 $68,500 $85,600 $102,700 8 $46,200 $62,000 $74,400 19 $29,100 $36,400 $43,700
Director, Finance Director, Human Resources Administrative Assistant
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Defining the External Market: Use Care
Narrow search to organizations most like yours
Match executive jobs carefully based on job responsibilities, not just
job title
Identify total remuneration (including benefits) where possible
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Setting Compensation: How much do you pay? External market information provides boundaries
Organization’s compensation philosophy should frame the decision of how to pay within the market boundaries
Conduct a market analysis prior to developing a compensation philosophy
Where to target compensation (e.g., market median vs. market 75th percentile) should take into account:
History of performance
Experience/tenure
Other unique qualifications
The market median is not always the answer
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Setting Compensation: Plan Design Keep it simple
The overall compensation plan should be easy to understand for new board members, donors, the media, and the public
A more straightforward plan has lower administrative costs
Start from the “target” total remuneration amount and back out various compensation elements (benefits, retirement, perquisites, etc.) to arrive at a salary
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Setting Compensation: Elements to consider Base salary, and annual salary adjustments
Clearly state in employment contract or other documentation how annual salary increases will be determined
Guaranteed annual step increases for CEO/Exec. Directors are becoming rare
Specify that annual salary decisions will be subject to the discretion of the board based on market movement and individual performance
Incentive compensation
Rare among CAAs but a growing trend among other nonprofits
Specify the “target” and “maximum” incentive opportunity
● Helpful to future committee members
● IRS views this as best practice
Specify the goal setting and performance review process in advance
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Setting Compensation: Elements to consider Retirement
Anticipate the future needs of both the executive and the organization
Retirement planning can be a significant issue if not addressed up front
● Historical, or “look-back,” compensation analyses have become disfavored – therefore, it is difficult to provide “make-up” payments for prior service
Deferred compensation
More common among trade associations and professional societies
Deferred compensation plans accrue over time and encourage retention
Given the limits as to what is considered “reasonable” compensation, retirement and deferred compensation accruals often take several years to accumulate adequate retirement savings
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Setting Compensation: Other CEO benefits Other benefits:
Employment contract (33% of Health & Welfare organizations in PRM Benefits Survey)
Professional association (26%)
Supplemental life insurance (21%)
Parking (19%)
Supplemental disability insurance (18%)
Car allowance (18%)
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Employment Contracts Contracts are becoming more common among nonprofit employers
Formal contracts provide security to both the executive and the organization
Typical length is 3 to 5 years for both the initial term and contract extension.
Tip: Be careful with “evergreen” provisions.
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Final Considerations
Educate new board members on the compensation plan/philosophy
Consider 990 reporting requirements and how compensation will be
reported
Create formal employment agreements with CEO/Exec. Directors
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Questions
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Contact Us
Quatt Associates
(202) 342-1000
James Wynn
Stephen Buchanan