COMPENSATION & BENEFITS WORKSHOP:
Best Practices for Setting Nonprofit Compensation
Maryland Community Action Partnership:
2015 Human Services Conference
Ellicott City, MD
May 14, 2015
Agenda

The Challenges of Compensation

Keys to a Successful Compensation Review

Compensation Review Process

Defining the External Market

Setting Compensation

Employment Contracts

Final Considerations
1
The Challenges of Compensation

Lack of reliable information

Too much anecdotal information

Not enough “comparable” organizations

Difficult to decipher publically available information
2
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
3
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
4
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
5
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
6
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
7
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
8
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
9
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
10
Defining the External Market: Watchdogs and Stakeholders

IRS

Staff below the CEO/Exec. Director

Donors

The Baltimore Sun Test (Media, Public, etc.)
11
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.)
12
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)
13
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
15
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
16
Defining the External Market: Market Data

Using compensation surveys
n
Total Survey
Total Survey
By Staff Size
0-10 Staff
11-50 Staff
51-150 Staff
151+ Staff
By Budget Size
$0-$500,000
$501,000 - $5M
$5.1M - $15M
$15.1M+
By Location
Washington, D.C.
D.C. Metro Area
Other Maryland
Director, Finance
25th %ile
Median
75th %ile
n
Director, Human Resources
25th %ile
Median
75th %ile
n
Administrative Assistant
25th %ile
Median
75th %ile
60
$68,200
$90,000
$111,400
54
$51,200
$68,900
$84,100
78
$28,900
$38,400
$51,300
16
11
22
11
$66,800
$73,000
$70,100
$85,100
$83,500
$91,200
$87,600
$106,400
$100,200
$109,400
$105,100
$127,700
8
18
22
6
$42,900
$48,300
$59,200
$75,200
$49,000
$60,400
$74,000
$94,000
$58,800
$72,500
$88,800
$112,800
14
26
28
10
$42,900
$30,000
$27,900
$35,700
$41,600
$37,500
$40,000
$44,600
$49,900
$53,200
$48,000
$53,500
10
22
18
10
$54,800
$69,800
$76,800
$92,800
$68,500
$87,200
$96,000
$116,000
$82,200
$104,600
$115,200
$139,200
10
22
18
4
$42,900
$54,100
$55,200
$61,000
$58,000
$67,600
$69,000
$76,200
$69,600
$81,100
$82,800
$91,400
10
22
18
28
$42,900
$29,000
$35,300
$30,400
$42,100
$36,200
$44,100
$38,000
$50,500
$53,200
$52,900
$45,600
16
34
10
$75,200
$64,000
$68,500
$94,000
$91,500
$85,600
$112,800
$109,800
$102,700
12
34
8
$55,400
$57,000
$46,200
$69,200
$71,300
$62,000
$83,000
$85,600
$74,400
25
34
19
$37,000
$32,600
$29,100
$46,200
$40,800
$36,400
$53,200
$49,000
$43,700
17
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
18
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
19
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
20
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
21
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
22
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%)
23
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.
24
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
25
Questions
26
Contact Us

Quatt Associates
(202) 342-1000

James Wynn
jwynn@quatt.com

Stephen Buchanan
sbuchanan@quatt.com
27