The Compensation Checklist for Nonprofits. Are you prepared for today and the next 5 years?

Transcription

1 The Compensation Checklist for Nonprofits Are you prepared for today and the next 5 years? January 25, 2011

2 Today s Presenters Nonprofit HR Solutions Providing human resources solutions for the nonprofit community Joan Reutter, SPHR Compensation Practice Leader Kevin Flaherty Senior Compensation Consultant 2

3 Our people aren t about the money. We are helping people and making the world a better place. - anonymous nonprofit director Nonprofits get mission myopia, because we care so much about what we re doing - Katya Andresen (author) 3

4 Introduction o The intense focus of an organization on its mission should not discount the value of other practices that help contribute to the long term sustainability of that mission. o People who have chosen their careers based on the strong desire to help others or to improve the world cannot ignore the challenges in the world of human resources. o Missions have the greatest chance of success with the right people with the right skills. 4

5 It s a Question All Organizations Face Some issues are nearly universal, regardless of an organization s size or tax status. Every organization, with designs of having long term sustainability, must sooner or later ask: How do we attract, motivate and retain the right employees to ensure our continued success? 5

6 And All Organizations Grapple With Some of the Same Trends o Near term While so far we have had a mostly jobless recovery, that could change. If the labor market starts heating up, do we have the plans and policies in place that will allow us to keep our current people and hire the skills we will need? o Ongoing the demographic bubble known as the Baby Boomers have started retiring. Do we have a strategy to replace the skills we may lose? 6

7 Then There Are The Challenges Unique to Nonprofits o Increasing accountability requirements from large benefactors (i.e., Gates Foundation) o Increasingly sophisticated methods for individuals to compare nonprofits (i.e., CharityNavigator.org) o Dramatic increase in IRS review of nonprofits for reasonable compensation o Growing concern by Board members about personal liability for excess benefits paid 7

8 and More Challenges Unique to Nonprofits o Potentially increasing expenses as some municipalities eye nonprofits as potential revenue sources o Changing nature of fundraising - micropayments and social networks o Ongoing devolution of federal funding of some programs 8

9 .and Some Concerning HR Trends in Nonprofits o Improving economy and directed stimulus money. o While some nonprofits have directly benefited; o Others have experienced salary and hiring freezes; and o Some have experienced reductions in pay or benefits, or even layoffs. o Municipalities look for ways to pare budgets. o Nonprofits are scrambling to fulfill their missions with fewer resources and increasing demands. o Limited resources for management of the HR function. 9

10 Polling Question How would you respond to the statement: The employees in my organization are paid fairly? 10

11 Important Compensation Steps to Touch Upon The Compensation Checklist o Compensation Philosophy o Job Description o Job Evaluation o Salary Data Sources o Market Pricing o Maintaining Competitive Salaries o Pay Plan Administration o Variable Pay/Bonus o Executive Compensation o Compliance o Total Rewards o Communication o Continuous Learning 11

12 Polling Question How many employees are in your organization? 12

13 How Does My Organization Want to Manage Compensation? A compensation philosophy is an organization s commitment to how it values employees. It is a plan for how employees are to be paid, and when and how salary adjustments will occur; and if and when they are incentive eligible. It can also include a focus on benefits and work life. Ex: Our policy is to pay at the 50 th percentile of nonprofits of our size in the DC market. It s intended to: o Attract, motivate, and retain the right talent for the organization s needs. (This does not mean zero turnover.) o Give the employee insight into the organization s philosophy towards its people. 13

14 Do We Have Clear Descriptions of the Organization s Roles? A job description is a written documentation of a specific job s tasks, and amount of time that job commits to each task. It also identifies responsibilities and accountabilities and any experience, certifications, or education required to competently fill that job. Job descriptions can be used to: o Assign work and document work assignments o Establish performance requirements o Recruit for vacancies o Make decisions on job restructuring o Provide a basis for market pricing 14

15 Do We Have a Process to Determine the Relative Worth of Our Jobs? The systematic determination of the relative worth of jobs within the organization is called a job evaluation. It is used to assess a pay hierarchy. Jobs are typically evaluated in one of 3 ways: o Ranking a job is slotted based on internal reporting positions and comparative jobs within the organization o Point/factoring each task/responsibility of the job is assigned a value. These values are summed and compared against the values of other jobs in the organization o Market-based jobs are grouped in grades based on the competitive salaries the external market is paying for the jobs 15

16 Do We Have Salary Data Sources Appropriate to Our Industry? Salary data sources report the salaries/wages paid for specified positions within a specific market. The 3 main sources for salary data are: o Published salary surveys published by many consulting firms and associations (i.e., GuideStar Nonprofit Compensation Report) o Online salary data (i.e.. Salary.com) o Third party consultants (i.e., Nonprofit HR Solutions) Choosing the right source(s) for your organization o Cost o Participation requirements o Legal defensibility o Quantity and quality of the salary data o Frequency of survey and effective date of salary data o Availability of data that is truly comparable to your organization. 16

17 How Do We Determine How Our Salary/Wages Compare to the Market? Market pricing is a formal process for determining the external value of jobs. This is used in conjunction with the compensation philosophy, i.e., Our policy is to pay at the 50% of nonprofits of our size in the DC market. Typical steps in the market pricing process include: o Define comparative market and identify salary data sources o Identify jobs to be reviewed o Compare functions described in the job description to the jobs/functions reported in salary survey to find a market price for the matched job o Age salary data, as appropriate 17

18 How Do We Ensure That We Maintain Competitive/Equitable Salaries? The result of market pricing is a target pay rate for each job (or representative number of jobs) within the organization. Once this is accomplished, the next step is to develop a pay range for each job. o A company may choose to establish formal salary structures or simply use the market rate to manage salaries. o In a formal salary structure, jobs are grouped by pay levels and a pay range with a midpoint representing the competitive market for the group of jobs is established. A typical pay range is +/- 20% of the midpoint. o A compa-ratio is a measure that expresses current pay rate as a percentage of range midpoint. o An organization with a stable employee population would target an overall compa-ratio of 100%. The experience and performance of a population may reduce or increase this target 18

19 How Do We Allocate Salary Increases/ Pay Adjustments? The annual question in pay plan administration is answered differently by all organizations: How do we distribute a set sum of money to our employees? o Flat Increase: Everyone receives a set percentage increase (usually referred to as a general increase or cost of living adjustment). o Merit Pay: An increase which reflects the level of individual performance. Higher performing employees will receive a larger percentage increase. Typically a formal performance management system is in place. o Market Adjustment: When an organization has made a commitment to market competitiveness, they may also set aside some of their budget annually for pay adjustments to employees whose salaries are low compared to the market or for jobs which have become more competitive in the market. 19

20 What, if any, Cash Incentive Do We Pay Other Than Base Pay? When considering the external competitiveness of your organization s compensation, always take into account any variable pay/bonus that you may pay, or that may be market competitive for different position levels. o While not as predominant in non-executive levels in nonprofits, variable pay is any cash payment over and above base salaries that is not mandated by law (i.e., overtime). o Variable pay takes many forms (annual bonuses, profit sharing, commissions, long term incentives, recognition awards) and there is traditionally a performance element associated with it. 20

21 What is the Process to Ensure Executive Compensation is Appropriate? While many of the compensation processes used for the rest of your employees also applies to your executives, there are a few additional requirements. o Compensation philosophy and pay plan administration for the rest of the organization can frequently be overseen by the Executive Director. But for the Executive Director and other senior management, any compensation initiatives or adjustments should be board approved. o These positions are subject to 990 filings and are the ones most commonly reviewed by the IRS for excess benefit issues. o It is not uncommon for senior executives to have additional variable pay components and enhanced perquisites, but they need to be competitive for that position. 21

22 Are We Current on Our Compliance Requirements? The two federal laws/codes of particular interest regarding compensation within nonprofits are: The Fair Labor Standards Act (FLSA) Section 4958 of the Internal Revenue Code (intermediate sanctions) FLSA establishes the federal minimum wage and requirements for payment of overtime. o Nonprofits operating any commercial activities that involve commerce, or the production of goods for commerce are subject to the FLSA. o The FLSA applies to any size organization. o Determination of which employees are subject to FLSA overtime requirements (nonexempt) versus those not subject (exempt) is based on job function, not title. o Nonexempt employees can not volunteer their overtime hours or be paid in comp time. 22

23 Are We Current on Our Compliance Requirements? (cont d) Section 4958 of the Internal Revenue Code (intermediate sanctions) does not allow 501(c)(3) organizations more compensation than is reasonable. o Most likely to arise among insider relationships: Officers, Directors, founders, their families. o IRS considers any form of compensation subject to test of appropriateness: salary or wages; pension and profit sharing plans; unpaid deferred compensation; payment for personal expenses; rents, royalties or fees; personal use of organization s property or facilities; loans or other payments, * For more information, see Guidestar October 12, 2010 webinar on Best Practices in Nonprofit Compensation. 23

24 Do We Have an Inventory of Our Total Rewards? Total Rewards* is the monetary and non-monetary return provided to employees in exchange for their time, talents, efforts and results. The five key reward elements are: o Compensation: Pay provided to an employee o Benefits: Retirement, Savings, Health & Welfare, Social Insurance (unemployment, workers compensation, etc.) and paid time off o Work-life: Workplace flexibility, health and well-being, financial support, community involvement, culture, etc o Performance and Recognition: Includes performance feedback o Development and Career Opportunities: Learning opportunities, coaching/mentoring, advancement opportunities *Source: WorldatWork 24

25 What are Some Unique Rewards that We Offer Our Employees? Don t overlook those rewards that employees value within your organization. o Shorter full time work week (average American work week is 46 hours) o Educational loan forgiveness o Travel o Positive organization affiliation organizations with higher perceived glamour or altruistic goals do not have to pay employees as much to attract people o Others? 25

26 Do Our Employees Understand What We Offer? Even the most well thought out and carefully administered compensation program may not meet its potential if there is insufficient communication. o Share your Compensation Philosophy with your employees and explain how their pay is aligned with that philosophy. Provide this information to prospective employees as well. o Include other valuable aspects (benefits, vacation, etc) they receive for working for you. o Reinforce the mission by reminding them of the good they are doing, both as individuals (personal recognition) and as part of the nonprofit. Remember, working for an altruistic endeavor is a reward. o However, you must be in a position to follow through on your statements and be ready to handle the questions. 26

27 How Do I Keep Up-To-Date on Compensation Issues? Like other important areas for an organization, compensation is an evolving field where continuous learning can be beneficial. There are many groups that provide information to help keep you current on compensation trends, practices and legislative changes, both in the broader market and specifically to the nonprofit field. Frequently this information is free. o HR Consulting Firms: In addition to Nonprofit HR Solutions and Guidestar, most large consulting firms release newsletter updates on industry changes. o HR Associations: World at Work and Society for Human Resource Management (SHRM) - have extensive resources and no professional requirements for membership. 27

28 Am I Ready for Tomorrow? o Growth o Succession Planning/Career Development o Workforce Readiness recruiting in future o Competition for Talent o Technology 28

29 The Compensation Checklist Compensation Philosophy: I can state how my organization wants to manage compensation. Job Descriptions: My organization has updated, accurate, clear and useful job descriptions. Job Evaluation: My organization has a process for assessing the value/worth of a job. Salary Data Sources: I have identified sources of salary data available that provide the quality of data my organization wants. Market Pricing: I know how the salaries in my organization compare with the market. Maintaining Competitive Salaries: My organization has a process in place to ensure we maintain competitive/equitable salaries. 29

30 The Compensation Checklist Pay Plan Administration: My organization has defined how pay adjustments are allocated. Variable Pay/Bonus: My organization has identified what, if any, cash incentives we provide above base salary. Executive Compensation: My organization has a process in place to ensure executive pay is appropriate. Compliance: My organization is current on compliance requirements. Total Rewards: My organization has an inventory of all the rewards we provide to our employees. Communication: My organization effectively communicates our Total Rewards package that our employees understand. Continuous Learning: I have identified resources available to keep me informed and up-to-date on compensation issues. 30

31 GuideStar Compensation Solutions Compensation Report What: Analyses of compensation paid by 99,590 exempt organizations in FY 2008 Why: To research fair and reasonable compensation practices CEO Compensation Checkpoint What: Analysis of CEO compensation at a specific nonprofit against CEO compensation at peer organizations Why: To determine where CEO compensation at a specific nonprofit falls compared to CEO compensation at peer organizations

32 THANK YOU! QUESTIONS? For more information on Nonprofit HR Solutions (202) Upcoming Events: 2011 Nonprofit HR Conference October 9-11, Washington, DC