When revenues are down and prospects for increasing or even continuing support from foundations, government, and individuals are not bright, nonprofits have to make some tough decisions about how to spend their scarce dollars. Typically, salaries represent well over 50 percent of an organization's budget, so compensation mistakes can be costly. In addition to the monetary consequences, nonprofits that make such errors stand to lose valuable staff, waste important resources, and, in the worst scenario, forfeit their credibility within their communities.
There are a few basic concepts to keep in mind about compensation in the nonprofit sector:
- What you need to pay is dependent on the labor market for the job.
For example, a nonprofit hospital seeking a CEO has to compete for talent with for-profit and government hospitals, and the search could be statewide or nationwide. On the other hand, a small human services nonprofit may be looking for an executive director with experience in other human services nonprofits; typically, the smaller the size of the recruiting organization, the more local the search.
- Size of the organization is important for executive jobs.
Compensation for management-level staff tends to rise with revenues and assets, whether the company is nonprofit or for-profit. The logic is that the decisions that managers of larger organizations make affect more dollars, more revenue, more clients, etc., and they should be paid more to make them. Generally this philosophy is reflected in the marketplace.
- For non-management jobs, the crucial factor in the pay level is years of experience, rather than size of organization.
For example, if a company doubles in size, the director of accounting (management) may get a raise, but someone who is a bookkeeper probably won’t—an additional bookkeeper will be hired to do the extra work. So pay for the lower-level job tends to be based on how much experience the job requires or how much experience the incumbent has.
- For non-management jobs, it is less likely that specific nonprofit experience is necessary. For example, when looking for a receptionist, the desired qualities are friendliness, good organizational skills, etc.—similar experience in a company or government agency would be relevant.
- Retaining the key people
If there is no money, think of other rewards. Salaries for jobs are very important, but there is a component of personal need for challenge, growth, and satisfaction with contributing toward completion of the mission. Is it possible to make hours more flexible, encourage work at home, or provide more positive feedback (letter of appreciation, reward of a lunch or dinner, etc.)? Try to think of employee needs that could be met with low-cost solutions.
- Filling vacancies
Be sure to look internally for candidates. Those already on staff are already committed to the organization and understand its culture—and there will be no search costs and perhaps no relocation expenses. When a job is available now, there will probably be interest from those who have been laid off from for-profit jobs, but consider possible candidates carefully. Is there evidence of commitment to the mission, or will they leave the nonprofit sector when the economy recovers? Is there a cultural fit?
- Succession planning and contingency planning
Develop some ideas on what staff and program adjustments would be needed at various projected revenue levels, that is, if the big grant doesn't come through or a program is no longer funded by a government contract. Plan for a variety of contingencies, including personnel changes. Think about who would be available on staff to step into key positions, and whether additional training might be needed for them.
- Review of the entire compensation system
Consider if the need to control the fixed costs of salaries calls for more focus on variable rewards based on performance goals. Many nonprofits tend to be more egalitarian, but pressure to reward the top performers and widen pay gaps grows when resources are scarce. Such a system requires metrics that include the financial (obviously, the organization must have the money to pay the incentives) but should also add some measures that relate to the mission. Many organizations are moving toward this approach as their supporters demand more accountability and evidence of program effectiveness.
Linda M. Lampkin, ERI Economic Research Institute
© 2009, ERI Economic Research Institute
Linda M. Lampkin is research director of ERI Economic Research Institute (www.erieri.com), a company that provides Form 990 compensation data for use by nonprofits, and former director of the National Center for Charitable Statistics at the Urban Institute. She can be reached at email@example.com or (877) 799-3428.