COMPENSATION STRATEGIES FOR NONPROFITS

1. COMPENSATION STRATEGIES FOR NONPROFITS October 30, 2008 Bay Area Nonprofit HR Network San Francisco, CA

2. Today’s Discussion • Introductions • Total Rewards Model • Compensation Challenges and Solutions • Wrap-Up and Questions

3. Total Rewards Model

4. Elements of Total Rewards WorldatWork’smodel includes five elements: • Compensation • Benefits • Work-Life • Performance and Recognition • Development and Career Opportunities

5. What is your Compensation Philosophy? • How do you look/act different from competitors? • How does compensation fit with other Total Rewards? • How does pay link to “business” strategy? • How much you value individual performance and differentiate pay as a result?

6. Compensation Challenge #1 Managing a tight salary budget Competing for Talent in the For-Profit World Competing with equity grants Driving performance without a bonus plan

7. Possible Solutions

8. Solution #1: Market-Based Salary Structure What is a salary structure? • Defines the base pay opportunities for jobs in an organization or company • Made up of grades and corresponding salary ranges developed from data about pay patterns in the market • Used toestablish and maintain the internal and market value of the positions in an organization

9. Start with competitive survey data for an individual position Determine the “market rate” for the job, which becomes your midpoint Put a min-to-max range around midpoint Solution #1: Market-Based Salary Structure

10. Solution #1: Market-Based Salary Structure Nonprofit Compensation Surveys • PRM Consulting • GuideStar • Council on Foundations • Watson Wyatt Data Services • Abbot, Langer Salary Surveys • ERI Nonprofit Comparables Assessor • CompAnalysis

11. Solution #1: Market-Based Salary Structure

12. Solution #1: Market-Based Salary Structure

13. Solution #2: Merit Increase Matrix

14. Solution #3: Total Rewards Approach Total Rewards Statements show employees what the organization spends on them each year • Using a software program, statement itemizes: • Compensation • Benefits costs paid by organization • Retirement contributions • Value of other perks • Often-missed “marketing” opportunity for HR

15. Possible Solutions

16. Possible Solutions

17. Compensation Challenge #2 Offering competitive pay package Recruitment and Retention of Top-Tier Executive Talent Not attracting unwanted scrutiny Linking pay and performance

18. Possible Solutions

19. Solution #1: Research Competitive Pay Understand the Executive Position • Position descriptions: Make sure the executive has recently reviewed their own job description • Executive interviews: Meet with incumbent to understand scope of the job and market match • Look for market match: Very few executive positions have no competitive comparable

20. Solution #1: Research Competitive Pay Determine the Competitive Marketplace • What is the broad “industry”? • Ex: Healthcare, social services, environment • Then narrow it down within the industry • Hospital or outpatient clinics • Job training for low-income population • Animal welfare and protection

21. Solution #1: Research Competitive Pay Determine the Competitive Marketplace • Executive pay is closely correlated with company or organization size • Most common measurement is annual revenue • Additional measures include • Budget • # of employees

22. Solution #1: Research Competitive Pay Determine the Competitive Marketplace • With whom do you compete for talent? • Is there an organization that recruits the same people you do? • Anyone that consistently steals employees from you? • Use the “next best offer” method

23. Solution #1: Research Competitive Pay Establish a Peer Group Using the narrowed down “peer group” characteristics, look to the competitive marketplace for relevant information. Competitive market defined through two data sources: • Published compensation surveys • Publicly available IRS form 900 disclosures from a targeted comparator group

24. Solution #1: Research Competitive Pay Establish a Peer Group • Casting a wide net helps eventually create a solid group (may start with hundreds) • Then follow these steps to arrive at peer group: Types of Organizations Filter #1: Operating Budget Filter #2: Employees Comparator Group How many organizations have similar operating budgets? Of the remaining organizations, how many have a comparable headcount? What types of organizations are “like enterprises” or offer “like services”? Arrive at a Comparator Group of 15 to 25 organizations

25. Solution #1: Research Competitive Pay Analyze Competitive Total Cash • Published surveys report actual and target total cash amounts • We analyze base salaries and annual bonuses separately • Then look at actual cash compensation paid in last fiscal year, updated to the current date • Don’t use target total cash, because target bonuses can be misleading if actual bonus paid varies significantly from the target

26. Solution #1: Research Competitive Pay Analyze Competitive Total Cash • IRS 990 Disclosures aggregate base salary and bonuses into a Total Compensation column • Can make it difficult to determine what was base salary and what was bonus • Once we settle on the market rate for a job, we put a range around that number • Typically +/– 20% for executives • May be a smaller range for nonprofits

27. Solution #2: Think About Retirement • Model the impact of your current retirement programs on key executives and employees under a variety of assumptions • It may be less expensive to make your retirement plans more generous than to increase compensation levels

28. Possible Solutions

29. Solution #1: Reasonable Compensation Reasonable comp. is the amount ordinarily paid for: • Like services • By like enterprises (whether taxable or tax-exempt) • Under like circumstances

30. Solution #1: Reasonable Compensation • Like Services • Type of work • National position or local in scope • Number of employees managed • Budget or assets managed • Multiple functions, departments or locations managed • Full-time or part-time

31. Solution #1: Reasonable Compensation • Like Enterprises • Size – budget, revenues, # employees • Same “business” type • Could be a mix of nonprofit and for-profit as long as scoped appropriately • Entities that compete for same pool of talent

32. Solution #1: Reasonable Compensation • Like Circumstances • Comparators must consist of similar mix of compensation elements • Include all compensation, whether taxable or not • Similar geography (cost-of-living)

33. Solution #1: Reasonable Compensation “Good Compensation Governance” • Systematic procedures set and followed • Responsible effort to determine reasonable levels • All taxable items reported accurately • Board of Directors maintain appropriate oversight • Executive does not make decisions related to his/her own pay

34. Possible Solutions

35. Other Points of Discussion • Geographic pay differentials • Employee communications • Market movement for certain “hot” job families

36. Questions If you have any questions about this presentation or other compensation issues, please feel free to contact me: Brooke Green Principal Presidio Pay Advisors, Inc. 850 Montgomery Street, Suite 150 San Francisco, CA 94133 (415) 438-3403 brooke@presidiopay.com