Short-term incentive (STI) plans remain a prevalent practice at nonprofit and government organizations, according to a recent survey by CAP and WorldatWork. According to “2019 Incentive Pay Practices: Nonprofit/Government Organizations,” 68-percent of nonprofit and government organizations have STI plans. However, when nonprofits are broken out separately from government organizations, the prevalence rises to 76 percent.

Other key survey takeaways include:

  • STI spending at nonprofits as a percentage of operating budget is two percent at median for 2019, which is slightly less than the 2.3 percent reported in 2017.
  • Median 2019 target award levels at nonprofits remained steady across position levels: 40 percent of salary for the CEO, 25 percent for other executives/officers, and 10 percent for managers/supervisors.
  • Long-term incentive (LTI) plans are used by a minority of respondents, with 22 percent reporting an LTI plan in 2019 (vs. 24% in 2017).
  • The most common type of LTI plan is a long-term, cash-based incentive plan.

The full results of the nonprofit/government survey are available to WorldatWork members.

Short-term, cash incentives continue to dominate the incentive-pay landscape at nonprofit/government organizations according to salary and compensation survey research released in May 2018 by WorldatWork in partnership with Vivient Consulting.

“U.S. nonprofit organizations continue to make significant use of short-term cash incentives to motivate and reward employees. Long-term incentive (LTI) use is still a little-used compensation element, but prevalence increased modestly in 2017 and may signal an emerging trend,” said Bonnie Schindler, partner and co-founder of Vivient Consulting.

Additional Key Findings from the WorldatWork-Vivient Survey

Nonprofit/Government Compensation Survey Results:

  • Nonprofit and government organizations favor simplicity by offering a limited number of STI plans. Of the respondents, more than 75% reported having three or fewer STI plans in place.
  • By far, the most common type of STI plan at nonprofit and government organizations continues to be an annual incentive plan (AIP). However, prevalence of AIPs dropped to 77% in 2017 from 86% in 2015

The compensation survey Incentive Pay Practices: Nonprofit/Government was conducted in December 2017 among WorldatWork members. The salary and pay survey is the third edition for nonprofit/government entities with the last report data released in 2015.

In the last few weeks, we’ve seen mainstream media highlight the competition for talent at tax-exempt organizations. The Wall Street Journal reported that CEO pay at tax-exempt organizations increased in aggregate by a third from 2011 levels. While this increase can be explained in part by the economic rebound of these organizations since the Great Financial Recession, there are larger factors at work.

Complexity and organization size, two main drivers of executive compensation in the for-profit world, apply to tax-exempt organizations as well. From a complexity standpoint, tax-exempt CEOs must simultaneously attend to multiple priorities and constituents. They have a tough balancing act managing multiple stakeholders’ interests to achieve the organization’s mission. This visible position must serve his or her community, court donors, navigate the political landscape, handle the press, and fiscally steward the organization. In contrast, Fortune 500 CEOs’ primary focus is to satisfy shareholders’ financial expectations (with other demands being subordinate). Further, the number of executives with the experience of successfully leading significantly-sized tax exempt organizations is limited. As a result, the talent pool is small, and the demand for them is fierce. For example, the Los Angeles Times just reported that the storied but financially struggling New York Philharmonic hired Deborah Borda as its new CEO with the expectation that she can sprinkle on it the “same magic” she did during her tenure at the Los Angeles Philharmonic.

The structure of compensation reflects this intense demand for talent, as well as the strategic planning and economics of these tax-exempt organizations. The typical tax-exempt CEO receives a base salary and a bonus opportunity, which is prevalent in three-quarters of such organizations according to Vivient Consulting’s survey. Some organizations also provide longer-term financial arrangements that serve as a retention hook and provide financial security in retirement. Most large tax-exempt organizations have multi-year strategic objectives (such as passing important legislation, multi-year capital campaigns, etc.) and want to focus their top executive on the extended time horizon required to create lasting legacies. However, unlike for-profit companies, there is no equity compensation available. As a result, long-term incentives need to be designed to reflect both mission and fiscal success, incorporating qualitative and qualitative measures that support these organization’s values and mission.

From a governance standpoint, we find that CEO pay at larger tax-exempt organizations is governed in an independent and structured process that mirrors that of for-profit companies. In our experience, independent Boards of Directors spend a significant amount of time and attention to the reasonableness, fairness, and pay-for-performance (defined more broadly to include the achievement of the organization’s mission) of CEO compensation. This is not surprising as sophisticated businessmen and women who sit on these organizations’ boards of directors bring their independence and expertise to the pay discussion. Further, the boards are careful to maintain good governance process over CEO pay decisions in order to maintain the “rebuttable presumption of reasonableness” and avoid IRS intermediate sanctions.

With increased demand for talent, we see more cross-over of executives and compensation practices between tax-exempt and for-profit organizations. Thoughtful compensation practices and programs grounded to the organization’s mission and economics can help retain and motivate these uniquely skilled executives.

Principal Bonnie Schindler discusses the compensation survey research conducted by Vivient and WorldatWork around incentive pay practices for private, non-profits and government entities.

In November 2015, Vivient Consulting and WorldatWork invited a sample of WorldatWork’s non-publicly traded members to participate in their “Incentive Pay Practices: Nonprofit, Government Organizations” compensation survey. More than 125 nonprofit and government organizations representing state, local and federal government entities, charitable and education organizations participated in the survey. This compensation survey updates the original survey completed by Vivient and WorldatWork in 2013.

The new 2016 compensation survey research shows that short-term cash incentives and bonus programs continue to dominate the incentive-pay landscape as a vast majority of organizations use and rely on incentive-based pay practices to recruit, motivate and reward employees.

Vivient’s Bonnie Schindler reports: “Nonprofits and government organizations report their annual incentive plans are more effective than their for-profit counterparts — a sign that incentives are leveling the playing field for all organizations competing for top talent.”

Key Findings from the 2016 Compensation Survey for Nonprofits and Government Organizations

  • In 2015, more than 75% of nonprofit and government organizations favored simplicity by offering three or fewer short-term incentive plans.
  • While government incentive-pay budgets remain modest, nonprofit budgets have increased significantly. Nonprofit, short-term incentive budgets are starting to approach the levels reported by the private, for-profit organizations.
  • More than 80% of nonprofit and government organizations said their AIPs were effective at achieving their objectives.
  • Of the nonprofit/government organizations with AIPs in place, 65% reported the programs are used to reward employees while 62% use the incentives to focus employees on specific organizational goals.

Partner Susan Schroeder and Principal Bonnie Schindler are interviewed on their 2014 survey of non-profit and government incentive pay practices.

The survey, based on 2013 survey data, provides a rare look at how non-profit/government organizations attract, motivate and incentivize their employees. Data includes hard-to-find statistics on the size and nature of short-term and long-term incentive pay practices, including the types of plans and vehicles used. More than 175 participants from nonprofit and government organizations responded to the survey.

Previously conducted in 2007 and 2011, this year’s incentive pay compensation surveys represent our third collaboration with WorldatWork. With this longitudinal data, we provide insight on the key compensation trends and explain the reasons behind them.

Compensation Trends: Nonprofit/Government Organizations:

  • In 2013, 78% of nonprofit and government organizations reported using short-term incentive plans, while 16% reported using cash long-term incentive plans.
  • Nonprofit and government organizations favor simplicity by operating a limited number of short-term incentive plans. Of the respondents, 68% report having three or fewer short-term incentive plans in place.
  • The majority of organizations (62%) rely on 4 to 6 performance measures in their Annual Incentive Plans in order to reward performance across several different dimensions.

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Family Business: Transitions Fall 2020

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