Compensation Trends & 2016 Best Practices

Data from 2015 reveals that organizations of all sizes and across multiple industries, including not-for-profits, performed well, a fact that reflects continued optimism toward the U.S. economy in general.  In an environment of growth, however slight, employers look for ways to at least maintain, if not further, revenue growth. Although revenue or charitable-giving growth objectives can be achieved using any number of tactics, most agree that real growth (as opposed to growth achieved through cost-cutting measures) is ultimately dependent on human capital productivity.  If your organization is looking to grow revenue (or charitable contributions), now is the time to consider ways to enhance employee engagement and inspiration and endeavor to improve your organization’s ability to secure top talent that understands and aligns with your organization’s growth objectives.

While it may be true that individuals attracted to working for nonprofit entities are generally more motivated by an organization’s mission than employees in the for-profit sector, this difference in “purpose” does not necessarily translate to significant differences in how employers should approach compensation strategies.  Despite the well-known fact that compensation benchmarks across all levels (e.g., non-exempt staff, exempt staff, management, and leadership) in the nonprofit sector are lower across the board, there remains a market of skilled labor interested in, if not committed to, working in the not-for-profit sector regardless of the known base compensation discrepancy.  This means that, to some degree, for-profits and not-for-profits are not “competing” in the same labor pool and while the nonprofit labor pool is undoubtedly smaller, cultural trends in generational attitudes suggest the possibility of unprecedented growth in the number of people who may be interested in working in mission-oriented environments.  As Baby-Boomers continue to migrate out of the workforce, and the presence of Millennial and Generation X, Y, and Z workers increases, compensation strategies that highlight multiple factors, not just base salary, become increasingly important.  This is because virtually every generation since the Boomers places greater emphasis on job satisfaction than base compensation, something not-for-profits can and should leverage.  Given these ongoing changes, employers are wise to develop more inclusive compensation and retention strategies.

The Value of “Culture”

Millennials (adults ages 18 to 34 in 2015) currently comprise more than one-third of the American workforce and are anticipated to become the largest share of the American workforce in a few short years.  When employers recognize that 72% of Millennial workers are willing to sacrifice higher pay in exchange for a more personally and professionally fulfilling career, it is possible to approach compen-sation strategies more holistically so as to emphasize mission, vision, and values, while also over-coming the inherent budgetary constraints that some face in setting base pay.

Merit-Based Pay Incentives Drive Mediocrity

While many nonprofits or similarly budget-conscious employers can offset the “cost” of a lower base pay with the perceived value of working within an altruistic organization, that alone may not be enough to keep and attract a top workforce.  Effective management of this evolving workforce may require critical review of the organization’s reliance on traditional merit-based pay incentives because compensation systems based on “annual merit raises” tend to create a culture of entitlement—everyone expects to get something.  In fact, in organizations that employ an annual merit review and annual raise option, 99 percent of employees receive a pay increase every year.  Under this tra-ditional and common performance management system, everyone is rewarded, regardless of contributions actually made.  Moreover, the merit-based system does little to provide for differentia-tion between or amongst strong contributors and non-contributors.  Even worse, the system arguably increases an organization’s financial burden unnecessarily because once salary treatment is given, it never goes away.  Accordingly, the “cost” of merit based systems compounds exponentially over time, rewarding employees for past contributions for as long as they remain employed.

Variable Pay Incentives Reward Performance

Compensation strategies that are more directly aligned with achievement of individual, team, and organizational key performance indicators reward actual performance without unduly increasing the organization’s long-term costs.  In addition, incentive programs that are designed to drive perform-ance and accountability reinforce the “right” employee behavior by encouraging productivity and efficiency when made contingent on discretion, performance, and/or results achieved. Ultimately, an effectively designed incentive plan can empower your organization to deliver targeted results, while directly rewarding employees for positively influencing or achieving predetermined results with the benefits they most value.

Smart Tip: To make an incentive plan work:

* Create a direct line of sight between employee performance and tangible rewards

* Focus on a mix of qualitative and quantitative incentives tied to individual and team performance

* Devise incentives that are closely aligned with the organization’s culture

* Grant rewards in close proximity to goal attainment

* Ensure program transparency and effective employee communication tools are in place