NonProfit Total Rewards Strategy: Earning Your Return on Investment

By Marc Kroll, Sr. Total Rewards Consultant | March 20, 2020

While our economy has improved, non-profit organizations are facing decreased funding due to federal and state fiscal deficits. Additionally, they continue to face deeper scrutiny with a significant shift by grant-makers who increasingly fund awards on a performance and/or return on investment basis. At the same time, the soaring costs of healthcare insurance and talent in a tightened labor market are adding significant pressure to operating costs. And if that were not enough, the passing of state mandated laws impacting salary levels (i.e., pay equity, minimum wage at $15/hour) pose an additional challenge to keeping the delivery of services at a similar level.
Without new revenue growth, many non-profits are looking for ways to measure and increase the value/return on their social mission and investments. Consistent with these changes, some non-profits are responding by trying to increase the “return” on their services and programs in terms of program execution, utilization and measurable results. Given this environment, non-profits are being forced to examine the viability of their highest costs. Most particularly, employee compensation and benefits for value against performance as well as market competitiveness are in the crosshairs.

Non-profit Boards and senior leaders are questioning what the appropriate compensation and benefit programs should be, at what levels they should be funded as well as how to drive accountability and performance in the employee workforce. While non-profit organizations have predominantly been about social service and charity with their cultures reflecting a “do-good” culture and a concern for employee welfare, present conditions have forced many to consider a culture shift toward performance and accountability, fiscal prudence and changes in their Total Rewards programs. This delicate balancing act between affordability and the ability to attract and retain a talented workforce presents a significant challenge. Nonprofits’ capacity to assure effective organizational culture, management practices, labor market relevance, strategic/operational priorities and regulatory compliance are at risk.

With The Human Resource Consortium’s 25 years of proven success in working with nonprofits, we hope that the following insights to six key questions provide a path for change in Total Rewards.

1. What should your Total Rewards Strategy be?

This is a statement developed by your Board or Management Committee on how the organization’s compensation and benefits programs will support and relate to your operational objectives, culture, management practices and performance. It also describes the labor market within which the organization wishes to compete and the level at which both cash compensation, benefits, rewards and recognition programs will be set and funded.

Reviewing and/or setting a Total Rewards strategy and its associated programs will establish both an on-going conversation and a relationship regarding ROI and your organization’s pay and benefits programs. Given the challenges of the current and future economic, regulatory and funding environment, it is vital that this happen for both financial viability and organizational effectiveness.

Until recently, typical non-profit Total Rewards strategies had been to set benefits at higher competitive levels than pay. Many organizations believe that this has worked as a successful attraction and retention strategy for a more experienced workforce and “fits” with their culture of “giving back” by helping both employees and their families.

However, with significant, steadily increasing benefits costs (healthcare being the leader) and with pay levels now escalating due to labor market tightening and government mandated salary adjustments, many non-profits are critically assessing what is affordable and more productive for their pay and benefits programs at a time of funding that is either declining or plateauing. It is advisable that the Board and leaders recognize that pay equity (based on gender and race) has become a greater potential risk with several state laws still addressing and defining what “equal pay” requirements will be.

Non-Profits are navigating their way through difficult funding constraints, increased demands for accountability, and increased productivity. A different, more strategic approach is needed to set and shift compensation and benefits programs to align with organizational objectives.

2. What is the present role of pay and benefits in your organization’s culture and management practices? Does the Board or management committee want to change that role?

Any organization contemplating Total Rewards’ plan changes should assess their salary, incentive compensation, executive perks, benefits and recognition programs on two levels.

The first consideration is the organizational culture needed to support the achievement of your operational strategy.

  • Does your organization value performance and accountability? Does it need to operate in teams or individually or as a combination of the two?
  • To what degree and why should it value differentiating performance between individuals or treating employees the same?
    The second consideration should be how this shift will impact how managers recruit, engage, retain and communicate with their staff on various challenges.
  • To what degree and how does your organization want to emphasize performance and accountability?
  • How can we best align performance to career growth/advancement and compensation decision-making?
  • How will your Total Rewards’ strategy fit your mission and goals to move your organization forward amidst funding and development challenges?

To assure that any changes in a Total Rewards program will not have an adverse impact on your workforce, it is critical that management and staff have the opportunity to “weigh-in” as early stage buy in on the role that culture and performance play in the design of both the structure and objectives of Total Rewards programs. This insight may be gained through interviews, focus groups, and/or surveys.

3. How do you determine the appropriate mix of pay and benefits for a non-profit organization? How do you determine whether it is “affordable?”

Understanding the factors which determine a winning menu of compensation and benefits is imperative to maximizing the return on your Total Rewards investment as well as attraction, engagement, performance and retention of a talented workforce. The cultural, financial and operational environments of non-profit organizations plays a critical role in influencing decisions on the breadth and depth of a Total Rewards program and should be carefully considered.

Cultural

Desired work culture needs to influence and shape a Total Rewards strategy. Most non-profits have a team-oriented, collegial and employee-focused culture which is consistent with the organization’s work in social services, healthcare services, and education. A Total Rewards program that has supported this type of culture will typically manifest itself in richer benefits than compared to pay. Many nonprofits believe this is the strongest strategy when trying to maximize attraction and retention of a workforce which is experienced and looking for a more stable work environment.

Financial

For nonprofits, ‘profitability’ is not a measure of financial success. However, grant makers and donors (public and private) use administrative cost as a percentage of total revenue to assess the viability of potential recipient organizations. This measure of efficiency against outcomes translates to their “return” on the dollars they are given. For many of our nonprofit clients, compensation and benefits is the most significant cost in this calculation. An organization needs to either increase its revenue streams or constrain/reduce cost in order to show fiscal performance improvement. At present, with trends toward declining funding, the review of compensation and benefits programs is a logical next step in this process.

Nonprofit compensation and benefits programs can be significantly impacted by the source of their funding. There are many public or private grants that specify what service(s) the funding may be used for in addition to recommended salary levels and potential operational requirements. For these reasons, planning a Total Rewards program and its funding may be a challenge when trying deliver a consistent message to the workforce.

Government funding has been the primary funding source of many community organizations for decades but, is clearly at risk. Private funding, while experiencing similar challenges, has one significant difference. Several pooled organizations, with the help of donor support, can create investment portfolios that generate additional streams of funding. This can create added financial leeway when determining grants, services and a more attractive Total Rewards program.

Operational and Human Resource Planning

The nonprofit’s mission (e.g. community foundation, community services, higher education, healthcare), the nature of jobs within a workforce and their market-competitiveness may dictate how aggressive a Total Rewards program will have to be in attracting and retaining talent. The professional level of the workforce and the minimum education and experience levels it requires will influence the number and funding levels of compensation and benefits programs.

Further, key jobs that are needed by an organization may require a different Total Rewards strategy based on the labor market and the degree of demand for a certain skill set. A current example would be the importance of information technology (IT) to your organization’s performance. For any nonprofit organization, the approach to attracting and retaining IT employees could be quite different.

Total Rewards Decision-Making: Strategic Integration of Factors

Designating and designing a Total Rewards Strategy and its associated programs requires a “triangulation” of the above three organizational factors. It is a nuanced balancing effort, based on external and internal conditions as well as changes that occur. Some of these changes may include:

  • Constrained Funding: Cost pressure (created by decreased funding) on both the amount of spending and structure of Total Reward programs is a current and ongoing challenge. In response, many organizations are restricting or not giving out an annual salary increase. And, any required minimum wage adjustments and pay equity adjustments will put further pressure on current and near future salary budgets. Wage adjustments, coupled with increasing cost of medical and dental programs, has left many organizations having little or no choice but to increase employee contributions to premiums and/or deductibles.
  • Labor Market: The labor market has recovered to a degree and is adding a significant number of jobs per month. Specific industries and job families have higher salaries than others, based on demand for their products and markets. The most significant examples are information technology (IT) and healthcare clinical specialists including nurses, physician assistants and physical therapists. For example, attracting and retaining a talented IT workforce is an ongoing challenge in for profit and nonprofit organizations due to the lack of supply, high demand and highly competitive salary levels. To obtain the IT talent they critically need, many nonprofits have been more aggressive in setting their IT salary policy. These organizations have little to no choice in trying to compete if they need a specific skill set. In the healthcare sector, digitalization is a critical and time-consuming strategy to achieve efficiency. Across all sectors, the accelerating rise of cybercrime is adding acute demand for cybersecurity specialists.
  • Transitioning to an Accountability-Based Culture: Connecting pay and performance is a management challenge for most organizations and especially for nonprofits. As grant funding continues to move toward performance-based awards, nonprofits will have to prove their performance. They will need to develop new mindsets and skills in their employees, align employee goals to higher levels of organizational performance and cascade performance metrics from strategy to individual roles. With this increased focus on performance, the work culture will have to shift to one of accountability and differentiating pay based upon performance. Many non-profits are seriously considering or embarking upon this change. However, others are concerned with changing their team-driven culture and continue to look for an “edge” in increasing both financial and operational results.

In setting their offerings of compensation and benefit programs, Boards and leaders are challenged by gauging the program cost against the ability to design a successful attraction and retention policy. It is further complicated by decreased funding and other costs that are mandated by state or local government. This can be accomplished by either reduction in compensation and benefits funding and/or programs or by constraining the size of the employee workforce. Most times it is the latter. However, it is important that that this dilemma be weighed carefully in terms of the number of employees needed to accomplish its mission and the cost of delivering services.

4. What is the appropriate labor market to which your organization wants to compare your current pay and benefits programs?

Comparing your Total Rewards programs to the relevant labor market is critical to determining how effective you will be in attracting and retaining talent to your organization. Leaders, along with Human Resources, should define the sector(s), geography and potential “hot jobs” that may be difficult to recruit or retain (e.g. Information Technology). Accurate understanding of labor market dynamics that impact your organization will be important to select the best survey data sources to assess your organization’s position versus its labor market.

5. What are the financial and practical implications of proposed changes in your Total Rewards programs?

Any changes in a pay or benefits program should be financially modeled for additional costs or savings. The first question from senior leaders or your Board will be the cost or savings incurred and how the organization will manage it. Other questions typically asked are:

  • In what ways and to what degree do these changes conform to the Total Rewards philosophy of your organization?
  • Will they make operational sense?
  • Does this change help, hinder, or not change the ability to attract and retain a talented and motivated workforce?
  • What is the compelling “business” rationale for the change?

A timely example might be the approach to fund employees’ retirement. The choices might include an employer-funded pension plan, a contributory plan (403b) where both employees and the organization (% match) fund an employee’s retirement or both. Recently, several clients have been conflicted with the decision over what and how to fund. The current labor market trend is that most organizations offer only a 403b plan. However, some organizations have both a defined benefit or defined contribution and a matched, contribution plan. Consider: Is it still financially feasible to offer both? Or, does this conflict with your ability to continue to attract and retain a talented workforce.

6. How will you implement and communicate Total Rewards program changes to employees?

Clear and compelling communication of new programs or changes to Total Rewards (compensation, benefits, rewards, recognition and well-being) programs are essential to their effectiveness and acceptance by your workforce. And, consistent messaging to employees from leaders, managers, and Human Resources with a practical (financial and otherwise) rationale for the change is critical in gaining acceptance.

The approach and format of how changes are communicated will depend upon how an organization normally communicates with its workforce. Whatever works the best should be used for announcing Total Rewards changes. However, due to the complexity and emotionality of compensation and benefits issues, increased frequency and repetitiveness is advisable, as is face-to-face communication. The “roll-out” of a program changes can be achieved through one or more tools:

  • Managerial training that supports communications with staff
  • Senior Leader led “All Staff” Meeting
  • E-mail Communication
  • Employee Training
  • One-on-One Employee Meetings with Managers or HR to review individual impacts

A carefully crafted, multi-pronged communications strategy for any changes in Total Rewards is always advised. Compensation and benefits changes impact employees’ concerns about their jobs and their livelihoods. It is strongly recommended that your organization treat the implementation of these changes just as seriously.