How to Attract and Retain Top Talent in the Nonprofit SectorMarch 19, 2018
When a nonprofit board starts the search process for top talent, particularly at the executive director/CEO-level, it helps to start with a consideration of what compensation options are available to attract the best candidates.
In a previous blog post, I addressed the elements of compensation that are acceptable and unacceptable for executives and other employees of a nonprofit organization. Now let’s look at the specific forms of compensation that should be considered to attract and retain top talent in the nonprofit sector.
The first and most obvious consideration is financial compensation, which can be viewed as having two component parts:
Direct Compensation starts with equitable and fair wages and salaries, bonuses and commissions provided at regular and consistent levels. This can also include performance-based incentive compensation packages. Other factors include market-driven adjustments and/or cost-of-living increases.
Indirect Compensation includes all financial rewards that are not included in direct compensation. This can be understood to form part of the “social contract” between the employer and employee, such as employee benefits, leaves, unemployment insurance, educational reimbursements and employee services.
Retirement savings plans may include a traditional 401(k) and/or 457(f) nonqualified deferred compensation arrangement. The latter is a nonqualified retirement plan which gives the tax-exempt employer an opportunity to supplement the retirement income of its select management group or highly compensated employees by contributing to a plan that will be paid to the executive at retirement.
It also can include all sorts of insurance plans: health, life, dental, vision, long-term care, short-term (STD) disability and long-term disability (LTD). It also will cover paid absences/paid time-off (PTO) including vacations, holidays, sick leave, educational leave, jury duty and compassion leave.
This area starts with the job description, which should clearly spell out interesting duties, roles and responsibilities as well as the reporting structure to the board or Chairman. It should also address organizational challenges, the authority the hired executive will hold, degree of autonomy and authority over important decisions like hiring and firing, budgetary discretion and directional latitude from a strategic standpoint.
In an either formal or informal context, the hiring nonprofit should also spell out how it plans to create opportunities for recognition, providing a feeling of achievement for the prospective employee and any advancement opportunities that may be made available.
The work environment or professional setting should also be clear – in terms of offering fair and consistent workplace practices and policies. Nonprofits typically offer a spirited and collaborative team-based work flow. The workplace should be safe and comfortable, and attempt to be on-trend in terms of offering flexible scheduling, and technology-enabled remote workplace access (secure laptops, tablets and smartphones).
Governance Considerations for Executive Compensation
Common sense and basic blocking and tackling come into play here. You should provide comprehensive, consistent and high-quality documentation that’s been reviewed by your legal counsel. If warranted, a compensation committee should be formed consisting of both board members and qualified outsiders. It is always a good idea to have executive compensation packages reviewed by qualified outside experts and approved by disinterested board members.
Every nonprofit organization should have an established written review plan for each level in the organization in the employee handbook, with consistency between like employees. Make sure that compensation is equitable for employees commensurate of the services being provided.
Establishing a “Reasonable” Non-Excessive Compensation Package
In order to avoid potential problems with having a nonprofit employee be identified as a “disqualified person” and therefore subject to private foundation excise taxes, a nonprofit organization needs to establish a “reasonable” compensation package.
The IRS recommends that nonprofits follow its three-step process to determine that compensation is reasonable and not excessive: (See also Treas. Reg. § 53.4958-6(a))
- The board should arrange for an "independent body" (which means that the person receiving the compensation should not be part of the review process) to conduct a "comparability review." Many nonprofits task a "compensation committee" or use their executive committee, or another sub-group/task force of board members, for this purpose.
- The independent body should take a look at "comparable" salary and benefits data, such as data available from salary and benefit surveys, to learn what nonprofit employers with similar missions, and of a similar budget size, that are located in the same, or a similar geographic region, pay their senior leaders.
- The board/independent body that is conducting the review should document who was involved (and their "independence" i.e., that they do not receive compensation from the nonprofit) and the process used to conduct the review, as well as the disposition of the full Board's decision to approve the executive director's compensation (minutes of a meeting are acceptable). The documentation should demonstrate that the board took the comparable data into consideration when it approved the compensation.
It Pays to Get Expert Advice
If this all sounds really complicated for nonprofit board members trying to administer sound governance policies and effectively exercise their fiduciary responsibility, it certainly can be. That’s why it pays to get expert advice when formulating highly attractive compensation packages for NFP/EO executives.
For more information on this topic and our specialty Not-for-Profit services, please contact Frances E. McKenna, MBA, EA, Tax Director.
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This material has been prepared for general informational and educational purposes only and is not intended, and should not be relied upon, as accounting, tax or other professional advice.
Please refer to your advisors for specific advice.
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