Compensation in Not-For-Profits: Why Not a Level Playing Field?

There has long been an apparent bias associated with compensation in the not-for-profit (NFP) sector.  This bias appears at all levels within the NFP environment, but is most pronounced in the executive suite. As a recent example, a reporter for a major metropolitan newspaper, who was interviewing me for an article he was preparing, was incredulous that executives in an NFP should be paid anywhere near the compensation levels paid within a for-profit company of the same relative size. His rationale was that people who work for an NFP should expect to be paid less, since they gain satisfaction and “psychological remuneration” from working for a charitable organization and it enhances their altruism. Unfortunately, this misguided belief can’t be used to buy groceries and certainly makes recruiting top talent at NFPs very difficult.  Why should NFP executives be paid less than comparable and similarly qualified executives in a for-profit setting? One justification could be to conserve the organization’s funds for use in enhancing its charitable mission – by providing competitive pay, NFPs would be using more of those funds and possibly compromising their services. This could be true, but it certainly doesn’t eliminate the need for an NFP to pay a competitive level of compensation that allows them to recruit and retain the highest quality executives.  If NFPs are going to be able to compete for the executive talent that will successfully direct their organizations, they must provide a total compensation package that contains similar pay components as other groups competing for the same executives. Again, critics often insist that incentives, bonuses and other forms of variable compensation are inappropriate.  Since NFPs “don’t make profits,” they say, there is nothing to distribute.  In actuality, many NFPs are able to run successful programs and still generate surpluses through good fiscal management. On the flip side, there are a fair number of for-profits that are unable to generate profits but continue to accrue variable compensation for their executives, much to the displeasure of their shareholders.  While we recognize that some pay elements, such as stock-based awards, are inappropriate and that the value of the total package may not be equal to the high levels attributable to some for-profits, there is no reason that NFPs (within the confines of various regulatory constraints) cannot use appropriately designed incentives and other programs. This is best accomplished through a “pay for performance” system that is based on meeting two simple principles: (1) that the performance measures and goals are clearly defined at the beginning of the performance period; and (2) that the potential awards are set forth in advance so that plan participants know what they must do and what the reward will be for reaching that goal.

In its simplest form, this addresses the cause-and effect relationship that focuses the participant’s attention on desired results or expectations by identifying “WIIFM” (what’s in it for me?). Adhering to these principles provides validation for future determination of award levels and can serve to justify these actions in the event of scrutiny from the outside.  As a result of Sarbanes-Oxley, there has been a revitalization and refocusing on the part of Boards of Directors and their compensation committees on the organization’s entire executive compensation program.  This includes the executive compensation decision.