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Making
Incentive Compensation Plans Work in Non-Profit Organizations
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Prepared
by James E. Rocco
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James
E. Rocco Associates, Inc. |
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Compensation
Consultants |
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This
article has been reprinted by permission of Nonprofit World,
http://danenet.wicip.org/snpo/
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For
some time now, the business community has recognized the effectiveness
of annual incentive compensation award plans. An incentive award
program in the for-profit sector can be a powerful motivational
tool for attracting and retaining top talent, increasing productivity,
and ultimately, achieving corporate goals (increasing profits).
As a result, over 80% of top executives in the private sector
participate in incentive plans. There is new evidence that the
same principle can be applied effectively within the Non-Profit
community. In fact, the idea appears to be catching on. Recent
studies have found that approximately 25% of Non-Profit organizations
offer their key managers the opportunity to earn cash compensation
awards in addition to their base salaries. Most of these programs
are based on incentives tied to the achievement of performance
measures to determine the awards. |
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In
order for a Non-Profit organization to successfully carry out
its mission, and fulfill the public's expectations, it must
attract, retain, and motivate competent staff, particularly
in key management and professional positions. For example, the
retention of a Chief Executive Officer in a Non-Profit organization
is, in many ways, even more important than in a private corporation.
Many successful Non-Profits have been led by the same CEO for
a number of years. This continuity is critical because of the
organizational complexity of Non-Profit organizations in terms
of volunteer relationships, public exposure, Board pressures,
fund raising demands and the normal operational issues associated
with directing an organization. An effectively managed Non-Profit
organization is generally more successful in attracting community,
business, and professional leaders as volunteers. Incentive
plans can play a key role in the management strategy of a well
managed Non-Profit organization in terms of the leadership talent
that they help attract. |
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The
successful operation of any organization is dependent, to a
large degree, upon the effectiveness in which key managers carry
out their responsibilities in today's environment. A competitive
base pay program merely compensates staff for carrying out their
basic activities and responsibilities. Increased competition
for qualified staff, from both the government and for-profit
sectors, competition for the fund-raising dollar and changes
in tax laws have forced Non-Profit organizations to examine
new methods of attracting and retaining a higher caliber of
manager and motivating key incumbent managers. To meet these
challenges, an increasing number of trade associations, health
and welfare organizations, professional associations, and educational
organizations are introducing incentive award compensation plans.
From a management perspective, an incentive plan places the
focus on key results and outputs which tie into the organization's
management strategy and what it is trying to accomplish as an
organization. Financial incentives, awarded in addition to base
salary, provide a recognized, accepted, and effective method
of stimulating the productivity of staff in key management positions. |
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To
be accepted, as well as effective, an incentive award compensation
plan must be carefully designed, conscientiously administered,
and most important, it must conform to the policies, ethical
standards and culture of the organization. There are, of course,
recognized limitations to the financial rewards that can be
expected from employment within a Non-Profit organization. By
definition, a Non-Profit organization cannot provide the stock
options or profit-sharing arrangements that are often available
in for-profit organizations. Since the public has every right
to expect that management will carefully oversee the administration
of funds allocated for compensation programs, care must be taken
to assure that a Non-Profit organization not provide non-performance
based bonuses or similar types of rewards in excess of competitive
pay levels. However, modest performance-based incentive plans
can prove to be valuable to Non-Profit organizations. In a well
designed incentive program, both the employee and organization
gain from superior results. If set up correctly, an organization
will achieve multiple benefits in relation to what the employee
receives and should be very eager to establish a plan. |
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Identification
and Selection of Incentive-Eligible Positions |
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A
management incentive award program is based on the premise that
senior level staff have a major impact on organizational performance,
and that it is in the best interests of the organization to
motivate senior level staff to exceed established goals and
objectives. Thus, only staff occupying such positions should
be eligible to participate in an incentive award program. Positions
selected to participate in the incentive award program should
include those whose inherent decision-making responsibilities
and relationships enable the incumbent to directly and significantly
contribute toward achievement of major organization-wide objectives.
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The
identification and selection of incentive-eligible positions
by the CEO and/or compensation committee of the Board of Directors
should be based upon a detailed review and analysis of the organization's
objectives, with regard to program development, income development,
general management, and other relevant criteria. Typically,
when a program is inaugurated, eligible employee groups usually
include only top management and senior management i.e., CEO,
Senior Vice President, Vice President. Initially, it is politically
and administratively prudent to limit eligibility in the plan
to senior positions: it is far easier to add positions to the
plan than to withdraw them. Programs are often later extended
to middle management groups. Generally, the larger the organization
and the more experience it has with such plans, the further
down the hierarchy the program will extend. |
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Performance
Measures |
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To ensure the integrity and effectiveness of the incentive program,
it is critical that the Non-Profit organization clearly specify,
in advance, the performance measures against which the incumbent's
actual performance will be measured. Performance measures fall
into two categories: organizational and individual objectives.
The process of identifying appropriate performance measures
and standards places added responsibility upon top management
to devote more attention to the planning process. Of course,
these performance measures must be achievable but they should
also reflect the goals and objectives that are vital to the
success of the organization, as well as the less tangible aspects
of a manager's overall responsibility (such as quality of service
and teamwork), along with the more common "bottom line" measures
(such as financial performance or fund-raising volume). To be
effective, an incentive plan should not simply focus on organization
performance, but also focus on individual performance. Therefore,
individual objectives need be defined for each position as well. |
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Generally,
there should be three to six performance measures, which will
vary in their mix of organizational and individual factors,
based on the position's level within the organization. Typically,
only one or two measures are designated as organizational objectives
and they apply to all participants. The remaining individual
objectives are evaluated on the basis of the existing performance
appraisal process or a Management-by-Objectives system. While
it is easier to measure results with an MBO system, the organization
should use the approach that best fits its management culture. |
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Since
higher level positions tend to have a more direct impact on
an organization's performance, the higher the level of the position,
the greater the emphasis on organizational goals. Usually, all
of the target award for a CEO is based on achievement of organizational
objectives. Conversely, as you move down the organization, greater
emphasis should be placed on individual goals. Organizational
performance criteria such as income growth, increased funding,
cost savings, publicity/public awareness campaigns, quality
of service or care, staff utilization, fund-raising and program
development are generally used. Performance scales for both
organizational and individual measures should be established
to indicate the relationship between achievement of performance
measures and incentive award payout. For some positions, a large
amount of quantitative data might not be available. However,
this should not prevent the position from being designated as
incentive eligible. |
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Criteria
to Determine the Award Amount |
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The
amount of the incentive award should be sufficient to instill
motivation. For each participant or group of participants the
plan should state the minimum award, target award, and maximum
award levels for each corresponding level of performance. The
minimum, target, and maximum amounts are generally related to
the individual's base salary, and are usually expressed as a
percentage of base salary. The incentive award must be treated
as a special reward for above average individual and/or organizational
performance and not as a normal and expected payment within
the annual compensation structure. Remember that the purpose
of the plan is to motivate managers to higher than anticipated
levels of performance. It should also be clearly stated that
the identification of a position as incentive-eligible does
not automatically qualify the incumbent to receive an award.
If the organization and/or incumbent does not satisfy minimum
performance criteria there should be no award. Thus the minimum
award is usually set at zero. |
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The
target award is the amount that will be paid to the participant
for achieving targeted performance levels. It must be sufficiently
large to be recognized as a reward for above average achievement
by the recipient. While rewards of 50% to 100% are not uncommon
in the profit sector, targeted incentives of 10% to 15% and
maximum incentives of 20% to 30% in Non-Profit organizations
are more appropriate. For example, a non-profit Chief Executive
Officer generally would be eligible for a target award of 15%
of base salary and maximum award of 30%. Senior executives would
be eligible for a target award of 10% and maximum award level
of 20%. In establishing the most effective target award levels,
a market pricing study (or compensation survey) of competitive
and comparable organizations (i.e., that might attract talented
personnel away from your organization) should be conducted to
determine the competitiveness of the organization's current
base salaries. This study should also determine, to the extent
possible, incentive award levels and practices in these competing
organizations. The prevailing rates of base salary and incentive
payments in the marketplace will guide plan designers in calculating
a competitive total compensation package. |
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Conclusion |
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Incentive
programs will continue to grow in importance in the Non-Profit
sector because they are an effective management tool. Non-Profit
organizations face ever increasing competition for staff from
both the government and for-profit sectors and increasing demands
for efficiency and productivity from contributors. A move in
this direction requires careful planning and implementation
focusing on the organization's goals. If not well designed,
an incentive plan can result in either excessive payments to
executives or performance goals which are unattainable. However,
the benefits and rewards to both the executive and the organization
makes these efforts worthwhile and such programs attractive
to Non-Profit organizations. |
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James E. Rocco Associates, Inc. is a Compensation Consulting
Practice based in Rye New York, specializing in working with
Non-Profit Organizations. They have extensive experience in
conducting a wide range of studies in the compensation / human
resource field and in designing innovative compensation plans
for both staff and executives. James E. Rocco can be contacted
at 914 925-3402. |
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