How should a nonprofit design a total rewards strategy with limited funding?

As budgets tighten, nonprofit boards and CEOs are forced to find creative ways to retain and motivate staffs while controlling costs. Staff is the heart and soul of every non-profit. Unfortunately, salaries are difficult to keep competitive in light of the pressures on revenues and restrictions on compensation contained in many grants.

The Houston Chronicle reported that the old label of “compensation and benefits” was giving way to “total rewards.” Total rewards covers pay, benefits, perks, and anything else employees value from the job.

A well-planned pay system sets expectations and guidelines, reduces risk and creates a less frustrating workplace for management and staff. It makes legal disputes less likely, and it makes it easier to defend the organization if a dispute does occur.

Thanks to a slow economy and budget deficits, there is a lot less money for nonprofits. Grant-makers are rewarding measurable performance or an obvious return on investment, and medical costs just keep climbing.

Nonprofits have tight budgets with little revenue growth, but many are getting creative and measuring how their spending directly benefits society.

As the pressure for quantifiable performance mounts, management is looking for ways to get better outcomes from one of their biggest expenses: people. The answer is to measure employee performance, pay, and benefits against the market and the mission.

Tight budgets are changing the whole conversation about pay and benefits. Top brass used to just ask how much to set aside for raises. Now they ask which pay and benefit programs fit their strategy and culture, how much to fund them, and how to make staff more accountable.

The nonprofit sector grew out of charity, care for the poor and the altruistic urge to help others, but the steady pressure to be lean and efficient is transforming how leaders handle people. Deciding who is really worth paying more to keep, how to help those people grow, and which perks do the most for the money is a delicate balance of cost versus talent, but it is becoming the real work of people management.

Redefining pay structure can be a real change process, so organizations need to carefully think through six main questions. The answers work as a prescription for change and a foundation to rebuild on.

The board or management team should sit down to make a Total Rewards statement that answers the big questions. It should link pay and benefits to organizational goals, fund-raising levels, and performance. It should mention the labor market, and whether the organization plans to match it or lag behind.

Many nonprofits try to pay close to what they have to on salaries and then make up for it in benefits. If there is a single stance for nonprofits, this is it, probably because it fits the culture. It works best when it becomes the company story, part of the tradition and sense of camaraderie. This is also a true total rewards approach. It takes the whole deal into account, not just pay.

Benefits costs keep climbing, but new revenues are not easy to find. Healthcare is the biggest worry of all, since that cost in particular keeps going up. Pay has been climbing steadily since the Great Recession ended, but funding is not keeping up. That suggests the old model of modest pay and generous benefits may not be affordable any more.

Make sure any review of total compensation looks at the whole picture — salary, incentives, executive perks, benefits and recognition — before judging what needs to change.

A good fit is a good place to begin with pay and rewards. What culture do you really need to carry out the operating strategy?

Do the group dynamics call for team or individual contribution?

How much should you differentiate rewards based on individual performance?

Change also reaches the communication between managers and staff. Conversations become less about process and rules and more about what people actually accomplish to get the results that matter most.

Any shift this deep brings up questions about how to stress accountability, how to link reviews and promotion to pay, and how to advance the mission at times when funding is scarce.

Change can stir up anxiety. That is why it is so critical to let managers and staff weigh in on culture and performance first, via interviews, focus groups or surveys. Otherwise changes can hurt the workforce.

An effective mix of pay, incentives and benefits gives you a big bang for the buck. That means thinking carefully about what drives the mix: Is it funding levels? Is it the nature of the work? Or what is the culture and workstyle inside? Focusing on those questions can help determine what to emphasize and what to hold back on. It can also help drive strategy and build culture over time.

Nonprofits are not judged on profit, but grant-makers and donors do expect to see efficient management. They use the admin cost ratio (admin cost / total revenue) as a quick check. So they may be checking to see what you pay. That is why many nonprofit CEOs have to constantly look for ways to trim costs or look to ways to shift the mix of salaries and benefits to produce more value for the money.

Many grants and donations come with conditions, and some put limits on what the money can fund. Those limits can make it tricky to handle pay and benefits. They may require separate funding streams to cover different departments or programs, but that can send the message to staff that not all roles are valued the same.

For nonprofits with government grants or contracts, these are hard times. Government funding at all levels has become less generous as revenue collection tapers off, meaning many programs have to face small budgets. Shrinking government funding is a fact of life, but some of the most entrepreneurial nonprofits are getting creative in their search for revenue streams that let them pay better. Donor-backed investment portfolios are one example, which provide added income so the organization can offer richer rewards.

Nonprofit work varies by function. Each mission calls for different people with different skills. Community service groups, hospitals, higher education and even community foundations all have a different market to recruit from. As education levels and experience rise, so does the cost of finding and keeping skilled staff, so the level of investment depends on the nature of the work, the level of competence needed, and how far you want to pay ahead of market rate.

Professionals with in-demand skills may need a different pay level or bonus system than everyone else. IT is a perfect example. A foundation, a college and a hospital are each likely to hire from a different part of the IT labor market, and that may require a different pay structure.

Most nonprofits place a high value on teamwork, collegiality and wellness, which usually explains why benefits tend to outweigh pay. That makes sense, because many nonprofits look for experienced staff seeking meaning and stability.

As pay and benefits become a bigger part of the budget, leaders are looking more carefully at the whole cost of their workforce. Strategy is about constant triangulation. It balances the need for change in the market against any need to change how things are done inside, and it mixes financial, operational and cultural factors to drive decision making.

All the focus on constrained funding, limited revenue and restricted grants squeezes the whole organization. There is less to go around, which is why many nonprofits are limiting or skipping pay raises, and asking staff to pick up a bigger share of medical or dental costs.

Just as in the private sector, IT roles may carry a premium to be paid for certain skills that are hard to find. Cybersecurity demand is rising as cybercrimes rise. If you need specialized IT talent, expect to compete harder for it or pay more to land it, whether the job is in higher education, a hospital system or even a large community foundation.

Introducing accountability to pay and benefits is hard because it raises deep issues about worth and recognition. It is especially hard for nonprofits, where the whole culture is built on doing something for people without expecting a return. But even nonprofits are facing a new order as donors demand proof of impact and measurable performance to get funding. To be effective, the organization must link incentives to the right metrics, and the staff must accept how different roles produce different results, leading to different incentives.

Many boards worry that individual rewards will shift the work culture toward internal competition and away from the mission, and that is an understandable fear. Even so, there may be room to give standout performers more incentive for that extra effort, which sets an example and demonstrates that leadership really does see who is making it all happen.

Everyone faces rising costs, and nonprofits are no exception. The constant pressure to control costs forces hard choices, so nonprofits run up against a tough call: Cut the budget for pay and benefits, or keep pay and benefits intact but limit hiring? Many boards are cutting back on hiring until they have a better grasp of revenue prospects, since it is a lot harder to back out of a promise to pay someone than it is to cancel a new hire.

Deciding which labor market or peer group to compare against is key to finding the right salary surveys, but that decision depends on how a nonprofit defines its business. Which market or markets are best to compare to? The local community or the wider industry? Each has its pluses and minuses. Ultimately, the leadership team has to decide.

Any change in how people are treated can feel personal to the staff, so the leadership team needs to walk through every step, including how the money will be handled and who does what. One good rule of thumb is to model the cost or savings of every single change, so you know exactly what you are doing and what it will do financially. Change always raises questions about which staff deserve extra, and how much to pay them, so make sure there is a compelling rationale for every new step.

If a retirement plan makes sense for the market you recruit from, be sure it is affordable, and that it matches what you want to offer to recruit, reward and retain staff. Does it make sense to fund a pension? To offer a 403(b), where the employee contributes and the employer matches a percentage of it? Or offer both?

Spreading the Word About a New Program or Change

Since many pay changes bring questions about why decisions were made, explain the reasons. They are much more likely to be accepted when everyone understands the rationale and all the tradeoffs that had to be made. Make sure the communication is clear and consistent. Pay is a complex topic and can be emotional, so it will take more than one set of talking points or one meeting to get everyone up to speed. Sending the message out over the usual internal channels is a good start, but it can also help to back that up with a few face-to-face meetings to answer any questions.

One size does not fit all here. It is best to use a mix.

• Train managers to explain any changes.
• Schedule an all-staff meeting led by senior leadership.
• Email announcements leading up to the change.
• Employee training sessions held during the workday.

The time has come for nonprofits to handle pay and benefits as a real strategy, since every choice will make such a difference to the organization’s financial health. New pressures on nonprofits call for a deeper look at what rewards programs cost and what they do for employee motivation. Pay touches people’s livelihoods, so any changes deserve careful handling.

A review of the pay and benefits plan kicks off a conversation that needs to stay active, especially since every dollar spent brings up questions about value and mission. This is not simply an exercise or a response to a problem. It is a core part of running a nonprofit.