Determining the appropriate compensation for employees of non-profits can be difficult. Fortunately, a process, using a written policy, exists to help.
The best way to approach employee compensation is in a systematic matter, with a clear policy in place. That way, the executive director or board member can explain to any employee or potential donor why the pay rate is what it is.
Create a Compensation Policy
- Create an explicit compensation guideline. For instance,"All positions will be compensated at 90-110% of median rate for like positions in similarly sized nonprofit organizations in the area" (or adjusted to cost-of-living for that area). Having a range of possible compensations allows for differences in candidate’s background/experiences.
- Include an explicit guideline for raises. For instance, "Prevailing market salaries will be determined yearly in order to adjust compensation, funds allowing." Another possibility is to state that salaries will be increased by the change in the annual cost of living index (COLI). A different inflation measure such as could be used instead. The important thing is to be specific.
- Determine who will have final approval of pay. For most employees, that could be the Executive Directors. For the Executive Director and other management-level positions (division directors, etc.) that should be the nonprofit board.
- Include a process of appeal. If a person feels their job has been miscategorized or that the salary information source the organization is using is faulty, the employee should have some recourse.
- State in the bylaws that compensation will be set by the compensation guidelines, which will be approved by a simple majority of the board. Do not actually put the compensation guidelines in the bylaws, as they are too detailed. Also, having separate compensation guidelines may make them easier to alter should market conditions or other factors change.
Determine Prevailing Nonprofit Pay
- Write a detailed job description for every job. This will not only help determine compensation rates, but will help with recruiting and hiring, and help clarify roles and reduce conflict once employees are in place.
- Use an online salary service to find out the compensation rates. Make sure the rates are for nonprofits. If that is not possible, see if the salary service provides information regarding how to adjust the rate information for nonprofits – or use another salary service.
- For unique positions, it might be necessary to blend job categories. For instance, Adam spends 60% of his time doing category X at pay rate X$ and 40% doing category Y at pay rate X$. This strategy can help with both jobs that are a hodgepodge of traditional jobs, or jobs that have an element that is unusual for that job (for instance, more travel than is usually expected in that kind of job).
- Remember that benefits are part of the compensation package. Most small nonprofits offer minimal benefits- generous personal (ie, vacation + sick) days, free/reduced price services, but no health insurance or retirement match. It is important to consider benefits along with pay, no matter what size or how many benefits are offered. If the organizations benefits are considerably more generous than normal, then pay should be adjusted slightly downward. (The exception to this might be a nonprofit that has the sufficient funds to seek the very best people to complete its mission; but such an exception is inappropriate for a start-up with just a handful of employees).
- Document the proposed salary, including the explanation for how the salary was derived. (I.e., Executive Director was deemed to fit fully into the “Executive Director” category. The median salary for this position at a nonprofit with 3-11 employees is X.)
- Have the executive director and/or board approve the salary.
Following this process, or a similar one, will ensure a clear and transparent method of creating and justifying employee compensation, up to the executive director level, at any nonprofit.
The copyright of the article Setting Nonprofit Pay in Non-Profit Governance is owned by Estela Kennen. Permission to republish Setting Nonprofit Pay in print or online must be granted by the author in writing.
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