What factors contribute to successful nonprofit executive compensation strategies?
For decades, the perception of executive pay at nonprofit organizations has been the image of a grossly underpaid executive director OR a scandalously overpaid CEO. But as the social sector matures, becomes more professional and finds meaningful ways to measure success, executive compensation is developing a new image. With the influence of engaged boards and thoughtful hiring and retention practices, nonprofits are poised to offer more competitive and attractive compensation packages than ever before.
Historically, executives at America’s nonprofits have felt pressure to take a nonprofit discount in pay in exchange for the psychic benefit of charity work. But is virtue truly its own reward? Does it compensate for lower compensation? As the line between sectors blurs, nonprofits compete more and more in the marketplace for top talent. Unlike the for-profit sector with their bottom-line focus on profits, nonprofits have a double bottom line that requires them to view all decisions (including hiring and executive compensation) against both a financial bottom line and a socially responsible bottom line. Limited resources, social pressures, and board biases may contribute to lower compensation. Even the IRS plays a role in determining what nonprofits can pay their executives.
With charity watchdog groups scrutinizing every dollar spent and pressure to keep salaries low and funding to programming high, competitively compensating nonprofit executives may seem impossible. But with innovative approaches to compensation that go beyond pay and by focusing on what makes their organization and the sector unique, many nonprofits are finding great success in recruiting and retaining top executive talent in the social sector.
Heart work has value
Pay scale surveys show that nonprofit employees typically earn less than their counterparts in the for-profit world. Those tasked with hiring top talent must keep pay relatively competitive but have the opportunity of capitalizing on what the social sector uniquely offers. For all nonprofits, this means focusing on the mission, giving leaders and staff something to rally around and fight for. Working for a nonprofit means the added bonus, unquantifiable, of heart work—spending your time doing something more important than turning a profit. Never underestimate the value of doing good, but don’t count on it alone to keep executives happy.
Be creative with compensation
Many nonprofits are able to offer intangible benefits not found elsewhere, benefits that create better life-work balance, and give employees more time to focus on pursuits outside of work. For the modern executive, this looks like a generous PTO policy, the option to work from home or enjoy a flexible work schedule. Studies show that people are willing to work for less pay if they feel their work makes a difference, if they believe in the organization, or if the job allows them time for non-work pursuits.
Focus on people-first
Fostering a culture within the organization of trust and collaboration creates the type of place people want to work. Job satisfaction surveys show that compensation is part of the equation, but people are also looking for good relationships with their colleagues, opportunities for advancement, and professional development. For top executives looking to mentor future leaders and collaborate with people who share their goals, nonprofits offer a unique structure that often flattens the hierarchy.
Change the metrics of success
Using for-profit metrics such as ROI (return on investment) and KPI (key performance indicators) can be beneficial for a nonprofit, but the sector must educate donors, boards and the public on other meaningful indicators of success. Just looking at the bottom line (net revenue) during an executive’s term provides only part of the picture. Using multiple indicators including a diverse donor base, number of new donors, number of new grants and grants renewed, program evaluations and percentage of dollars spent on programming give a clearer picture of the success of an organization and the leadership of the executive team.
Executives looking for meaningful work, greater life-work balance, and the chance to mentor and collaborate with their staff, will be drawn to the nonprofit world. If the salary is not significantly lower, and organizations bridge that gap with appreciation, support and the intangible benefits of working at a nonprofit, top talent will lead the social sector.
Sara Ebert is a 2020 graduate of the Master of Nonprofit Leadership and Management program at Arizona State University. Ebert combines her MNLM degree with a background in journalism and political work to affect change in modern public policy issues. She lives in Salt Lake City and loves spending time with her husband and five kids. Her story was featured in ASU Now last spring.
For more on nonprofit compensation in Arizona, purchase the ASU Lodestar Center's latest Compensation and Benefits Report, featuring data on dozens of job titles in the nonprofit sector.