Managing Incentives in Not-for-Profit Organizations

Nearly 60% of not-for-profit organizations (excluding trade organizations) provide incentive pay to recognize significant staff contributions. In most cases, all staff members are eligible for consideration of an incentive payment, although the levels of payment vary significantly depending on accountability for driving results. For non-exempt staff, payment typically ranges from 3% to 5% while for senior executives, payments would more typically range from 10% to 20%. For the chief staff executive, incentive payments are generally in the range from 15% to 30% of salary.

It is estimated that more than one-third of U.S. companies are moving away from an annual performance appraisal model as their means of assessing performance and determining rewards². Instead, they are using more frequent, informal check-ins. This provides “real-time” feedback on performance, allowing employee and supervisor to regularly discuss progress toward goals, identify barriers, correct performance deficiencies, and celebrate successes. Documentation is usually web-based and “rolls up” from check-in to check-in, with the result that any year-end write-up is a short summary of key accomplishments. Managers are then allocated a pool of funds to divide among their team members, based on the relative value of their accomplishments.

Incentives can provide a real link between organizational objectives and individual performance.

Incentive plans, when implemented well can reinforce organization values, support business strategies and initiatives, stimulate productivity and quality improvement, and enhance recruitment and retention.

There are, however, a few questions to ponder before considering the implementation of an incentive plan, particularly in the not-for-profit environment:

·     Does an incentive plan “fit” within the context of the organization’s mission and culture?

A test of this would be to assess how an incentive plan would be viewed by the Board of Directors, clients, funders, and other key stakeholders. In an organization dedicated to poverty relief or hunger relief, it may be difficult to justify incentive payments, whereas they may be common and accepted in other types of non-profits.

·     Are organizational and individual performance objectives easily identifiable?

These are usually drawn from an organization’s mission statement, strategic plan, annual work plan and priorities.

·     Are systems in place to support an incentive plan?

These usually include a robust strategic and business planning process, where departmental, team and individual performance goals are clearly identified, along with measures of achievement. In addition, systems for ongoing monitoring, evaluation and reporting of results are required, as well as a mechanism for assessing and providing feedback on individual and team results.

Merit pay, or pay for performance, is the more prevalent approach to incentives, used to provide greater rewards to individuals or teams contributing most to organizational or departmental goals and objectives. Using this approach, it is important to clearly articulate key performance indicators and metrics and supervisors must be forthright in differentiating the levels of contribution of their individual staff members. With merit increases as a whole holding steady at approximately 3% for the past several years, the average merit increase has held as well, ranging from 1%-6%.

Using a combined approach, some organizations provide all staff with satisfactory performance with a general increase consistent with growth in the CPI or other local economic trends, and then give lump sum payments to high performing staff, usually representative of the top 5% to 10% of performers.

Non-cash performance awards are also an option to recognize the contributions of staff below the executive and managerial level. Some examples include thank-you notes, spotlight profiles on the website or company newsletter, additional paid time off, access to training or developmental opportunities, and meals or parties to recognize team accomplishments. There is no limit to the types of non-cash awards that can be given: the key is to use them consistently to reinforce behaviors and productivity and ensure that they are in a form that is truly valued by your workforce.

Tips for Managing Your Incentive Program

1.    Use multiple reward strategies. In addition to an appropriate approach to delivering regular salary increases, consider the use of bonus or incentive pay to recognize significant staff or team contributions, and non-cash performance awards to reward behaviors and lesser accomplishments.

2.    Don’t assume “one size fits all”. Most organizations have multi-generational workforces and the rewards valued by one generation may be entirely inappropriate for another. Use staff focus groups to identify the most appropriate and meaningful ways to recognize contributions and apply them to the segments of your employee population where they will be most effective.

3.    Assess the competitiveness of the total compensation package. It’s a wise idea to assess the competitiveness of your total compensation package, including an analysis of benefits and perquisites, to see how your organization compares to market norms. Once the comparative analysis is complete and any changes are implemented, consider issuing annual total compensation statements to inform staff of how much employer-paid and mandated benefits and perquisites adds to the value of their compensation package. These include premiums paid toward insurance coverage; Social Security/Medicare and retirement plan contributions; paid time-off’ mandated benefits (unemployment and worker’s compensation), and any other special benefits (cell phone, tuition reimbursement, etc.) awarded to individuals.

¹2017 Management Compensation Report for Not-for-Profit Organizations published by PRM Consulting Group
²Harvard Business Review, October 2016, ‘The Future of Performance Reviews’