As we plan for 2021, we need to consider COVID-19’s impact on 2020 compensation decisions for nonprofit executives. For the most part, nonprofit executive compensation came to a halt. Many organizations froze, or in some cases reduced, current compensation levels.
According to PRM Consulting Group’s (www.prmconsulting.com) 2020 Management Compensation Report of Not-for-Profit Organizations:
The mean total cash compensation reported for the Top Executive Officer by all respondents is $460,217, while the reported median is $375,357. While the mean total cash is nearly unchanged, the median total cash is approximately 6.6% higher than last year’s median total cash of $375,357 for the Top Executive Officer. The actual total cash compensation reported for the Top Executive Officer ranges from a low of $84,000 to a high of $2,085,364, versus a total cash compensation range of $80,000 to $3,894,537 in last year’s survey for this position. For certain other survey positions, the average and median total pay figures are lower than in the previous report. Although pay data for individual survey positions generally increases from one year to the next, there are a number of factors which may lead to lower year-to-year pay figures for some positions. Such factors may include smaller organizations, new position incumbents, different survey respondents matching the position, and / or fewer or lower variable pay awards.
For another perspective, let’s consider Gallagher’s HR and Compensation Consulting Practice (https://www.ajg.com) take on nonprofit executive compensation:
We are hearing from a few clients and seeing in the headlines that executives are implementing or considering executive salary reductions. Most of the pay cuts have ranged from 50% to 10%. Expected executive salary increases for 2020 prior to the COVID-19 outbreak were reported at 3% on average. Most organizations are continuing to use the projected 3% as of now. If organizations do not implement executive salary reductions, we expect that modest increases may occur for executives that fall below a targeted base salary positioning as informed by an organization’s executive compensation philosophy. Headcount reductions or hiring freezes may require existing executive leadership team members to “wear even more hats,” and their market benchmark may require reexamination if additional duties become permanent. An expanded breadth of responsibility may also impact base salary and base salary range positioning.
In recent discussions with the Compensation Committees of our nonprofit clients, Astron Solutions is hearing the following:
• “While executive compensation is a concern in terms of visibility to employees and the public, it is important that we retain critical executive talent as we navigate through 2020. Now is not the time to reduce compensation levels.”
• “We need to focus more on total compensation (the mix of base, incentive(s), retirement, and benefits), and be sure we are providing a balanced package to our executives, focusing on rewarding success in difficult times and establishing long-term retention programs.”
• “Short-term base pay and incentive strategies need to be replaced with long-term recognition programs focusing on strategic plan accomplishments and long-term retention (three to five years), using cliff vesting models where the executive must be employed at the end of the long-term period to receive any earned payout.”
• “There should be more emphasis on creative deferred compensation arrangements (for example, Section 457(f) plans) to help executives prepare for retirement and to shelter income from taxes in the short-term.”
Based on these comments and the impact of COVID-19 on executive compensation strategies, Astron Solutions has conducted numerous executive compensation audits in preparation for further discussions regarding 2021 planning. These audits examine the following total rewards elements:
- The current mix of total compensation, to determine what is most appropriate for the organization based on realigned short- and long-term strategic objectives.
- Current compensation strategies and philosophies as they relate to organizational short- and long-term strategies coming out of 2020 and the impact of COVID-19 on the organization.
- Current market competitive strategies in terms of what is the most appropriate mix of industries to be included in future total reward reviews.
- Pay equity regarding how executives’ compensation is determined in comparison with how non-executives are compensated.
- The effectiveness of current short-term incentive opportunities and the potential need for re-alignment and incorporation of more long-term strategies.
- Current retirement and / or deferred compensation arrangements and their appropriateness in the context of the organization’s mission in the community it serves.
As we move into 2021, there are many questions as to how nonprofit executive compensation will look. The collective research from WorldatWork (www.worlatwork.org), Willis Towers Watson (https://www.willistowerswatson.com), and Salary.com (https://www.salary.com) all point to 2021 compensation budgets between 2.8% – 3.0% for nonprofit executive positions. While this may look remarkably similar to projections in recent years, the findings represent a slight decrease from past budget projections higher than 3%.
Given our interactions with numerous Board leaders, we also are finding the following:
- A move away from reliance on 990 compensation data. Many changes have occurred in 2020 due to COVID-19. In addition, 990 data are at best two years old. As such, many Board Committees have come to realize that 990 information is not a reliable indicator of current nonprofit executive compensation levels. As a result, there is greater emphasis on reliable published data sources.
- Inclusion of for-profit industry segments into the market analysis mix. Many Boards now realize that for-profit organizations are reaching out to nonprofit talent. Boards are concerned about the need to address this issue by establishing more competitive total compensation levels. While in practice the for-profit data often is “weighed” less than the nonprofit data, its inclusion is a marked departure from past analysis.
- A definite move towards more emphasis on variable compensation over base pay with, for the first time, more emphasis on long-term incentive opportunities.
- Creating more formality in Board proceedings related to executive compensation decisions. Many of our clients’ Boards are adopting more formal policies and procedures as part of their governance. A number are utilizing resources from the Council of Nonprofits (https://www.councilofnonprofits.org/tools-resources/executive-compensation).
2020’s confusion created by COVID-19 with respect to executive compensation at nonprofits should give way to a 2021 in which we will find more effective executive compensation decisions, more structured processes, and a move to increased short- and long-term incentive compensation opportunities.
Do you have questions or thoughts on nonprofit executive compensation in light of 2020’s changing world? Please share them with us in the comments section below!