Last year, when preparing for 2021 and what we assumed would be a post-Covid 19 world, this article focused on the fact that most nonprofit organizations had frozen executive base pay levels and were focusing on long-term incentives. Does that still make sense as we head into 2022? Let’s explore what’s changed – and what’s stayed the same – in this issue of Astronology®.
- 2020 Observation: “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.”
- 2021 Observation: The nonprofit executive market has become extremely competitive. Successful nonprofits, having navigated Covid-19, are finding their executives being recruited away by executive search firms. The focus has returned to maintaining competitive base pay rates for these roles. Budgets are being set in a range of 4% – 6% on average for 2022 for executive base pay.
- 2020 Observation: “We need to focus more on total compensation (the mix of base, incentive(s), retirement plans, and benefits), and be sure we are providing a balanced package to our executives, focusing on rewarding success in challenging times and establishing long-term retention programs.”
- 2021 Observation: The total compensation mix remains important. Many nonprofit organizations are reanalyzing their total compensation offerings. They are reviewing their benefits offerings, to include supplemental medical, life, and disability insurances, as these have become important in both the recruitment and retention of executive talent.
- 2020 Observation: “Short-term base pay and incentive strategies need to be replaced with long-term recognition programs focusing on strategic plan accomplishments and long-term executive retention (three to five years). They should use cliff vesting models where the executive must be employed at the end of the long-term period to receive any earned payout.”
- 2021 Observation: Covid-19 has resulted in many nonprofits abandoning their plans for long-term incentives and re-establishing aggressive short-term strategic objectives. Those objectives are linked to an enhanced short-term incentive plan. Many nonprofits are budgeting between 25% – 50% of base pay in their short-term incentive plans, with the higher amount linked to exceeding strategic objectives.
- 2020 Observation: “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.”
- 2021 Observation: 457 plans continue to grow in acceptance and use in the nonprofit sector. However, since 457s are non-qualified retirement plans, many nonprofits are extending the benefits cliff vesting periods, often more than five years. This is being done to add additional incentive to retain key executives needed to implement post-Covid 19 strategies.
Throughout 2021, Astron Solutions had conducted numerous executive compensation audits in preparation for further discussions regarding clients’ 2022 planning. These audits have resulted in the following total rewards observations (built upon 2020 general observations):
- A focus on the current mix of total compensation, to determine what is most appropriate for the organization based on realigned short- and long-term strategic objectives. For 2022, Astron Solutions is finding a shift back to base pay and short-term incentives over non-cash and long-term incentive elements.
- A review of 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. 2022 has shown that, due to shifting market priorities, wage inflation, and talent shortages, it is impossible to set long-term strategic objectives and supportive incentive opportunities.
- An examination of current market competitive strategies in terms of the most appropriate mix of industries to be included in future total reward reviews. Market strategies for 2022 have been altered due to increasing talent shortages and the highly competitive nature of the nonprofit executive space.
- Consideration of pay equity regarding how executives’ compensation is determined in comparison with how non-executives are compensated. These issues remain in focus for 2022. There is increasing concern over how best to manage both executive and non-executive compensation budgets for 2022 with talent shortages, wage inflation, and increasing minimum wage levels draining the limited dollars nonprofits face. But many nonprofits now realize that they must retain key executive talent to reman successful, and are not as concerned that the executive level may be compensated at a higher level compared to non-executive staff. More focus has been on potential glass ceiling issues in which female employees may be left out of promotional opportunities to the executive level.
- Examination of the effectiveness of current short-term incentive opportunities and the potential need for re-alignment and incorporation of long-term strategies. For 2022, the emphasis has once again shifted back to short-term incentive opportunities rather than long-term incentives. Nonprofit Boards are very concerned about how they are going to navigate challenges year to year and are focusing strategic objectives accordingly.
- Utilization of current retirement and / or deferred compensation arrangements and their appropriateness in the context of the organization’s mission in the community it serves. For 2022 these elements of total rewards are becoming less critical in the total rewards strategy, with renewed emphasis on base pay and short-term incentives.
As we move into 2022, there are many questions as to how nonprofit executive compensation will look. The collective research from WorldatWork, Willis Towers Watson, and Salary.com all point to 2022 compensation budgets between 3.2% – 4.5% for nonprofit executive positions, up from 2.8% – 3.0% for 2021. In addition, as with overall compensation budgeting for 2022 reviewed earlier, many nonprofits are creating special market adjustment budgets of 2% – 3% of base pay, in addition to the normal adjustments, to address potential market shifts in 2022.
2022 will be a major transition year for many nonprofit organizations in terms of executive compensation. Many nonprofits are having to realign their short-term strategies when it comes to the retention of key executives, as well as potentially having to recruit replacements for positions that have become vacant. Based on these observations, Astron Solutions recommends the following:
- Once short-term strategic objectives for 2022 have been realigned, build a balanced scorecard approach for executive short-term incentives with maximum payouts between 25% – 50% (depending on the executive level).
- Be prepared to provide aggressive base pay adjustments in response to a growing inflationary wage trend and the need to retain key executive talent.
- Incorporate special market adjustments of 2% – 3% into a special budget line item to have the funds necessary to respond to competing offers for key executive talent.
- Consider providing one-time special discretionary bonuses of 10% or more of base pay to key executive staff in recognition for having successfully navigated Covid-19, and to send a message regarding their executives’ value to the organization.