Nonprofit Employee Compensation: Understanding the Essentials

Strategic employee compensation is an essential ingredient of success for any organization. Both how we compensate staff members for their hard work and express gratitude for that hard work are crucially important for two core reasons:

• Compensation strategies set the tone for employee/employer relationships.
• Compensation strategies should lay foundations for sustainable growth by encouraging employee retention and long-term engagement.

Developing employee compensation strategies that successfully balance an organization’s needs can be tricky, but the payoff is worth it, especially when it comes to retention. However, balancing these needs can be trickier for some types of organizations than for others.

We’ve outlined plenty of tips for lowering staff turnover in a previous AstronologyⓇ post, but in many ways, nonprofit employee compensation is its own unique challenge.

If you’re a nonprofit professional, you’re already well aware of how challenging it can be to build an internal culture that prioritizes retention while operating on a lean budget. Particularly for nonprofits, year-over-year revenue can be inconsistent or even volatile, making it even more difficult to develop attractive and long-term nonprofit employee compensation strategies for engaging and retaining key staff members.

Too many organizations struggle with nonprofit employee compensation, and their ability to pursue their mission often suffers as a result. However, developing effective and sustainable compensation strategies is always within reach, and it starts with understanding the essentials. We’ll walk through a few core topics to get you started:

1. Debunking nonprofit employee compensation and retention myths
2. Modern approaches to nonprofit employee compensation
3. Developing strong nonprofit employee compensation strategies
4. What to look for in a compensation consulting partner

At Astron Solutions, we offer human resources and compensation consulting for small to mid-sized organizations. We’ve seen firsthand how developing a strategy that balances all your nonprofit’s needs can unlock serious growth by boosting retention.

However, whether you work with an expert guide or try it on your own, refining your nonprofit employee compensation strategies starts with having a realistic understanding of the challenges at hand. Let’s start by debunking a major misconception that holds many nonprofits back.

1. Debunking Nonprofit Employee Compensation and Retention Myths

There are many common myths about employee retention more generally, but there’s one major misconception about what it means to work for or direct a nonprofit organization.

Does the nonprofit sector have higher than average employee turnover?

Although many in both the for-profit and nonprofit sectors believe that nonprofit organizations suffer from unusually high employee turnover rates, this isn’t true. 

In 2016, the average employee turnover for the entire U.S. economy was calculated to be 19%. That same year, the turnover rate for the nonprofit sector on its own was also reported at 19%. Explore this article from NonprofitPro for more context on these findings. The main point to remember is that on average there’s no significant difference between the employee retention rates of for-profit and nonprofit organizations.

Where does this misconception come from?

Some nonprofits certainly suffer from poor management that directly damages their ability to retain talent. However, the misconception that nonprofits suffer from high turnover is largely due to the fact that when your budget is tight and your operations depend so heavily on campaign-by-campaign performance, even a low turnover rate can feel quite high.

Nonprofit professionals themselves, particularly at smaller organizations, often believe the myth of nonprofit turnover because they’ve experienced firsthand the impact that losing even one or two colleagues can have. With resources stretched thin, passion and institutional knowledge are invaluable, so many small to mid-sized, social service-focused nonprofits often struggle to recover after losing a senior or especially skilled team member.

In some ways, it makes sense to assume that these nonprofits must experience more pronounced employee turnover. They rely fully on donated support to continue pursuing their missions, and it is a well-known fact that nonprofits of all sizes operate on relatively unpredictable budgets.

However, we often mistakenly think of small or social-service focused nonprofits as organizations that only spend money on their missions and charitable projects. It can be easy for the broader public to forget that they have employees and overhead costs just like any other organization. Donors tend not to think about the more mundane operational benefits that their gifts have for nonprofits.

However, while a sector-wide average of 19% isn’t terrible, it’s still often difficult for some nonprofits to actively encourage retention with attractive compensation packages. This is particularly true of small to mid-sized organizations struggling to scale up their operations.

How does the retention myth relate to nonprofit employee compensation?

When high turnover and low employee retention rates are often normalized among smaller nonprofits, they can blind organizations to meaningful opportunities for improvement.

That is, if nonprofits accept as a given that high turnover rates are unavoidable or that it’s always very difficult to recover from the loss of a key staff member, they limit their own ability to develop stronger strategies and processes. We’ve already seen that nonprofit turnover isn’t unusually high, it just often feels that way due to a lack of infrastructure that buffers against damage from turnover.

For example, growing nonprofits might not have the resources to purchase and configure an updated database platform, which means the loss of a key fundraiser might mean the loss of all that person’s unrecorded contacts or knowledge of the space.

Strategic nonprofit employee compensation is the best way for nonprofits of all sizes to combat churn. Consider these benefits of refining your nonprofit compensation strategy:

• Help employees feel more valued beyond their direct compensation.
• Build a stronger internal cultural infrastructure that can withstand turnover.
• Encourage more mission buy-in and retention, fueling more growth.
• Reduce the need to continually put out fires and instead focus on long-term goals.

Taking a more modern and comprehensive approach to compensation can help nonprofits recognize that there are plenty of ways to help employees feel valued. There’s no need for nonprofit leaders to struggle with self-imposed constraints around perceived retention problems!

2. Modern Approaches to Nonprofit Employee Compensation

If you think your organization could benefit from updating its compensation strategies, you first need a realistic understanding of where you currently stand. Ask yourself or your team these questions:

• Without calculating it yet, how would you estimate your nonprofit’s retention rate?
• How many paid employees currently work at your nonprofit?
• What is your employee turnover rate over last year? The year before?
• How difficult was it for your team to adapt the last time you lost a member?

Chances are your organization’s turnover rate is lower than you initially assumed. If your actual turnover rate is higher than you originally thought, you should definitely take the time to refine your approach to compensation. Either way, when you don’t have a clear understanding of your organization’s ability to retain employees, there’s room for improvement.

As with any sector, competitive compensation packages are key to boosting and maintaining the healthy retention rates that support long-term growth.

We already explored how, even though nonprofit turnover rates aren’t statistically higher than for-profit businesses, tight budgets and underdeveloped internal structures often prevent nonprofits from pursuing robust and attractive compensation strategies. Try taking a more modern approach: total rewards compensation.

What is the total rewards concept of compensation?

Total rewards compensation is a comprehensive way of understanding how a nonprofit values its employees. It takes both direct and indirect forms of compensation into account, including:

• Direct compensation
• Indirect compensation and benefits, like healthcare, PTO, retirement savings plans, etc.
• Performance management styles
• Recognition of achievements and contributions
• Work-life balance and internal culture

The total rewards concept of compensation is useful because, while it’s certainly true that pay is a top motivating factor for any job, we tend to undervalue other, more intangible elements. It’s these elements that then work together to generate and express value for employees.

In many cases, this indirect value expressed through intangibles is just as (if not more) important than direct compensation. For example, a highly-paid employee at a business whose internal culture is extremely formal or aggressive will probably be unhappy, tired, or stressed no matter their direct compensation. An employee paid a median salary at a more relaxed company that recognizes achievements and communicates well with employees will almost certainly be happier and less likely to leave for a new job.

This example is fairly basic, but it communicates the main idea of the total rewards concept: Indirect forms of compensation are often very important determining factors when it comes to employee retention.

This is particularly useful for nonprofit organizations to recognize since they typically work with lean budgets. The total rewards concept of compensation reminds nonprofits not to undervalue the positive impact that healthy internal culture, strong communication, and other benefits can have on their employee retention rates.

Why does nonprofit employee compensation strategy matter?

We’ve already covered how taking a comprehensive approach to compensation can help your nonprofit to more accurately gauge all of the elements that contribute to your retention or turnover rates.

A strong compensation strategy that addresses both the direct and indirect ways that your nonprofit values its employees creates a solid foundation for growth by encouraging retention and reducing turnover. This can only be done through understanding how your organization values its employees in a more holistic sense (and not simply how much it values them via direct compensation).

For any nonprofit looking to grow more strategically, improve a poor retention rate, or strengthen its internal culture, you should first look to your compensation strategy.

3. Developing Nonprofit Employee Compensation Strategies

We’ve covered a lot of ground already in the previous sections, so to recap:

1. Contrary to the common assumption, it’s not true that nonprofits have worse employee retention rates than for-profit businesses.
2. This misconception largely springs from the fact that nonprofit resources are often stretched thin, meaning nonprofits typically don’t have the infrastructure in place to smoothly transition during periods of turnover.
3. Comprehensive nonprofit employee compensation plans are the best way to build an infrastructure that encourages retention and stronger mission buy-in.
4. Even when budgets are lean, thinking of compensation in terms of total rewards can give nonprofits a much fuller picture of what attracts and retains their talent and support.

So how can nonprofits begin developing stronger employee compensation strategies? For quick, diagnostic advice or a more comprehensive overhaul, the best move is usually to work with a compensation expert. Compensation consultants typically specialize in working with specific segments or sizes of organizations, so there’s a perfect partner out there who’s already familiar with the unique challenges that organizations like yours face.

If you’re ready to start examining your compensation strategies on your own before calling in an expert, there are a few first steps you can take. Let’s walk through a few tips and best practices for reviewing and strengthening your nonprofit’s employee compensation strategy:

• Begin by researching the compensation strategies of comparable organizations to your own. As much as possible, try to examine staff size, average yearly revenue, and mission. Take a peek at online research on employer review websites, or reach out to talk with colleagues in other nonprofits. Your best bet is working with a well-grounded consulting firm who can guide you to key resources and help you take full advantage of institutional knowledge. When it comes to direct compensation numbers, you won’t find much information due to the Department of Justice Anti-Trust Guidelines, but you or your consultant can purchase reputable salary surveys for your sector.
• Conduct surveys of your employees’ feelings on their direct and indirect compensation. Official salary surveys and more comprehensive, qualitative surveys on what staff members think of the indirect benefits of your workplace can give you a useful overview for identifying weak links in your retention strategy. Consider working with a consultant to administer a custom total compensation survey and/or employee opinion survey for your nonprofit.
• Draft total compensation statements for your organization’s employees. Review the elements of the total rewards concept of compensation, and then clearly outline the direct and indirect forms of compensation that each employee receives. Having sample compensation statements on hand is also an effective tool for recruitment.

• Foster a communicative, transparent culture at your nonprofit. Employees often tend to be more flexible and understanding when nothing feels as if it’s being hidden or kept secret. As long as there’s a sound structure in place, it’s a good idea to share compensation information with employees. Read our article on transparency for more context and information.
• Look over your succession plans. For nonprofits, turnover and the loss of institutional knowledge can cause serious issues. Enterprise-level organizations use executive succession plans to mitigate these negative effects, but even the smallest of nonprofits should take steps to plan ahead on how to handle losing a key staff member and their unique knowledge about your organization’s space or community.
• Review any existing compensation strategies that could use improvement. For example, many employers rely on signing bonuses to attract new talent. While they’re great for recruitment, they can damage organization morale and cohesion over time. Finders fees and retention incentive programs built into your compensation strategies tend to be more sustainable alternatives. Even if your organization doesn’t use signing bonuses, it’s worthwhile to examine any recruitment tactics you use and their long-term impacts.

Whenever an organization decides to update its compensation strategies, it’s always a good idea to sit down and review everything with the senior leadership team. Review your existing total rewards strategy, discussing all the elements of direct and indirect compensation at play. Talk about your organization’s goals and limitations. Getting input from senior leadership early in the process can go a long way to secure their buy-in once it’s time to take your updates live.

Whether you choose to work with a compensation consultant or first examine your compensation strategies on your own, the main idea is to begin creating a sturdy compensation structure, not a one-time fix. Only by building a long-term nonprofit employee compensation strategy that takes the big picture into consideration can your organization lay the foundation for strong retention and growth into the future.

4. What to Look For in a Compensation Consulting Partner

If your organization decides that some expert guidance is the best way to begin improving or even overhauling your nonprofit employee compensation strategy, take your time finding the perfect partner.

As mentioned above, compensation consultants typically specialize in particular segments or spaces, so look for a consulting firm that works with nonprofits around the same size as your own. They’ll be able to provide an objective, third-party perspective that understands the unique forces, pressures, and limitations that affect nonprofit organizations.

Next, think about the specific services that you might want or need from a nonprofit compensation consultant. These services often include:

• Full base compensation strategy development
• Specialized strategy development, like for executive compensation
• Incentive and variable-based compensation programs to address retention goals
• Human resources support to train your team on administering new compensation programs
• Compensation survey creation and execution

Remember that any consultant you consider should ideally focus their services around a total rewards understanding of nonprofit compensation. As discussed in earlier sections, the concept of total rewards enables nonprofits to take a more flexible and less limited view of their own ability to compensate their staff members.

Nonprofit employee compensation can be a tricky subject. Misconceptions are common both outside of the nonprofit sphere and within it.

Building strong compensation strategies and long-term programs is the best way to both improve retention and protect your organization against damages from employee turnover. Take the time to understand the importance of strategic compensation and building a healthier internal culture, and then recruit expert help when you need it.

To learn more about nonprofit human resources consulting and compensation strategy, be sure to continue your research with a few additional resources:

• Top 7 Compensation Consulting Firms for Any Sector. Explore our list to find the right partner for the unique needs of your organization.
• Our Guide to Blind Hiring in 2019. Does your organization benefit from being a diverse workplace? Equitable hiring practices lead to stronger nonprofits.
• Top 13 Nonprofit Consulting Firms from Re:Charity. Nonprofits partner with experts for all kinds of projects. Find the right consultant for the job!

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