Compensation Philosophy

Salaries and compensation packages are determined as part of employment negotiations. Salary figures may need annual adjustments, either to reflect inflation or to include a bonus for exceptional performance. The chief executive is responsible for determining the individual compensation levels and fluctuations of the staff, but the board sets the chief executive’s compensation and approves the overall annual compensation budget for the organization. Compensation is impacted by a multitude of issues and requires serious attention. To facilitate this awareness, it makes sense to draft an overall organizational compensation philosophy that guides the board and the chief executive in their respective obligations.

What is compensation philosophy?

Any recurring task benefits from existing guidelines because those guidelines create a base for decision making and eliminate repetitive research every time a decision must be made. A compensation philosophy understands the battery of issues that impact the organization’s capacity and willingness to remunerate employees for good work done. The philosophy takes into account internal and external challenges, compliance requirements, financial means, and numerous value-based standards influencing the culture within the organization. A well-formulated statement serves as a tool for the board and staff to assess the organization fairly in the very competitive market within which it operates.

Board’s role

One of the core duties of the board as a fiduciary is to ensure organizational compensation decisions are well-founded and follow generally accepted standards. Specifically, the board sets the compensation package for the chief executive and approves the budget that contains all salary and benefits items. In consultation with the chief executive, the board determines the philosophy that guides all compensation issues that influence recruitment and employee retention.

Benefits of compensation philosophy

The benefits of adopting a compensation philosophy are numerous. Some examples include:

Efficiency — With a predetermined set of guidelines, the organization is able to rely on a systematic approach to all compensation questions. A base for decisions exists and neither the board nor a staff member needs to reinvent the wheel each time a human relations issue arises.

Financial planning — A philosophy spells out the long-term financial implications related to compensation. Promotions and bonuses affect budget calculations. A philosophy becomes handy when circumstances require a strategic decision to be made that impacts pay capacity.

Legal protection — Documented policies serve as a liability protection for the organization. A philosophy ensures all necessary legal issues have been incorporated, including the IRS safe harbor provisions against intermediate sanctions.

Human resources — A philosophy helps draft a non-discriminatory, merit-based compensation program for the organization. A well balanced philosophy impacts the organization’s capacity to:

• attract qualified workforce and retain motivated employees
• stress a link between performance and compensation
• accomplish internal and external equity
• maintain satisfaction and office morale
• create an organizational reputation (over competitors) as a great work place

Framing the philosophy

Compensation itself is not just about salaries. A compensation philosophy is not just a statement to help attract good staff. Similar to strategic planning where the process of crafting a plan forces the organization to undergo numerous sets of evaluations, the process of defining a compensation philosophy forces the board to pay attention to a large scope of issues that influence the final decision. A good board not only knows how to ask questions but sees the correlation between a cause and an effect and is able to frame compensation issues accordingly.

To meet the fiduciary requirements the board must ask the following questions:

• Is the overall compensation in the organization reasonable?
• Are the intermediate sanctions stipulations respected?
• Is the planned compensation approach affordable within the financial constraints?

These kinds of questions help ensure all compliance requirements are met and that no funds are wasted.

To act as a strategist, the board is concerned about the organization’s viability in the market place and how it compares to other nonprofits and for-profits in the compensation arena. The following questions can assess its competitiveness:

• Are the internal and external equity in balance?
• Is there enough flexibility built in to allow the chief executive to make counter offers to valuable staff members?
• Have we calculated our future staff needs to be able to meet our future goals?

To bring in added value, the board understands the staff is the most precious asset the organization has. To find and keep the right kind of workforce, the board focuses on issues that ensure the reputation of the organization as an exemplary employer. The board should ask the following types of questions:

• Does our compensation philosophy attract the most qualified employees?
• Are we able to hire the best and the brightest and keep them motivated for years to come?
• Is the philosophy impacting staff morale and building loyalty?
• Are we paying for performance?

Review

The board needs to review the policy annually, ensure it continually corresponds to the present goals and objectives, and make certain it reflects the values of the organization.