Employee Compensation PlanningThursday, November 8, 2012

by Mary Ellen Williams, LiveWell Colorado

David Livingston, HealthTeamWorks

Agenda

Compensation Planning Elements– Compensation philosophy– Benchmarking staffing, salaries, and benefits– Data sources– Budgeting and controlling personnel costs– Executive compensation review

Compensation Philosophy

Purpose– Guidance on how to set compensation against market– Recruiting, retention– Communicating value– Negotiating

Compensation Elements– Base pay/salary– Incentive pay– Benefits

Nonprofit Organization Compensation Philosophy

As a nonprofit organization with an XXX strategic plan it is essential that Nonprofit Organization (NPO) attract, hire, retain and engage highly qualified, creative, and motivated professionals to fulfill its mission, meet its goals, and represent its values.

NPO strives to provide a comprehensive compensation package that is competitive within the XX% of the nonprofit market in Colorado. We believe that employees who consistently meet expectations should be rewarded with base pay that recognizes talent. We provide a compensation plan and benefits package to meet employees’ health and welfare needs, encourage healthy behavior, promote professional development and networking opportunities, recognize performance, and provide retirement resources. Benefits are contributory in nature and designed for employees to select those consistent with their needs and circumstances.

In alignment with our organizational culture, we will strive to communicate openly about the goals of the company and the design of the compensation program. The compensation process is intended to be fair and simple so that all employees and Managers understand the organization’s goals and outcomes. NPO will work to administer the compensation program in a manner that is consistent and free of discrimination. With a competitive compensation plan, NPO rewards employees who advance priority goals.

NPO Compensation Strategy

Competitive Set: NPO will benchmark the X area and target nonprofits as our industry and an organizations size of $X annual budget, less than X employees, who serve the state in healthcare and culture change.

Degree of Competitiveness: NPO will use the XXth percentile of base salary as the target for employee base pay. Individual placement against that target will be based on experience and performance.

Variable Pay Targets: NPO will use variable pay as a financial incentive for performance based goals. These targets are used to establish the amount of incentive an employee is eligible to receive for meeting established goals.

Variable Pay Targets

Position Level Variable Pay Target Attributable to Company GoalsName of Position Amount in $ or by % of base pay

Sample Compensation Philosophy

Benchmarking

Benchmarking compares compensation per position against similar positions across an industryInfluencing factors– Industry– Location– Size of organization (revenue, number of employees)– Demand for specific skilled positions

Purpose of benchmarking– Measure to meet compensation philosophy guidelines– Fairness

What do you benchmark– Staffing, salaries, and benefits

Data Sources

Salary Surveys– Colorado Nonprofit Association– Mountain States Employers Council– Professional, trade, and industry associations– Chambers of commerce– Economic development offices– Guidestar (executive compensation – CEO/CFO)

Benchmark Analysis

Survey Source

Salary Ranges

2012 Actual

Variance to 75th

Percentile%

Variance

Percentile

Job Title 25th 50th 75th 90th Office Manager/Exec Assistant MSEC Colo Benchmark Compensation 46,402 55,000 61,936 68,000 51,250 (10,686.00) -17% MSEC Non-Profit/Foundation Compensation 41,000 46,551 54,438 61,317 51,250 (3,188.00) -6%

Identify the gap and strategy to close the gap– Salary adjustment over a period of years– Capping salaries at benchmark or higher

BudgetingEmployee Name Start 12/31/12 Number 2012 Salary OASDI Medicare SUI

Total Salaries & PR Tax

Calculation of 401k Match

Last First Title Date Days PayPeriods Monthly Annual Incentive 6.20% 1.45% 3.12% Total PR Tax EE Defer ER Match X%

2012 Employer Contributions Employee Name Coverage Workers

Health

Life AD&D STD/LTD401k

Last First Title DOB DOH Health Dental Comp Dental Match Total

Establish a strong template– Precision in estimations– Resource for strong forecasting

Controlling Personnel Costs

Banding– Establish a minimum and maximum salary per

position level, proficiency, experience or geographic area• Minimum• Median• Maximum• Cap salary to contain costs• Adjust periodically for inflation or other conditions• Guideline for new hire salaries and salary increases

Questions

CEO/Executive Director Compensation Review

This presentation will address:What are the first steps in getting a process started.Considerations to improve your existing process.Why Necessary - IRS standards (as reported on the Tax Return Form 990): See Handout #1– Review and approval by the board (or committee so charged)– No person with conflict of interest involved in compensation

decisions– Comparable data (salaries for like jobs in like enterprises under like

circumstances) collected and used to make decisions– Documentation of decisions when they are made

1st of 5 Significant Places in IRS Form 990 Part VI Section B #15 (Page 6)

You definitely want to be able to answer yes on 15a.The importance of yes on 15b is dependent on:– Number of other officers.– If there are more than one or two other officers or

key employees with salaries over $100,000.

2nd of 5 Significant Places in IRS Form 990 Part VII Section A (Page 7)

3rd of 5 Significant Places in IRS Form 990 Schedule J Part I #3

First 5 boxes are relatively important.The 6th box (“Approval by the board or compensation committee”) is very important.

4th of 5 Significant Places in IRS Form 990 Schedule J Part III (New in 2011)

This narrative supports the checked boxes in Part I #3 of Schedule J.This narrative was not required in prior years (at least not for Question #3)

5th of 5 Significant Places in IRS Form 990 Schedule O (Support of Part VI)

This narrative supports the “Yes” answers in Part VI, Section B #15.The Schedule O has been required of all non-profits since 2009

Schedule O Narrative Example

Another Schedule O Narrative Example

Getting Started - the right ProcessAs CFO/Finance Head – give a heads up to your ED/CEO – emphasize IRS compliance.Work directly with your Board Treasurer (implement an annual process)Treasurer and Board Chair should decide (and revise bylaws to reflect):– If ED/CEO Comp should be an Exec Committee, CEO Comp Committee or full board process.– Schedule at least 2 meetings of this group prior to making a recommendation to full board.– What information will be needed in order to make an independent compensation data from like organizations.– Should an independent compensation consultant be retained or is the comparable compensation data for like

organizations readily available and to be provided by you?– The goal of this process is to be able to make an independently evaluated and appropriate recommendation

to the full board concerning the ED/CEO’s compensation.Provide background information and process steps in memo format to Treasurer and Board Chair - answer clarifying process questions only. (See handout item #2)Once this process is handed off, limit involvement to providing requested information.Encourage the ED/CEO to provide documentation to the Exec Committee (or CEO Comp Committee) a report providing the basis for evaluation of performance (See handout item #3)– An existing year summary of highlights (successes) and misses.– A look forward to the next year – anticipated focus areas and measurable goals.

Getting Started - the right Process(Cont.)

1st meeting - this opportunity for the ED/CEO to meet with Board Members on past year performance and next year goals should occur in an executive session (with Ed/CEO only) and will strengthen the accountability culture of the organization.The Exec Committee and CEO Comp Committee should consider a process whereby full board input on ED/CEO performance is provided (open meeting or private polling…?) prior to the recommendation of compensation to the board.A 360 Evaluation process for the organization head is considered unusual.The 2nd meeting of the Exec Committee (or CEO Comp Committee) should be without any staff and dedicated to– Discussing ED/CEO performance.– Reviewing the comparable compensation data for ED/CEOs from like organizations.– Coming up with a recommendation for that year’s bonus (if applicable) and the next year’s salary increase (if

applicable) to present to the full board.– Agree on the next year’s goals that will be communicated and expected of the ED/CEO

In presenting the Exec Committee (or CEO Comp Committee) recommendation to the full board, a summary of past and proposed compensation is helpful (Handout #4)Post board decision, a letter detailing the results of the compensation change should be provided to the ED/CEO by the Board Chair (Handout #5)Also post board decision, the ED/CEO Compensation process should be documented in memo format (Handout #6)

Considerations in your existing ProcessIs the process outlined in your Bylaws?Do you use an independent source for your comparable data? An independent consultant – When necessary?Is the deciding/recommending body receiving sufficient information to make a sound judgment on the appropriate salary/bonus for this individual?How involved is the full board in evaluating the ED/CEO performance and /or their compensation level? What level of involvement is necessary?Although process is for ED/CEO Compensation only – what level of counsel should the board (Exec Committee) provide to the ED/CEO in the compensation of next level staff members?Does your ED/CEO receive a letter outlining the results of the compensation review and next year’s expectations?Does the organization have sufficient documentation of the process followed?

Final Questions