It’s hard enough in the private or public sector to offer executives the kind of compensation package that will attract the best and entice them to stay. But if you’re an organization in the not for profit (NFP) sector—often relying on donations or membership dues or government grants—it can be challenging indeed.

Michael Anderson President, CSAE

But it’s not impossible to attract good candidates, says Michael Anderson, president and CEO of the Canadian Society of Association Executives (CSAE). First, working for a cause you believe in, whether it’s an industry association, a society of professionals, or a charity, can give someone far greater job satisfaction than just bringing in the big paycheques. Second, the experience of running the show with limited resources, sometimes at a young age, and being able to get involved in all aspects of the organization is a wonderful career builder. And last, many NFP employers have flexible work arrangements such as telecommuting or taking time off in lieu that can fit an executive’s lifestyle better than the often more rigid corporate world.

“There are individuals who will go into those organizations where the compensation is not the number one reason why they’re getting involved,” Anderson says. “Often why they’re going in is because they want to make a difference. They’ll even look at it and say, ‘I know this thing isn’t going to pay me as well as another position but the issue that this organization is dealing with is so important to me that that overshadows it. I’m prepared to do what I need to do for a couple years and then move on and potentially move into a larger organization where the compensation levels may be more robust.’”

Challenges

Budget
For a long while, there’s often been an understanding in the not-for-profit sector that executives should lower their salary expectations, Anderson says. “There was often—if I can use the term—a bit of a martyr’s approach that it’s your time to give back now so you’re not going to make as much as in the private or the public sector.” But today, pay for NFP executives can vary greatly depending on the organization’s size. A national organization with 10 regional offices and an annual budget of $25 million can obviously afford to compensate senior staff at higher levels than those with a $500,000 budget.

Still, non-profit groups have a tough time competing with the private and public sector when it comes to salaries: according to a 2002 CSAE study of nearly 700 organizations, the average CEO in Canada’s NFP sector earned $90,660 ($86,228 in base salary plus $4,432 in additional cash compensation such as bonus or incentives). CSAE doesn’t have comparable figures in other sectors but they’re almost certain to be higher. The study also found that the pay increase for CEOs in NFP associations has been less than 2% per year for the past 10 years—below the inflation rate.

The NFP sector lags behind others when it comes to offering incentives. Less than one-quarter of all non-profit CEOs in 2002 received incentive compensation—most of them heading up industry groups.

NFPs are also struggling with a large pay gap between men and women, even though some 43% of chief staff officers are women. The CSAE report shows that in 2002, the average male CEO earned $101,655, more than one-third higher than the average for females at $75,875. That’s an improvement from the 41% gap experienced in 2001, but is still too high, Anderson says.

The reasons for the gender gap are not known for certain, but Anderson suspects it’s largely because there are more male CEOs in industry and professional groups, as well as associations with larger memberships and revenues—all of which tend to pay higher staff salaries.

Board of directors
Usually, compensation for senior NFP executives is set by the board of directors, often volunteers who are mandated with tightly managing costs. “But then they almost default to saying, ‘Because we’re so committed as volunteers, then we expect something similar from our paid staff and part of that is that they aren’t going to be compensated as highly as other organizations in the private or public sector,’” Anderson says.

Sometimes, NFP staff earn more than the directors do in their day jobs, which can cause friction, Anderson points out. Yet these directors—often experienced businesspeople—likely wouldn’t nickel and dime the staff in their own company, so why should they do it to the staff of their non-profit organization? “It often takes someone pushing internally around the board table to say, ‘Wait a minute, we wouldn’t treat our own people like this, why are we suddenly taking a step backwards simply because this is a not for profit organization?’” Anderson says.

Too many boards are too hands-on when it comes to determining executive compensation, Anderson says. A room of 8 to 12 people can waste hours debating whether to give their chief staff person a $2,000 or $2,500 raise, only to go through the whole exercise the next year.

Different responsibilities
Running a not-for-profit organization is different from running a newspaper or restaurant. For starters, if a newspaper reader doesn’t like your point of view, they’ll read the competitor. If someone doesn’t care for your pizza crust, they’ll go elsewhere. But if a potential donor doesn’t like the way you run your organization, you could lose out on hundreds if not thousands of dollars. You’re also not spending your own money: it’s usually revenues from membership dues, government grants, or donations that must be carefully accounted for. You have to try hard to please everyone who belongs to or is served by the organization. These extra pressures require certain skills in executives that should be compensated for.

Some organizations are still stuck in the mindset that they have to find someone from within their own community to be a leader. For example, a trade association representing the interest of newspapers would often hire someone who was a publisher to run the association. But running an association requires a different set of skills, and today, many NFP executives are professional managers and leaders, and should be hired and compensated based on their leadership abilities and experience in dealing with volunteers and constituents, and not necessarily due to their knowledge of a particular industry, profession, or charitable cause, Anderson argues.

Because of smaller workforces, typically, NFP executives must be a “Jack or Jill” of many different trades, often combining fundraising with long-term planning, hiring junior staff, working with accountants, travelling to regional offices, attending weekend board meetings, even organizing the annual general meeting. This makes for long hours that many organizations could not even begin to compensate for.

“They’re incredibly busy. There are a lot of things going on,” Anderson says. “It’s a job that can absolutely consume you,” he says, noting that many executives in the private and public sectors work long hours, too.

Meeting the challenges

Board of directors
Underpaying executives just increases turnover and forces the board to go through the hiring process more often, which wastes their time and can set the organization back as new staff go through the learning curve. So more boards are increasing their executives’ salaries to try to get good talent who will stay longer, Anderson says. They are saying, “‘Look guys, let’s be realistic here. The organization needs to progress and the way we’re going to be able to do that is to bring someone in who’s got a high degree of experience, strong capabilities, good resources, and to move the organizations forward and the only way we’re going to be able to do that is to pay them competitively.’”

However, he acknowledges that many smaller organizations have a ceiling on how much they can pay and simply have to work within their budget.

Enlightened NFP boards are setting up compensation committees to determine executive pay, Anderson says. “In my view, it should not be left up to the board of directors to debate the chief staff officer’s salary. That should be essentially comprised of a small group of people of the board—an evaluation committee—that has a certain degree of latitude. Then from there the chief staff officer makes the decision in terms of the staffing remuneration levels. It’s not something the board should be mucking around in and that’s what often happens.”

Compensation committees should research what comparable organizations are paying their executives and what their own organization can afford to pay, and work with the full board to set an acceptable salary range or percentage of the total payroll budget. They should do their chief executive’s annual review and then determine how much to pay, and report to the board that the salary is within the determined range but not disclose the actual amount in order to protect the executive’s confidentiality, Anderson advises.

Boards of directors should strongly resist the urge to save money by slashing the CEO’s salary if a long-time executive leaves, he says. “What they haven’t recognized is that they want somebody of that same calibre. They’re going to have to pay to get that person to come into that position.”

Nor should boards fall into the pay equity trap by lowballing their executive salaries, assuming that women will be tripping over themselves to work for less pay. “It’s the responsibility of the board to a great degree but it’s also the responsibility of the individual who’s coming into that position to try and get those inequities out of the way,” Anderson says. He recommends that women try to negotiate starting salaries and bonuses based on their worth “as opposed to just being grateful that they offered you the job.”

Recruiting
Chances are good that boards will have to look outside of the organization to find executives. The CSAE study found that nearly two-thirds (64%) of CEOs were not members or employees of the association before they took their positions.

Anderson recommends that NFP organizations be very clear when recruiting for executives what the expectations and compensation will be.

“A lot of organizations find out the hard way. They’ll start interviewing people and yet when they get to the compensation area, people are like, ‘Forget it, see ya later,’” Anderson says. Instead, organizations should state the salary range upfront. “What you’re whittling out pretty quickly is anybody who’s looking for a higher compensation level and you get back more into the issue of people who are very, very committed to that particular area and are not looking solely based on compensation.”

NFPs should also make it clear when they expect senior staff to work evenings and weekends, and whether that time will be paid in overtime or time off in lieu. Be realistic as to whether the executives actually can take their banked time off at some point.
Organizations should be aware that some people will take a lower-paying executive position if they are truly committed to the cause, but they may become dissatisfied with the salary later on, Anderson warns. “The passion that they have sometimes works against them because they’re so passionate about it and they just want to get that job at all costs, they’re willing to say, ‘Ok, it’s not exactly what I was looking for but I can live with it’ or ‘I’ll get in there and I’ll do such a good job that then the adjustment will be made.’”

Be prepared as well for some hard-hitting bargaining with executive candidates. Nearly half of association CEOs surveyed in 2002 said they used NFP sector salary surveys when negotiating their pay, and they earned an average of $21,000 more than those who did not. And some 10% of CEOs—usually in professional and industry groups—used a third-party negotiator to increase their salaries by an average of $43,000 more per year.

Incentives and bonuses
More NFPs are offering senior staff incentives and bonuses similar to those in the private and public sectors, to go beyond base salary and sweeten the pot to attract and retain talent.

Organizations are offering more vacation days to make up for a salary ceiling. They’ll allow executives to work some of the time from home and/or the ability to work flexible hours. They’ll also provide more training and educational opportunities to help senior staff expand their skills and careers. They’ll contribute to the executive’s registered retirement savings plan, which helps attract older candidates nearing retirement, Anderson says.

Certainly, non-profits cannot offer stock options. But they can offer performance bonuses. Anderson recommends combining bonuses based on “hard,” objective information such as meeting financial targets or increasing membership, with “soft,” subjective criteria such as how an executive deals with its members. “You can have a very healthy organization with regard to its financials, but you may have low member satisfaction levels or low member involvement or you didn’t particularly handle that key government relations issue that well.”

Bonuses don’t have to be cash, although many younger NFP executives do prefer it, he says. NFPs can offer educational opportunities to leaders who meet their performance targets. If your chief staff officer travels non-stop as part of her job, you can give her the opportunity to take her spouse with her on trips as a bonus. You can also pay the executive’s professional membership dues, offer them financial counselling, send them to professional conferences, provide paid fitness memberships, and even offer sabbaticals to help their physical and mental well-being, Anderson suggests.

The CSAE study also found that many NFPs offer their top staff the use of a cell phone and frequent flyer points for personal travel.

Laurel Hyatt is managing editor of Workplace Today®.