Nonprofit Variable Pay

DESIGN OF VARIABLE PAY PLANS

Purpose of the Plan

The first step in designing a variable pay plan is to decide the purpose of the plan and why you are establishing it. A variable compensation plan can accomplish the following:

• Reward employees. The ability to recognize and reward employees is a critical component of a performance-driven culture. It is also critical to attract, retain, and motivate an engaged workforce. Surveys typically report that the number one reason a nonprofit chooses to implement a variable compensation program is to reward employees for contributing to specific goals and objectives.
• Attract and retain employees. A market-competitive compensation plan with an appropriate mix of base pay and variable compensation is important for an organization's ability to attract and retain a quality workforce. Variable pay can be attractive to certain types of people - those who may be the strongest contributors in the organization. However, it should be noted that not all people are attracted by these types of plans. Some employees have very high fixed expenses and value fixed income. With those for whom security and consistency are highly important, variable pay may not be appropriate. However, the decision to include or exclude an employee should be based on the job rather than the individual to ensure equity and consistency within an organization.
• Attain individual and organizational goals and objectives. Variable pay can be established to reward employees for the attainment of individual or organizational goals and objectives. A well-designed variable compensation plan will align employee incentives and motivate plan participants to meet and even exceed important goals and objectives. These may be individual, team, department, division, or organization-wide goals and objectives. It is important for a variable compensation plan participant to understand that when the entire organization works together, these important goals and objectives can be accomplished. When setting goals and objectives, they should always be attainable. Communication and transparency are important to ensure the plan participants understand the goals and objectives and make progress towards objectives throughout the performance period.
• Engage plan participants. Variable pay can be an important tool to motivate and engage plan participants. A well-designed plan and communication program can be critical towards engagement of the plan participants. A well-managed plan will contribute towards a meaningful partnership between management and plan participants working towards common goals and objectives. Communication is key.
• Manage Costs. A variable compensation plan will reduce fixed compensation expenses while contributing to the attainment of important goals and objectives. If the goals and objectives are not attained, there may be minimal or no payout. For example, during the 2008 financial crisis companies did not attain their financial objectives and used their variable compensation plans to reduce labor costs during this critical period. A market competitive compensation mix will ensure an appropriate ratio between base pay and variable compensation.

Plan Participants

It is important to determine the right plan participants for a variable compensation plan. Will the plan be designed to include individuals, teams, departments, divisions, or the entire organization? Will eligibility be determined by level—such as salary grade, management, by job, or role in the organization?

Is the variable pay plan market competitive? Is the variable pay plan equitable throughout the organization? Does the variable pay plan’s goals, objectives, and performance standards apply to the eligible participants? Finally, variable pay plans work best when the employee’s efforts can impact the variable compensation plan’s goals, objectives, and performance standards.

According to a recent survey, over half of all employees are eligible when an annual incentive plan is used within a non-profit organization. In most organizations an annual incentive plan is very common for top management. It may also be used for managers, supervisors, and other exempt employees.

Performance Period

A variable pay plan will also have a performance period. In most instances, an annual incentive plan will have performance measures that coincide with the calendar or fiscal year for the organization.

These questions need to be considered: Will the plan participants have the ability to attain the goals, objectives, and performance standards within the designated performance period? When earned, will the plan payouts be fair and equitable? Will payouts be timely to motivate and retain the plan participants? (An annual payout is most common under an annual incentive plan.)