Nonprofit Variable Pay

PERFORMANCE APPRAISAL

Older performance appraisal programs may have measured behaviors and, even worse, employee characteristics. These aren’t appropriate measures to use in a variable pay plan.

In today’s new performance management programs, the once-a-year program has been replaced with ongoing processes and discussions. It encourages ongoing coaching, feedback, and development along with quarterly performance discussions. By following a quarterly approach, Q1 provides an opportunity for goal setting and planning. Q2 and Q3 allows for progress towards objectives and performance achievement feedback. Q4 allows for year-end attainment while having ongoing coaching, feedback, and development discussions.

Setting Performance Measurements

When designing a variable compensation plan, it is important that the eligible participants understand the performance measurements being rewarded.

When management establishes performance measurements, it is important that eligible plan participants be able to influence the performance measurements' results. Variable compensation plans can succeed when this occurs and can fail when it does not. This is why performance measurements and targets must always be attainable.

Some common examples of performance measurements are:

• Financial measures. The following financial measures capture the more common financial measures of a short-term incentive plan.
  • Revenue and/or growth in revenue (most common)
  • Income (very common)
  • Revenue over expenses
  • Cash flow
  • Cash flow growth
  • Return on assets, or investment
  • Market share

Budget Revenue or growth in revenue are common financial objectives of nonprofit organizations. Revenue is an outcome of maintaining membership and even growing membership and/or clients.

• Operational objectives. Operational objectives measure short-term tactical objectives of an organization. In many instances, they will lead to the attainment of long-term strategic objectives. Operational objectives will measure the efficiency of the organization.
  • Customer satisfaction (most common)
  • Service/quality (very common)
  • Operational efficiency (very common)
  • Progress towards goals
  • Project completion
  • Turnover
  • Membership growth
  • Employee satisfaction/engagement scores
  • Safety/occupational injury

For many nonprofit organizations, customer or client satisfaction is a key operational objective. Client satisfaction can be measured through customer feedback, delivery date attainment, and lead-time reductions. Customer retention is a good measure because it affects the bottom line. For most service organizations, customers generate more income each year they stay with the organization because the costs of initial processing, advertising, and promotion are reduced, and purchases or donations generally rise with each year of the relationship — while operating cost declines. For any type of organization, a satisfied customer is an appreciating asset.

Operational efficiency is measured as the ratio between the input to run a business operation and the output gained from the business. When improving operational efficiency, the output to input ratio improves.

Often, a focus on financial measures and/or productivity comes at the expense of the quality of service provided. Let’s look at an example: In a health care organization, employees may be concerned that a focus on productivity will reduce the quality of care. Some health care organizations have found it useful to focus on quality as well as productivity and/or financial measures. A goal of “zero defections” of customers or members can be like that of manufacturing organizations that strive for “zero defects.”

Threshold, Target, and Maximum Performance

Threshold is the minimum performance required to receive an award under an annual incentive plan. The term “target” represents 100% attainment of the performance measurement to receive the target incentive level. The term “maximum” performance represents the maximum payout under the plan.

Although some plans are designed without a cap or ceiling, this practice can cause windfall or unexpected payouts. Typically, it is not recommended to leave a plan uncapped.