Nonprofit Variable Pay

VARIABLE PAY REQUIREMENTS

A successful variable pay program should be competitive within the defined labor market and compatible with the business culture, strategy, and organizational requirements. To examine the feasibility of having pay for performance, it is useful to review the following three theoretical concepts: valence, performance-reward, and performance-effort.

Valence

Valence says that people must feel that the reward being offered (in this case money) is important in satisfying their needs. Although an argument can be made that money is the most universal instrument for need satisfaction, it is clear that different people value it differently.

Keep in mind that variable pay is pay at risk. When employees are unable to pay their core living expenses due to an incorrect compensation mix, employees may not support the variable compensation program. It is best to ensure a market competitive base salary and then a market competitive variable compensation program.

Nonprofit employees also value other Total Reward programs. Job advancement, retirement plans, and additional base compensation are also considered to be important in retaining employees in nonprofit organizations.

Performance-Reward Connection

For variable pay to be effective, there must be a connection between performance and pay. The variable pay plan design should motivate plan participants to perform at the required level to attain the desired reward. When the reward for the desired results is set too low or is too difficult to attain, the plan participant may not deliver the required results. In the same way, when the reward is too high or too easy to attain, the costs of the plan may be prohibitive.

Performance-Effort Connection

Employees must perceive that their effort leads to improved performance. An organization-wide plan is designed so that the combined performance of all employees will influence the overall results of the organization.

A variable compensation plan can be discretionary or based on attainment of individual or group performance or achievement of key operating results. The plan may be designed for an individual, team, department, unit, or the entire organization. The plan’s success may be contingent upon the employee’s ability to influence their performance or the operating results within the plan.

A very important point is that a variable pay program assumes that performance can and does vary and that this difference is observable. Even if there are differences, measuring them or attributing them to the effort of the employee may be difficult. The employee may not feel he or she controls the important measures of performance.

In Summary

A well-designed variable pay plan can influence valence, performance-reward, and performance-effort connections. A successful plan will support an organization in attaining its key operating objectives. It is even more effective when both employee and organization requirements are attained.