Nonprofit Variable Pay

TYPES OF VARIABLE PAY PLANS

Variable pay can be divided into four separate categories:

• Short-Term Incentives – up to 1 year performance period
• Long-Term Incentives – 2-5 year performance period
• Bonuses – one-time awards
• Recognition Awards – one-time awards

Variable pay is not one specific plan. Rather, there are a variety of different approaches that can support an organization's strategy and market competitiveness. Selecting the plan type depends on a number of factors:

• the legal environment
• business strategy
• total rewards strategy
• labor market competitiveness
• management support
• financial ability
• plan objectives
• plan type
• eligible participants
• performance measures
  • financial
  • operational
  • *SMART objectives
  • individual performance
  • combination of measures
• stability or volatility of organizational results
• performance unit (individual/team/department/organization-wide)
• variable pay at risk (% or amount)
• performance period (month/quarter/semi-annual/year/years)

*S  Specific
M  Measurable
A  Achievable
R  Relevant
T  Time-Based

Short-Term Incentives

A short-term incentive plan (STIP) has up to a 1-year performance period and is commonly used by nonprofit organizations. STIPs include the following plan types:

• Annual Incentive Plan
• Discretionary
• Team/Department/Unit/Organization

Long-Term Incentives

A long-term incentive plan (LTIP) will typically measure a performance period of 2-5 years. Although these plans are common for executives in for-profit businesses and can be managed mostly through equity awards, they are not commonly used in nonprofit organizations because the awards cannot be funded through equity.

An LTIP that may be used by some nonprofits is the Supplemental Executive Retirement Plan (SERP). This is a deferred compensation plan that can be used to retain top executives. It is funded year-to-year until the executive retires or may be revoked if performance expectations are not met.

Cash awards may also be used to reward performance over 2-5 years.

Bonuses – One-time Awards

One-time bonuses will typically recognize an employee for a unique, one-time event. Payouts should be designed to be payable upon completion of the event. These types of bonus plans may include a:

• New Hire Referral Bonus
• New Hire Bonus
• Retention Bonus
• Mission Goals Bonus

Recognition Awards – One-time Awards

Recognition awards are also one-time awards that tend to be used to spontaneously recognize an individual, team, or the organization for a special achievement.

• Spot Bonus Award
• Supervisor, Manager, Executive Director/CEO
• Peer Award
• Organization-Wide Award