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Compensation Philosophy – What Is It, and Why Do We Need One?

When InterSector completed its Northeast Wisconsin Nonprofit Compensation and Benefits Survey in October 2019, 41% of 112 respondents said they have a formal compensation philosophy in place. That suggests that 59% of nonprofits either haven’t made the time to create one, or aren’t aware that having one could benefit them.

What is a compensation philosophy? It states simply your approach to and structure for what’s become known as “total rewards” — the pay and benefits your employees can expect. By documenting the “why” behind your decisions, a compensation philosophy helps ensure that employees are rewarded consistently.

In their book It Doesn’t Have to Be Crazy at Work, Basecamp co-founders Jason Fried and David Heinemeier Hansson state their compensation philosophy with clarity: “Once every year we review market rates and issue raises automatically. Our target is to pay everyone at the company at the top 10 percent of the market regardless of their role. … Our market rates are based on San Francisco numbers despite the fact that we don’t have a single employee there. San Francisco is simply the highest-paying city in the world for our industry. So no matter where you choose to live, we pay the same top-market salaries.”

According to the QTI 2020 HR Trends Report, having a compensation/total rewards philosophy and communicating that philosophy to employees is vital to employee engagement. This transparency may increase employee perception of fair pay, which could in turn decrease the likelihood that employees will voluntarily turn over due to compensation. In QTI’s survey, 41% of respondents identified compensation as one of the top reasons for employee resignation; 85% of those respondents do not share with their employees how and why they make pay decisions.

In InterSector’s compensation and benefits survey, nonprofits with annual budgets less than $500,000 are far less likely than their larger counterparts to have such a compensation philosophy; only 10 out of 46 respondents (22%) who fell in this category said yes to this question. Of nonprofits with annual budgets greater than $500,000, 55% said yes.

Nonprofits interested in adding an executive director compensation policy will find a template from the National Council for Nonprofits in Nonprofit Next, a resource available for free to Fox Valley nonprofits through the Nonprofit Leadership Initiative, and for a $49/year subscription to other nonprofits.

For an example of a detailed, agency-wide compensation philosophy, visit Direct Relief.

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