One of my clients -- to whom goes full credit for every good idea in this post, but whose identity I am respectfully keeping confidential -- introduced me recently to an highly effective incentive plan design that other nonprofits may want to consider.
This is a fairly large nonprofit -- expense budget well over $100 million per year. Their incentive plan covers all the key executives reporting to the Chief Executive Officer, about eight in number. The target incentive is 3% of base pay -- it does not vary by position or level -- and it is an "all or nothing" incentive: an incentive bonus of 3% of base salary is earned or there is no payment.
For each participating executive, there are three performance criteria, all linked to the strategic plan. The first criteria, given a third of the performance weighting, is based on meeting the overall organization's financial operating budget for the year. The second and third criteria differ based on each executive's responsibility, but each relates to specific strategic plan goals and each is weighted at one third of the total performance rating.
At the end of the year, performance for each executive is ranked against the criteria using a 5 point scale, in which point 3 is meets expectations, 4 is exceeds expectations, and 5 is far exceeds expectations. An executive's overall ranking must be 4.0 or above to receive an incentive. If this threshold is met, an incentive bonus of 3% of base salary is awarded. If not, nothing is paid.
Why do I like this plan?
- It is a true incentive. This organization sets stretch performance goals, and pays incentives only when performance is truly above average. To this point, only 3 in 8 eligible executives received awards last year, and it is unusual for any given executive to receive an award more often than one year out of three.
- The target amount of the incentive -- 3% of base pay -- is not so large that it would encourage setting unrealistically low targets or fudging the numbers to achieve goals. The awards are meaningful -- $3,000 to $6,000 typically, when earned -- but not life changing. So top management can assess performance honestly, without the pressure that the potential for very high awards can sometimes bring.
- Management at this organization is always focused on what's right in terms of achieving mission, rather than what will produce year-end incentives. They value the incentive program, but its mechanics and opportunity are not such that it would ever distract them from acting on the best interests of the institution.
I recognize that some nonprofits pay much larger incentives and that others believe that incentive compensation has no place in the nonprofit community, and that both views have merit. However, if your organization has been considering incentives, modeling a program on the one described in this post would likely be a good way to start.
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