How Optimizing Executive Compensation Boosts Recruiting at Nonprofits

The “Great Resignation” hasn’t bypassed nonprofits. In fact, the new realities of the labor market may have hit the sector harder than most industries.

Much of the attention to this problem has been focused on lower-paid employees,¹ with nonprofits reporting high vacancy rates throughout 2021.² But with wages rising across the board, nonprofit boards need to consider how to attract and retain executive leadership at their organizations.

It’s difficult for nonprofits to keep up with salaries at for-profit companies, but they can develop compensation strategies to help level the playing field.

Compete but don’t overpay

In executive compensation, nonprofits need to know what peer organizations — both for-profit and nonprofit — are paying top management and what benefits are standard.

The governing board needs compensation data from comparable organizations to ensure it is providing reasonable compensation. That data should be a starting benchmark for nonprofit executive compensation.

Nonprofits rarely can compete with private companies on salary. What’s more, paying too generously for an executive can draw scrutiny from the Internal Revenue Service as well as donors.

However, nonprofits can compete in other ways. A bonus structure with incentives will make a nonprofit more appealing, as will an attractive package of insurance benefits covering life, disability and long-term care.

In addition, an effective deferred compensation plan tailored to an individual’s circumstances can provide valuable tax benefits.

It’s all about tailored benefits

Depending on an organization’s needs and its status — for instance, its status under the Employee Retirement Income Security Act of 1974 (ERISA) — it might want to explore a 457(b) top hat plan or a 457(f) plan for executives.

Some types of nonprofits can also have 403(b) plans, which can be subject to ERISA, but they are exempt from top heavy and Actual Deferral Percentage testing.

Each type of plan has its own nuances and advantages. However, both are exempt from ERISA’s non-discrimination testing and provide employers customized compensation plans that balance an organization’s goals with the preferences of an individual executive.

Tailoring benefits for executives like retirement plans is key, conferring a competitive advantage in recruiting and retaining talent. For instance, one potential high-ranking employee may be concerned about tax efficiency in a retirement plan, while retirement catch-up options are more important to another candidate.

It’s important to have strong communications between potential and existing nonprofit executives and their governing boards to optimize compensation. To tailor an executive compensation package like described above, the board has to understand what each individual needs, wants and expects.

Clear communication is essential to learn about the goals and priorities of the organization and the individual, set realistic expectations, and provide give and take in negotiations.

Be mindful of the organization’s mission

The organization’s responsibilities and mission need to be considered in executive compensation, so that any executive compensation package is appropriate and furthers the nonprofit’s goals.

And in these times, it’s important for nonprofits to emphasize an executive’s quality of life in recruiting and retention. Employees value flexibility more than ever and potential executives may be seeking a role far removed from the overwhelming grind of the for-profit world.

Being the leader of a nonprofit is stressful, of course, but usually does not have the same level of stress as being a leader of a public company. That in itself is a power recruiting message.

Contact HUB to speak to a retirement specialist and learn more about HUB Retirement Services.

This content is for general information only and is not intended to provide investment, tax or legal advice or recommendations for any particular situation or type of retirement plan. Please consult with a financial, tax or legal advisor on your own particular circumstances.

HUB Retirement and Private Wealth employees are Registered Representatives of and offer Securities and Advisory services through various Broker Dealers and Registered Investment Advisers, which may or may not be affiliated with HUB International. Insurance services are offered through HUB International, an affiliate

¹ New York Times, “As Workers Gain Pay Leverage, Nonprofits Can’t Keep Up,” December 23, 2021.
² National Council of Nonprofits, The Scope and Impact of Nonprofit Job Vacancies, November 15, 2021