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Want to better compete in the labor market? Now is the time to review compensation

Oct 10, 2022

While nonprofits are able to distinguish themselves as mission and value-based organizations — a differentiator in the market — all organizations in today’s competitive labor market are struggling to attract, retain and motivate talent.

So how does a nonprofit compete in an intense labor market with increasing wage pressures and competitors coming from previously unlikely sources (e.g., restaurants, hospitality, retail, fast food restaurants and distribution centers)? By proactively and intentionally creating an environment that retains existing talent and attracts new employees. One of the top decision points for employees when determining whether to stay or seek a new opportunity is compensation and employee benefits.

Reviewing your pay practices

Fair, equitable and consistently administered pay practices are imperative. Effective pay practices include performing an evaluation of your current pay practices relative to the market, building a competitive compensation structure, creating a strategy to address pay inequity, conducting a benefits review, and establishing the foundation for continued pay equity moving forward or affirming that your pay practices are indeed equitable across the organization.

Philosophical questions to consider to help you get there include:

  • What is your compensation philosophy and supporting policies?
  • What is your position on pay transparency? What degree of transparency will you have when communicating pay decisions with employees?
  • How are you going to compete with retailers, manufacturers, and other industries whose base wage is steadily increasing?
  • What is going to be your minimum wage level? How does that compare to the living wage in your area?
  • How are you going to release the inevitable wage compression that is occurring due to market pressures?

Here are next steps your organization can take:

Explore shifting funding towards talent

Nonprofits should shift the focus from using available dollars for programming to investing in their most important asset: their people. In this tight talent market, it may be beneficial for your organization to pay slightly higher wages, not only to compete in the market and help staff reach living wages but also to combat some of the expenses of constantly managing employee turnover costs (e.g., recruiting, onboarding, training, etc.).

In a memorandum issued by the Office of Head Start on September 12, 2022, programs are encouraged to look holistically at their organizational structure and identify ways to stabilize their workforce. The article suggests programs should use thoughtful, data-informed strategic planning to support workforce compensation strategies, such as permanently increasing compensation through wage comparability studies; offering financial incentives in the form of bonuses, short-term pay increases and other financial incentives; compensating staff during emergencies, closures and transitions; and continuing to pay health insurance premiums when staff are furloughed (e.g., during winter and summer breaks).

The U.S. Department of Health & Human Services has also provided compensation, benefit and incentive resources, as well as state/local specific examples to assist program efforts with recruiting and retaining a strong workforce.

Conduct a pay equity analysis

A pay equity analysis will help you determine whether your current compensation structure is competitive within your industry and markets. Organizations may consider completing an internal equity analysis, as well as engaging with an independent third party to conduct an external market analysis.

  • Internal equity analysis: The internal equity process helps to determine the relative value of each position within your organization and allows you to compare a position to every other position in your organization. This process is unique because it helps your organization identify positions that may look very different in terms of roles and responsibilities as having comparable internal value.
    When undergoing an internal equity analysis or job evaluation process, it’s important to use an objective evaluation process that supports the Equal Pay Act’s compensable factors, such as education experience, skills, responsibilities, working conditions and physical/environmental demands.
  • External market analysis: As a best practice, organizations should consider working with an independent third party to conducting an external market. They are able to bring an outside, objective view that is not influenced by the faces, names and backstories of employees, building credibility for the overall compensation system.

The third party should use reputable, published wage and salary survey data as the foundation of their analysis and use demographic factors (e.g., geography, budget size, number of employees) that are meaningful to your organization. It’s critical that job descriptions are the foundation of the analysis and not the incumbent or job title of the role, so ensuring current and up-to-date job descriptions is critical.

Use current and relevant market data to design (update) your salary structure

Salary structures are an important element of effective compensation programs and help drive appropriate pay levels for groups of positions that are deemed similar, either by the external market analysis or during the internal equity review process.

When letting the market analysis drive the development of your salary structure, it is best practice to use the 50th percentile when setting your range midpoints. This is because 50% of the pay rates reported are below the 50th percentile and 50% are above it.

Due to the highly competitive market, where organizations were previously able to review their salary structures every two to three years, today, most organizations are reviewing their salary structures and pay ranges annually to drive equitable and competitive pay for their employees.

Conduct a comparative-ratio analysis

A comparative ratio (compa-ratio) analysis evaluates individual employee pay in consideration of the respective pay range midpoint within the salary structure. This is a critical step in determining equitable pay between employees as several factors, including hot jobs/hot skills, rapid growth, the tight labor market, minimum wage increases, talent and skill shortages, are related.

The quickly increasing higher rates of pay can also create compression issues within an organization. Not only should organizations pay competitive wages, but they should also look to identify and address wage compression. Considerations for releasing compression could include performance, overall length of service, time in role, other measurable factors important to the organization and/or a combination of factors.

Tips for addressing pay compression:

  1. When/where you find compression, address it. Don’t sweep it under the rug. Being proactive vs reactive will allow your organization to address compression before employees start talking about it.
  2. Instead of hiring new staff on at higher rates of pay, consider leveraging sign-on bonuses (or retention bonuses for existing staff) as mentioned in the June 2022 Office of Head Start Information Memorandum.
  3. Create hiring budgets and review pay equity within a role/job family before any open roles get to the job offer stage.
  4. Have administrative compensation policies in place that specify how various employment circumstances will be handled. For example:
    1. Bring new hires into the organization at/above the range minimum if they do not meet all of the position qualifications.
      1. Once qualifications have been obtained, move to pay to 90% of the midpoint.
    2. Bring new hires into the organization near/at the range midpoint if they have all of the position qualifications.
    3. For fully proficient employees, after 1-2 years of service, move them to/beyond the range midpoint — paying higher in the pay range — resulting in a higher compa-ratio. Not only will this drive competitive pay, but it will also create room to bring in new hires lower in the range, maintaining pay equity and continue to alleviate compression.

Complete a review of your current benefit offerings

Aside from comparing your benefits to market-based research, the best way to determine whether your offerings are serving your employees’ wants and needs is to obtain employee feedback through a confidential survey or needs assessment. The simplest way to do this is to add few survey questions to any engagement survey you are already administering.

In conjunction with obtaining employee insights, you also may want to conduct a utilization review of each plan/offering to help determine which benefits employees actually use.

To assist your employees in understanding the benefit options, communicate your offerings on a regular basis, including the alternatives and differences between options. It is also recommended that you communicate the monetary value of your benefit offerings to employees, so they know how invested your organization is in their health and wellbeing.

Need help?

Wipfli has developed a free sample RFP to assist nonprofit organizations with securing a third party to help them analyze their organization’s compensation structure and practices. Feel free to use this tool in its entirety or edit it to ensure it reflects your organization’s needs when seeking professional services.

Consider sending your RFP to Wipfli, as we are ready to assist.

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Paige Oveson, PI, CMA
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