Compensation Strategy and Organizational Mission

All organizations base their actions on goals that are either explicit or implicit. Strategic planning is done in well-managed organizations to ensure that current resources, financial, material and human, are used in the manner most effective to the organization's raison d'être. Organizations with effective performance appraisal programs will require individual employees to set performance objectives based on department goals, which in turn are driven by division and organizational goals. This “cascading” effect allows successful organizations to link broad, often ambitious, goals and values with the activities of their individual workers. Thus, ultimately the individual employee is responsible for carrying out the fundamental mission of the organization. Because of this, it is imperative that the rewards system be part of the nonprofit's strategy and plan and be consistent with the organization's goals, culture, and environmental pressures. Organizations need to decide where they want to go and how they will get there. Compensation is one of the many important cogs in the total organizational machine that must be carefully tended, frequently lubricated and repaired, and upgraded or replaced if it no longer functions adequately.

For example, an organization that is changing its organizational structure must ensure that its pay strategy fits these changes. The most effective pay for self-directed work teams is probably not a traditional salary program; careful analysis of the goals of the work teams and their structures, the reasons why teams are being implemented, and the pay strategy of the organization all must be considered to determine the best approach.

It is imperative that workers are paid for what the organization wants to reward. This obvious yet critical fact is illustrated by Steven Kerr's well-known article, “On the Folly of Rewarding A, While Hoping for B” which cannot be quoted too often:

A familiar example of this type of mistake occurred frequently in the early 1980s when employees were given regular, annual cost-of-living increases. Although high inflation demanded some salary escalation to keep workers even with living costs, organizations were in effect paying their employees to merely show up, whether or not they were performing in the best interests of the organization. A better way to use pay to accomplish organizational goals is to direct the largest increases at those workers who contribute the most, not equally to all employees regardless of their performance. Another more distasteful example was a situation at Green Giant, in which employees who were rewarded for finding insect pieces in the vegetables began importing “home-grown” bug parts in order to increase their incentives (as reported in Milkovich, Newman, and Gerhart, 2011).

The Need for a Rewards Policy

Environmental and market demands have significant impacts on reward systems. Organizations that have jobs requiring extremely high levels of technical skill and expertise, such as medical doctors or engineers, must design systems that reward these key positions adequately. Management needs to ensure that qualified people are attracted and retained, while at the same time carefully balancing pay relationships across jobs within the company to avoid inequity.

Edward Lawler (1990, p. 11) recommends that managers should develop an effective strategy “with an analysis of the outcomes or results they need from their pay system and then develop a core set of compensation principles and practices to support these directions.” Aligning the reward system, including compensation, benefits, and work environment factors, to the organization's mission and strategic plan as well as its management style is critical. Thus, before a reward program is seriously considered, the executives and professionals responsible for designing it need to evaluate carefully the organization's goals, values, culture, and strategy to ensure that rewards plays a key role in accomplishing organizational goals. The key point here is that the nonprofit's top management should carefully and strategically assess “What knowledge, skills, abilities, and outcomes does our organization need to reward?” This simple yet meaningful question should become the compensation manager's motto, continually guiding him or her in making decisions about the content and process of the organization's total rewards strategy.

One way that many organizations define their total reward strategy is through the development, communication, and maintenance of a reward policy. This is generally a simple, relatively short statement that communicates how the organization plans to reward people, including pay, benefits, and work environment characteristics, how the system will be designed and maintained, and the philosophy of what rewards are supposed to accomplish. Also included should be a statement expressing the organization's intention to treat everyone fairly and equitably, regardless of race, sex, religion, age, disability, color, national origin, and other protected classes relevant to local laws or organizational values or policies. Notably, 89 percent of Fortune 500 organizations, as well as some jurisdictions, include LGBT (lesbian, gay, bisexual, and transgender) as a group protected by their antidiscrimination policies (Human Rights Campaign, 2015) and, indeed, there are important business reasons to do so (Day and Greene, 2008). Although the organization's rewards policy should be brief, much care and deliberation needs to go into its development, since top management must make a commitment to staunchly adhere to its precepts to maximize employee trust. The reward policy should then be communicated to employees, along with other key policies.

Using Consultants

Before embarking on any major new salary or benefits program, the nonprofit organization should consider the value and cost-effectiveness of contracting with a compensation consultant. Organizations on tight budgets, particularly nonprofits, often fall into the trap of trying to save money by developing major programs in-house. If current human resources (HR) staff have the needed expertise, this may be the appropriate avenue to take. However, even if current staff are equipped with necessary skills, the following points should be considered.

First, consultants generally have a wide range of experience across a number of organizations and therefore may know what will work best for any unique organization. Compensation programs, especially benefits, are sophisticated and complex systems, and even HR professionals with basic compensation knowledge may not have the breadth and depth of knowledge to develop and install programs that are truly a “good fit.” Consultants are able to introduce innovative ideas gleaned from their work, and if they are strategically focused, will recommend the ones most suited to the organization rather than any current HR fad.

Second, consultants usually have access to a vast amount of salary and benefits survey data or have easily accessible sources and will be able to assess external competitiveness better than an organization can alone.

Third, because consultants have experience with other types of organizations, both in different sectors as well as multiple products or services, they often bring innovative and creative ideas that even the brightest HR manager within the organization wouldn't consider. They are paid for creating inventive, state-of-the-art solutions, so they may be able to generate cost-effective, unique ideas that will contribute to the organization's effectiveness or distinctiveness in the labor market.

Fourth, consultants are outsiders, and this gives them an extremely valuable commodity: objectivity. Since the consultant's salary will not be part of the new program, unlike the in-house executive's or HR professional's, he or she will be in a better position to tell top managers or the board of directors about unpopular or expensive issues (for example, critical positions that are dramatically underpaid relative to the market). Objectivity also is a great asset in explaining to employees why some jobs have been downgraded and that their topped-out employees (who are at the maximum of their grade and thus ineligible for salary increases) will not be receiving raises for the next year or so. Additionally, if the consultant is hired to conduct a specially designed salary or benefits survey, competitors may be more likely to participate and share their information, since the consultant provides a greater guarantee of confidentiality than a rival organization.

The major disadvantage of using consultants is of course cost. But keep in mind the observation cited earlier that wages often constitute over half of total organization expenses. Sometimes several thousand dollars in consulting fees is money well spent if it is able to provide the organization with a system that maximizes the value of the salary/benefit dollar.

To assist in-house compensation program development, HR professionals can gain useful technical knowledge through the certification programs of WorldatWork (formerly known as the American Compensation Association). These certifications cover everything from base pay to benefits to work-life rewards. Earning the “Certified Compensation Professional,” for example, consists of completing ten seminars and exams. Those serious about establishing, installing, and maintaining a state-of-the-art rewards program should investigate these.

Let us now turn to the components of developing a sound salary and benefits program. We will begin with base compensation, usually known simply as salary or wages. Executive pay and incentive programs in nonprofit organizations will be discussed before moving on to development of benefits packages.

“To Job or Not to Job”: Job- or Person-Based Systems

However, jobs provide a number of practical advantages. They also do not seem to be disappearing into the mists of time, since most organizations continue to use them (Giancola, 2007). The “job” concept often is superior to “non-job” models because of its ease in recruiting, conducting market analyses of competitors' pay levels, and training design. But it is generally true that many jobs have increased in flexibility and, in order to achieve their missions, small organizations usually require workers who are willing to wear a number of hats.

The point is that the way management views how work will be accomplished, as either carefully prescribed “jobs” or as more loose and flexible “roles,” will make a difference in the type of pay systems and procedures that should be developed. Thus, nonprofits should carefully analyze their organizations' characteristics, the type of work that needs to be done, and the type of people most likely to have these skills and decide to what extent work should be conceived of as jobs or roles. One way to conceptualize this question is to ask whether the organization wants to pay for a job to be done, in which the work requires a defined set of tasks and duties that are relatively stable—and for which a reasonable number of candidates in the labor market could be found to fill them—or if the work requires a person's unique set of abilities and skills for a variety of changing organizational needs. Generally speaking, this needs to be determined organization-wide, not job-by-job or person-by-person, so that the entire pay structure is coherent and consistent. Very small organizations, such as start-ups, often by necessity use roles because the work to be done is so variable and must be responsive to quickly changing environmental demands.

Since evidence suggests that organizations, for-profit and nonprofit, have not abandoned the convenience of the job, but rather have merely broadened its content and flexibility, the emphasis of this chapter is focused on more traditional job-centered compensation systems. For readers who believe a non-job system would be more workable for their organizations, most recent compensation textbooks contain descriptions of specific non-job techniques (examples include Bergman and Scarpello, 2001; Milkovich, Newman, and Gerhart, 2011).

Job or Work Analysis

As is true for many personnel practices (recruitment, staffing, performance management, training and development, and others), the foundation of salary systems is current, accurate, and thorough analysis of the work to be done. “Job analysis” consists of a variety of techniques used to observe, examine, record, and summarize the main components of jobs. Given the interest in person-based (role or “non-job”) approaches, techniques are now being developed to analyze the work accomplished in organizations outside of a traditional job context. For example, tasks within an entire department, system, process, or skill set may be investigated as the unit of analysis, where multiple people may do many interchangeable tasks (Milkovich, Newman, and Gerhart, 2011).

However, as noted above, most organizations have retained the basic “job” concept, and job analysis is still a useful term. Through job analysis, data on the content of jobs are gathered, evaluated, quality-controlled, compiled, and summarized (usually in the form of job descriptions) so that jobs are thoroughly and accurately understood. This somewhat time-consuming process is absolutely necessary for at least two reasons. First, accurate job knowledge is critical in establishing external competitiveness so jobs can be compared across organizations by their content (what the people actually do), not merely by a job title that may not truly describe it. Second, only by understanding jobs can the level of internal equity in the organization be assessed and, if necessary, adjusted. Internal equity involves comparing the organization's jobs, so it requires accurate and current job information be available in a useable format.

Job analysis can be conducted with a number of techniques, depending on its final use (job analysis is also used in designing programs for training, recruitment, and job design, among others). These techniques include interviews of incumbents and/or supervisors (either individually or in groups), observations of workers, highly structured questionnaires or checklists completed by the job incumbent (such as the well-known Position Analysis Questionnaire^®), or open-ended questionnaires completed by the incumbent, supervisor, or both. The questionnaire approach is most frequently used by small to medium organizations, since it allows data to be gathered easily and relatively cheaply. Open-ended questionnaires are typically designed by the organization so that the data gathered fit the values and goals of the organization—in other words, they should collect data on what the organization wants to reward. As will be discussed later often the compensable factors that will be used in the job evaluation process are assessed through this questionnaire.

Organizations that do not have the resources to engage consultants or lack the in-house expertise to perform job analysis may find useful open-ended questionnaires on public-domain Internet sites. However, it is critical to keep in mind two important points. First, job analysis, as mentioned earlier, should measure jobs (or work) in relation to what the organization wants to reward. Therefore, “off-the-shelf” techniques or questionnaires that don't really measure work in ways meaningful to the design of an effective pay system may turn into a terrific waste of time. Second, job (or work) analysis can become a highly charged emotional and political activity in any organization, particularly if the results are to be used for pay determination. When employees know that job analysis results may play a role in how their jobs are valued, they have a vested interest in consciously or unconsciously making their work sound as important and complex as possible. If they believe that the process was unfair, incomplete, or contaminated, serious intra-organizational problems could arise. Thus, it is strongly recommended that compensation experts be involved in this process as early as possible.

External Competitiveness

Since the mid-1990s, external competitiveness, or the need for organizations to identify their competitors for labor and set pay levels in response to them, has increased in importance. Several changes in the national (and global) economy have shifted the weight of pay system development from internal to external considerations. A primary change is that American organizations now recognize that they exist in a highly competitive labor environment. Indeed, even in times of economic downturn, the “war” for talent continues for many technical and highly educated workers. Given projections that KSAs in the American workforce will not meet organizational needs over the next few decades (Heneman and Judge, 2009), external competitiveness has moved to the front of the line in pay system design. Further, this increase in competition for highly skilled labor has discouraged workers from limiting themselves to one sector or another. Indeed, public-sector and nonprofit organizations may find themselves in competition with for-profits for the same people who previously saw themselves as nonprofit workers. Thus, the ability to understand the entire labor market, both for-profit and nonprofit, enables the nonprofit compensation manager to make informed decisions regarding total reward strategies. Finally, rapidly increasing technology requires hiring and retaining people with skills that are “market-driven.” As nonprofit organizations rely more heavily on automated information, Internet fundraising, and other functions, the need for the salary system to respond quickly and effectively to labor market forces is critical. Without adaptive systems to gauge and react to market changes, retention of highly skilled workers will be extremely difficult. To build a responsive, externally competitive system, we need to define our relevant labor market, identify the data we need, and decide how to use it.

Using the Data

Good salary surveys report several statistics for each job, usually including the average salary, weighted average, minimum, maximum, median (50th percentile) and perhaps other percentiles. Generally, the most important statistic in the salary survey is the weighted average, since it represents the average salary across all the surveyed job incumbents (not just across organizations), and thus better estimates labor market rates. Several points should be reviewed before using data from a salary source:

• How many organizations participate? Make sure the data represent a sufficiently large sample.
• Are the firms representative of the organization's relevant labor market(s)?
• How does the weighted average compare to the average salary? If they are dramatically different, it may mean that one very large organization's data are skewing the results, since weighted averages are weighted by the number of employees within each organization.
• How do the average and weighted average salaries compare with the 50th percentile (median)? Again, a large discrepancy could indicate a skewed distribution that may mean it is a nonrepresentative sample.

At least three different salary data sources should be collected for each benchmark job, more when possible. This helps to ensure that final market data averages are valid. Since survey data are collected at different points in time (high-quality surveys will cite the effective date of the data), data must be “aged” by a reasonable inflation factor so that all data are comparable. This factor should be based on the general increase in salaries and salary structures currently occurring in the market (sources for these statistics will be discussed later). Next, the individual data points for each job need to be checked to ensure they are within a reasonable range of each other; outliers, those significantly higher or lower than others, should be removed. Then data for each job should be averaged, after which the jobs can be arrayed in order of market value.

A useful means of evaluating the organization's current standing in the market is through regression analyses. Using job evaluation points (to be discussed later) as the independent variable (on the “x” axis), one regression line should be calculated with market average salaries as the dependent variable (on the “y” axis). This regression line should be plotted and compared with the regression line for which current salary is the dependent variable. By looking at the disparities between these two lines, the degree to which the organization conforms to the market can be ascertained. For example, such a comparison may show that the organization is paying competitively for lower level jobs, while upper levels jobs are being paid under their market rates (such as in Figure 23.1). Using these graphs to illustrate discrepancies helps explain compensation needs to decision makers, including boards of directors, who must consider economic impact. Especially when justifying radical departures from the organization's status quo, such as dramatic increases to formerly underpaid jobs, directors and other top decision makers are often understandably skeptical. Ensuring them of the veracity and legitimacy of the data may be imperative to getting the new program implemented.

The convenience of adopting a job-based pay program is clearly seen when trying to gather market data for a non-job-based pay program. Simply speaking, it is quite difficult to use market surveys to price “non-jobs,” because such surveys are not designed for this purpose. Flexible, unique, and highly adaptable “roles” defy collecting competitive salary data. Efforts have been made involving extrapolating key skills from job-based salary data, but this strategy, while theoretically workable, is time-consuming and difficult.

Internal Equity

Internal equity refers to the perception of fairness in pay for various jobs throughout the organization. In other words, in an internally equitable system, jobs that are of similar levels on key compensable factors, such as skill or knowledge required, supervisory responsibilities, accountability for budget and resources, complexity of the job, or working conditions, will be paid at the same general level. For example, a job of accounting clerk may require some post-high-school education or experience, knowledge of basic accounting principles, no supervisory responsibilities, and little accountability for financial resources. If this job is compared to a beginning employee benefits claim clerk, a job also requiring some post-high-school education or experience, basic technical knowledge, no supervisory responsibilities, and little accountability for financial resources, we would conclude that the jobs are essentially worth about the same to the organization. However, a custodian, as compared to those jobs, would probably not be valued as highly, since custodial work usually requires less education, technical knowledge, and experience. In an equitable system, these differences in internal job value would be appropriately reflected in the pay structure; in a system that is not equitable, the custodian may be paid the same or more than the accounting clerk or benefits claims clerk, or the benefits claims clerk may make significantly more or less than the accounting clerk. An important caveat here is that job evaluation addresses differences between job content, not employees' performance levels. We are interested in what the job requires, and not in what any particular individual might be able to do or how well he or she does it.

Internal equity is established using some form of job evaluation. This broad term describes a number of methods by which jobs are valued within the organization. Two of the most prevalent in small- to medium-sized organizations will be discussed here: slotting and point factor job evaluation.

External Competitiveness and Internal Equity: What Roles Should They Play?

The competitive pressures of the external labor market, plus the importance of creating organizations in which employees believe they are paid equitably, require nonprofit managers to carefully weigh the relative importance of internal and external equity. It is possible for organizations that do not have the need to attract the most highly skilled, specialized, or in-demand workers to find their needs better served by first ensuring an equitable internal hierarchy of jobs and then making sure that it generally matches the relevant market. Alternatively, organizations dependent on the attraction and retention of highly skilled workers will probably need to first focus on developing a system in which jobs are paid competitively and then work to ensure internal considerations are taken care of. As always, the mantra of “What is it that the organization wants to reward?” should inform and guide this strategic decision. It is upon this decision that the amount of market data needed and the complexity of the job evaluation procedure should rest.

Building the Externally and Internally Equitable Salary Structure

A salary structure creates a means by which pay is set and administered. It serves to integrate the organization's policies relative to external competitiveness and internal equity in a manageable system that sets minimum and maximum pay levels for jobs, thereby serving to ensure pay is within the range that supports the organization's rewards strategy.

Range Spread: Traditional or Broadbanding?

The range spread is the difference between the maximum and the minimum amounts paid for a job and is expressed as a percentage of the minimum. In older, more traditional salary systems, range spreads typically run from 35 to 50 percent, with the smaller ranges usually used for lower-level jobs. The rationale is that incumbents in lower-level jobs will stay in the range for less time than incumbents in higher-level jobs, since the lower jobs are less complex, easier to learn, and incumbents will tend to be promoted quickly to higher levels. However, in the last couple of decades, a useful concept called “broadbanding” has been adopted by organizations seeking to make their pay systems more flexible. Broadbanding collapses what would have been several grades into a broad “band,” creating a more flexible system in which the pay for jobs can be adjusted without reclassifying a position from one grade to another. Figure 23.2 illustrates this concept. Broadbanding also allows more managerial discretion, in that a manager has a wider range within which to pay people. Since a broadbanded system has fewer bands than there are grades in a traditional salary structure, it is easier to administer and maintain. While broadbanding may not formally assign a control point to the band, in practice there may be “zones” or “shadow ranges” within the band that are keyed to market rates (Klaas, 2002). In more traditional systems, salary grades group jobs together that are of the same value to the organization. In broadbanding, a certain amount of precision is lost, and jobs in the same band will differ more with regard to their organizational value than they would in a traditional system.

Broadbanding systems are useful when flexibility and nontraditional career paths (often referred to as “career networks” or “career lattices” to denote that “up” is not the only direction to build a career) are the preferred strategy of the organization. However, because there are fewer ranges and fewer minimum and maximum pay rates with which to control salaries, there is the risk of paying jobs under or over market rates. Further, the increased managerial discretion opens the door wider to potential for bias. As in all reward system decisions, the mission, organizational strategy, and rewards strategy need to be carefully considered in determining whether broad bands or more traditional ranges should be used.

Communicating Salary Plans

How much to communicate, to whom, and when, are important strategic decisions that need to be carefully considered. Recently, a small number of organizations have been in the news for dropping the traditional secrecy around pay and making information about the entire system, including individual salaries and bonuses, available to anyone in the organization. This is a radical step, and it should never be undertaken without a careful assessment showing the strategy makes sense given the pay system's internal equity, external competitiveness, and administrative soundness and the culture of the organization. Unless all of these are properly aligned, a completely open pay system risks disaster. While innovative management strategies focused on egalitarian information sharing might seem optimally aligned with openness about pay, the method of communicating salary plans must be carefully aligned with the strategy and culture of the organization.

An easier case can be made for making information about the entire salary structure (pay grades' minimum, midpoint, and maximum values) available to all employees. Theoretically, organizations build reward strategies because they will be motivational, and if employees don't know what the structure is, the motivational benefit may be lost. Knowledge of the earning potentials of prospective jobs to which individuals aspire may motivate them to acquire the necessary skills and experiences to secure those jobs. However, if such career options do not exist and the organization's culture does not support such disclosure, it should not be done.

Organizations have to make strategic decisions regarding how much information about the plan should be available to employees. Some public organizations, like federal, state, and local governments, are legally mandated to make data regarding all salary grades and ranges available to employees as well as taxpayers, and individual salaries levels can be easily discovered by an Internet search. Other organizations are more private, and some make discussion of individual salaries among employees a disciplinary offense (however, the legality of this approach has recently been questioned). Generally speaking, most organizations make information about the minimum, midpoint, and maximum of a salary range available to the individuals whose jobs fall within it. In this way, employees are aware of the earning power of their present jobs.

A conservative and common approach is to communicate the following basic information to all employees (Rubino, 1997):

• The employee's job description and how it was obtained (job analysis)
• The general methods by which jobs are evaluated
• The organization's strategy about how market data are collected and analyzed
• The organization's approach to relating performance to pay
• How performance is measured and appraised
• Administrative policies and procedures
• Benefit plans

Going into depth and specific detail about any of these elements should be discouraged, since reward plans are often complex and may be beyond the capacity and interest of most “lay” employees to understand. Introducing more information than is needed should be avoided, so employees are neither confused nor suspicious about how their rewards are determined.

Types of Incentives

Simple short-term bonuses are probably the most widely understood incentive. These bonuses are based on a measure of performance over which the employee has some level of control and can be awarded for individually based performance, or to groups, departments, or units, depending on the desired behavior. “Spot awards,” in which a supervisor allocates a small bonus to employees (usually $50 to $100, often given as a gift card) for excellent performance in isolated events, also can be powerful if carefully used.

Gainsharing programs require significant up-front design time, but may be more acceptable to board and public stakeholders because, in the nonprofit context, they focus on cost savings generated by employee performance. This type of program may be particularly appropriate for nonprofits that are experiencing unnecessarily high operating costs. While these plans vary widely in design, they nearly always include some employee-participation mechanism whereby employees' ideas and initiatives determine methods to save costs and encourage buy-in to the program. Usually, the organization will split the cost savings on an equal basis with the employees, and thus the plan benefits both the individuals and the organization. The major downside to this type of program is that it involves developing what can be a fairly complicated formula by which productivity gains will be measured, and this often requires hiring knowledgeable consultants to assist in the design and installation.

Nonprofit organizations considering incentive plans should ensure that they are in compliance with IRS regulations. While specific guidance is beyond the scope of this chapter, it should be noted that the IRS allows incentive plans as long as they do not violate rules that prohibit inappropriate private benefit or inurement by executives, managers, employees, or other insiders (Klein, McMillan, and Keating, 2002; also, see Chapter Two of this Handbook for general legal guidance on matters of private benefit). There are also Fair Labor Standards Act implications for U.S. nonprofits, since bonuses add to earnings and thus must be included in overtime calculations for nonexempt employees.

Benefits in the Rewards Policy

As discussed above, it is important for an organization to formulate a total rewards policy that explains what it is the organization wants its rewards system to achieve. Just as with pay and work environment considerations, the role of benefits in the overall total rewards system needs to be clearly articulated. Among the information that organizations should consider for inclusion in this policy are the following (McCaffery, 1983):

• The organization's desire to provide employees with meaningful welfare and security benefits
• The organization's intention to design benefits to fit employee needs
• The frequency and philosophy by which the program will be audited and evaluated in relation to costs, salary increases, and external factors
• The organization's desire to use benefits as a means to motivate and achieve desired levels of productivity
• How the organization plans to fund the benefits (most organizations offering benefits require employees to pay at least part of the cost)
• The organization's intention to communicate effectively, including to explain changes to benefits programs to employees
• The provision of individualized annual statements that explain to each employee the value and cost of their benefits, including the organization's contributions and the cost to employees
• The market with which benefits will be compared
• Any requirements for trustees and carriers to regularly (such as annually) submit detailed reports management and others
• The commitment that benefits plans will be evaluated regularly (annually or some other term) to ensure they meet the changing needs of the demographics of the employee group

Health Care

No U.S. reader of this book is unaware of the critical issues in health care that the United States has confronted during the past several decades. These continue to escalate and, at the time of this writing, the Patient Protection and Affordable Care Act that was enacted by the U.S. Congress in 2010 continues to be challenged, even though most of its provisions were substantially implemented by 2014. Given the structural and political complexities of the Act (often referred to as “the ACA”), and the fact that it is based on an employer-based health care system, it is beyond the scope of this chapter to discuss employer-based health care in any depth. The ACA was enacted as an attempt to resolve the two most difficult challenges confronting the United States: controlling health care costs and ensuring access to health care to all Americans, yet it is unclear whether the ACA will resolve these challenges to the degree intended. Regardless of one's position on this specific legislation, the process of developing solutions to these complicated problems has been and will probably continue to be painful.

Nonprofit organizations in the United States are challenged by both cost and access. They are challenged directly by the rising cost of providing health insurance and, indirectly, by the need to make the difficult decision of whether to provide health insurance or have employees shop for it via the federal or state health care marketplaces developed in many locations per the requirements of the ACA. When it comes to the question of whether to provide the insurance itself, an organization that has fifty or more full-time employees must pay a penalty for each employee it does not insure (National Council of Nonprofits, 2015). Further, it is important to know the details of this act and how its provisions are enforced, since the employment of multiple part-time employees can count as full-time and cause an organization to become subject to the law's provisions. The bottom line is that many nonprofits, like many small for-profits, simply cannot afford the expense of offering health benefits to part-time (or even full-time) employees. Notably, the ACA provides individual employees an opportunity to purchase insurance within one of these “marketplaces,” with the expectation that the cost would be lower than they would have paid before its enactment.

In the 1980s, one initial response to rising health insurance cost issues was the implementation of “managed care” programs by many organizations offering health benefits, both profit and nonprofit. This is a broad term for a variety of program types, ranging from Health Maintenance Organizations (HMO) to Point of Service Plans (POS) to Preferred Provider Organizations (PPO). In general, all of these types of programs require significant monitoring and management of individual health care occurrences, including ensuring that individual care selections are prudently chosen and that the costs associated with each occurrence are reasonable. Although there are many variations, generally speaking, HMOs require employees to choose physicians and other health care providers who belong to a network; POSs and PPOs reward employees who choose within their networks, but usually allow some coverage outside. In this way, employers can achieve reduced rates for medical services by either paying en masse for services or receiving discounts on certain procedures. However, most benefits professionals agree that managed care hasn't been the miracle cure for cost control that was hoped for (Employee Benefit Research Institute, 2009a).

Currently, many organizations employ more innovative measures to control costs, such as the use of “consumer driven” or “defined contribution” health care benefits. These are designed to push more decision-making responsibility about health care expenditures onto employees, through a variety of methods, from presenting multiple health care insurance choices to providing employees a certain amount of cash and letting them purchase their insurance privately. Most common among these methods, however, are those that utilize some sort of health savings account (HSAs) or health reimbursement arrangements (HRAs). HSAs are funded through a mix of employee and employer contributions and must be combined with high-deductible insurance plans. HRAs are funded solely by the employer and may or may not be paired with high-deductible insurance although, in practice, they usually are (Employee Benefit Research Institute, 2009b).

The basic advantages to organizations in all these plans are that employers' costs become more fixed and administrative costs are reduced. For employees, out-of-pocket costs may be higher, and they are required to better understand complex medical benefit plans and make more independent health care decisions.

Retirement Plans

In the past, organizations with retirement plans aimed to provide retirees with retirement income that was between 50 and 70 percent of their pre-retirement income. This was considered sufficient because, in retirement, work-related expenses are no longer accrued, employment deductions are no longer made, tax breaks give retirees a new advantage, and money is no longer being put away for retirement. However, recent experience suggests that most retirees now have little desire to scale back their lifestyles and, perhaps, even look forward to doing things they didn't have time to do earlier in life. Many financial consultants now recommend that future retirees plan to ensure a larger income, perhaps 80 to 100 percent of pre-retirement pay. Additionally, many retirees are living longer and need more funds for significant expenses (including, of course, medical expenses), for these longer retirements.

Retirement income in the United States usually is achieved through the coordination of payments from the Social Security system with income from retirement plans. However, Social Security's long-term future appears uncertain, given its projected underfunding in the coming couple of decades. This has been the focus of much political debate, yet little progress or change has occurred. Recently, a push from the political left has even demanded expanded benefits, while the efforts from the political right have been to rein them in. Proposals to make the program solvent in the future include decreasing scheduled benefit increases, changing the amount of contribution in relation to salary, and increasing the retirement age (Employee Benefit Research Institute, 2009c). It's likely a combination of these solutions will be implemented, and Americans need to be aware these changes will affect the amount and timing of retirement benefits they receive from Social Security.

All of these conditions and developments have significant implications for nonprofit organizations that wish to include retirement benefits as a part of their total rewards strategies and plans. Two general types of retirement plans exist: defined benefit plans and defined contribution plans. In the past, defined benefit plans were the norm for organizations that provided retirement plans. These plans define the income (the “benefit”) the employee would receive upon retirement, based on a formula that usually included the average compensation over all or a number of the employee's years of employment. These plans require extensive actuarial guidance, incorporating assumptions regarding employees' future earning potential, number of years until retirement, and other pertinent factors. The contribution the employer makes is determined through actuarial assessments and, often, these contributions would be supplemented by the employee. Because of the expense of these programs and the requirement of a fairly large employee base to ensure their affordability, they are becoming relatively rare in all but the largest nonprofit organizations, and their numbers are in fast decline in all sectors.

Defined contribution plans, on the other hand, define the amount (the “contribution”) that is put into some kind of investment vehicle for retirement. Therefore, the actual retirement income the employee will receive depends on the amount of the contribution and the success of the investment and is thus unknown, but the amount contributed to the plan by the employer is defined and limited. Often, the investment is contributed primarily by the employee with an employer match. These are commonly implemented in nonprofit organizations in the form of tax sheltered annuity programs (or TSAs) or so-called 403(b) plans.

Similar to 401(k) plans for for-profit employees, 403(b) plans and TSAs allow employees to reduce taxable income by contributing a percentage of their salaries on a pre-tax basis to one or more qualifying annuities and mutual funds. In 2016, individuals may contribute up to $18,000 a year, with a “catch-up” provision allowing employees aged fifty or over to contribute an additional $6,000 per year.

Currently, defined contribution plans are the preferred choice of most nonprofit employers. It is important that employees be aware of the financial risks of such plans and educated about their responsibility to participate. Estimates of actual U.S. participation rates in defined contribution plans vary based on who is doing the estimation but, regardless of the source, significantly less than 100 percent of eligible employees participate. The obvious resulting problem is that a number of Americans may be extremely underfunded for their future retirement. Some employers now offer automatic enrollment in which employees must “opt out” rather than “opt in,” which may increase participation. Also, many organizations offering defined contribution plans provide retirement or financial planning seminars to their employees many years before their normal retirement date to help them plan for retirement. This type of education, which generally is provided at no or low cost by providers, can assist employees in understanding the importance of investing, help them feel comfortable about their retirement prospects, and aid employers by increasing employees' sense of commitment to the organization.

Retirement plans for nonprofits in the United States, like those of for-profit organizations, are subject to extensive regulation by the IRS, the Department of Labor, and other regulatory regimes (especially the Employees' Retirement Income Security Act, or ERISA). The design and operation of such programs are well beyond the scope of this chapter. However, nonprofit executives and HR professionals who design or sponsor such retirement programs should understand that these types of programs are heavily regulated with active governmental oversight, and it is essential that they be prepared to comply with these complicated regulations.

A number of other unique and specialized benefits may deserve the attention of a nonprofit HR manager, particularly those of very large employer organizations, but space prohibits coverage of most. The Internet resource site for this Handbook provides a number of links to organizations and resources that have useful information. However, given their strategic importance, we will address two additional benefits that are common in the nonprofit employer world: programs that provide for paid time off, such as vacation and holidays, and programs that provide for the tuition reimbursements. These are covered in the closing section of this chapter.

Paid Time Off

Often nonprofit organizations can more easily offer paid time off than cash to reward performance. In today's business environment, employees view vacations, holidays, and sick leave as an employment right, and thus paid time off has become a standard part of the total compensation package. Determining the best mix of paid time off requires application of the same principles used to determine other reward components: internal equity and external competition considerations. The demographics of the employee base may affect the particular kind of paid time off employees prefer. Younger workers may prefer sick leave, personal time off, or family leave provisions in order to raise children. As employees age, there also may be more demand for family leave programs that allow middle-aged employees to care for elderly parents. However, as in all benefits matters, caution is advised about making unfounded assumptions based only on demographics. The best way to determine employees' preferences is to ask them, using surveys or other methods. Questions regarding preferences regarding paid time off should be included in any employee surveys or focus groups the organization uses.

Competitive market pressures also must be taken into consideration. For example, one nonprofit organization gives its employees all working days between Christmas and New Year's Day as paid holidays because a major for-profit employer a few blocks away does so. This example reflects the necessity for nonprofits to be aware of the time-off policies of organizations with which they compete for labor. All organizations should carefully evaluate what their particular labor market implications are offering before setting their own policies.

Most American employees in medium and large organizations receive an average of nine paid holidays per year, ten days of vacation at one year of service, increasing to nineteen days at twenty-five years of service (Society for Human Resource Management, 2014). Some organizations also offer floating holidays, or days that change depending on the calendar and the needs of the organization. For example, if Independence Day falls on a Thursday, Friday may be given as a “floating holiday” to create a four-day weekend that many employees will value.

Many organizations now offer what is frequently referred to as “paid time off” (PTO) or “personal days,” often in lieu of separate hours for specific categories such as sick leave, holidays, and vacation (Cyboran, 2008). Policies regarding amounts vary substantially, but PTO offers a specific number of days that the employee may choose to take off for any personal reason, from sickness to birthdays to “mental health days.” However, when PTO days are used up, additional time off for illness or any other reason must be taken without pay. The theory behind PTO is to encourage workers to take responsibility for their time off and to manage it in a way that fits their needs, whether it is to care for sick children, take the dog to the vet, go to the dentist, or perform any other necessary personal business. Such programs can be effective in improving or maintaining trust in and commitment to the organization, but must be carefully designed reflecting employee preferences and historical absence data so the program is as effective as possible.

There are other paid time off decisions to be determined by the organization as well, including policies regarding jury duty, military leave, and bereavement leave. Additionally, plans must be carefully formulated to ensure that policies deal fairly and appropriately with overtime pay, shift differentials, incentive pay, status of paid time off provisions during probationary periods, accrual of time off not used, and other relevant issues. Of course, in the United States, paid time off policies need to be coordinated with Family and Medical Leave Act (FMLA) requirements as well as the Uniformed Services Employment and Reemployment Rights Act (USERRA). In Europe and many other parts of the world, similar types of governmental policies and requirements exist and must be taken into account as paid time off policies are developed and implemented.

Tuition Reimbursement

About 80 percent of all U.S. companies provide tuition reimbursement (Ziehlke, 2004). Many of these organizations provide tuition reimbursement only for their employees who are pursuing degrees. Most require the student employee to receive satisfactory grades as well as to be working on a degree that is somehow related to his or her current employment or reasonably imminent promotional opportunity. Just as all compensation components need to be integrally linked to the organization's mission and strategic plan, tuition reimbursement programs should be carefully geared to some kind of career development philosophy that helps accomplish the organization's human resource strategy. In other words, nonprofits with limited resources need to understand what they are purchasing when they financially assist their student employees. It could be simply employee goodwill, recruiting a generally younger group of workers, or a more strategic goal of educating workers to fill needed professional roles or become more proficient in the use of new technologies, as identified in the human resource planning process. As with any expenditure, management should direct its tuition funds deliberately.

Communication of Benefits

Although effective communication is essential in nearly all aspects of human resources, there may be no other area so critically dependent upon communication as the benefit program. Although ERISA requires employees receive an annual summary plan description covering retirement benefits, this is not sufficient. Not only do employees need to know what their benefits are in order to effectively utilize them, but ensuring that they understand them is the only way for organizations to truly gain the “bang” for their benefit bucks. After all, both profit and nonprofit organizations spend an enormous amount of money on benefits. To obtain the optimum level of motivation and commitment from employees requires communicating the value of what they are receiving. Indeed, implementing a good benefits communication program has been shown to increase employee satisfaction by 40 percent (Kislievitz, Debgupta, and Metz, 2006). Havely and Levin-Scherz (2015) offer the following five principles for an effective benefits communication program:

1. Employ a total rewards focus in benefits communications. Help employees understand how benefits fit into their full rewards package.
2. Be consistent in overarching messages. Stress the overall purpose and strategy of the behaviors and motivations the benefits and total rewards strategy seek to encourage.
3. Target communication to unique segments of the workforce and retirees. Benefits communication is more impactful if employees see how it affects them personally.
4. Reach the audience through a variety of media, but be mindful of the message. Make sure electronic communication reaches all audiences, and make the communication mode interesting, but make sure the information communicated is on target with the strategy.
5. Measure and modify. Make sure the benefits communication is doing what it's designed to do. Goals and timetables for any communications strategies should be measureable so the program can be evaluated and improved.

Other useful recommendations are to seek input from employees and guide communication strategies around what they want to know; consider “events-centered” communication points, such as hiring, promotion, anniversaries, and so forth; test communication materials to ensure they are understandable by all employee groups; enhance employee trust by using effective and credible communicators, such as nonsupervisory benefits professionals; and ensure the communication budget is adequate (McCaffery, 1992).