Compensation conundrum: mixed reports make compensation expectations tricky.

ASSOCIATIONS' NET REVENUES--THE DIFFERENCE BETWEEN an organization's total revenue and its total expenses--have fallen since 2000 as a result of conditions endured by the broader U.S. economy. And yet several recent studies find that executive compensation has shown rather dramatic increases. According to the 12th edition of the Operating Ratio Report, released in December 2003 by ASAE, associations on average recorded net revenues of -1.4 percent during the most recent fiscal year, down from a net profitability of 4.8 percent in 1999.

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At the same time, executive salaries at the nation's largest nonprofit foundations and philanthropies continued to rise, with a median salary increase in 2003 of 4.3 percent--nearly twice the 2002 inflation rate of 2.4 percent. The findings, reported in the 12th annual survey of compensation and benefits by The Chronicle of Philanthropy, show continued growth in executive salary and benefits despite the sluggish economy, layoffs, and program cutbacks at many charities and foundations.

Other surveys--of a more diverse group of nonprofit executives hailing from trade associations, professional societies, as well as charitable groups--report mixed findings. Compensation surveys concluded in mid- and late 2003 by the Greater Washington Society of Association Executives, Washington, D.C., and the Canadian Society of Association Executives, Toronto, reported significant pay increases, particularly at the CEO level. Median compensation for chief staff executives in the GWSAE survey (which surveyed executives in the District of Columbia, Maryland, and Virginia) was $203,030, up 16 percent from 2002. For Canadian association CEOs, the average cash compensation totaled $97,349 Canadian (with additional nonmonctary benefits averaging $21,600), which represented a 7.4 increase over the 2002 average, "by far the biggest average annual increase in the sector since 1996," according to the survey. At the same time, Compdata Surveys (www.compdatasurvey.com), a compensation and benefits survey data provider in Olathe, Kansas, reported significant declines in nonprofit CEO base salaries and total compensation, with an average drop of 2.7 percent in base salaries nationwide and a 7.1 percent drop in total compensation. In addition, the survey, which is conducted annually in 37 states and represents responses from 259 nonprofit organizations, also indicated a decrease from 71 percent to 52 percent of nonprofit organizations offering long-term incentive plans to executives.

So, "What gives?" you might ask. "Why the conflicting and sometimes counterintuitive figures?" Clearly, regional differences play into the answer. The Compdata survey, for example, reported the greatest declines in top nonprofit executive salaries in the central region, which it defines as Illinois, Indiana, Iowa, Michigan, Minnesota, Missouri, Nebraska, Ohio, and Wisconsin. And the GWSAE survey is centered in the Washington, D.C., area. ASAE's next association executive compensation and benefits study, due out later this year, may shed more light on the facts and figures that ASAE members look for: data on salary levels and employee benefits for numerous executive-level positions in trade associations and individual membership organizations nationwide. In the meantime, executive recruiters, compensation consultants, and a lawyer specializing in negotiating nonprofit executive contracts identify the latest trends in association executive compensation and offer some advice for contract negotiations and for getting the most out of budgeted salary dollars for staff.

Benefit basics and beyond

It remains generally true that the levers for executive compensation and benefits, as reported in ASAE's 14th edition of the Association Executive Compensation and Benefits Study (2003, ASAE), include gender, total association annual budget, total association staff size, geographic location of organizations, and membership type. Basically, it boils down to the bigger the budget, staff, and responsibility, the larger the compensation package. And unfortunately, women continue to be paid less than their male counterparts, although the Canadian study reported that the gender gap had narrowed considerably--with male CEOs averaging 33 percent more in compensation than female CEOs compared with an average of 41 percent more in 2001. Last year's ASAE study showed even greater disparity in 2002--with median compensation for male CEOs at $147,085, approximately 50 percent higher than that of female CEOs, who earned $98,108.

Apart from these usual compensation drivers, executive recruiters and compensation experts are seeing more emphasis on performance measures as they relate to compensation. Bob Jones, senior vice president and national director of compensation consulting, Aon Consulting, Chicago, says, "We're seeing increased emphasis on payment for performance. Ten years ago, some not-for-profits admitted that they needed to run more like businesses. And now we actually see increased professionalism and more effective leadership as a result of educational efforts, market pressures, [and] the ongoing war [for] talent. That has created an understanding that nonprofit entities can be more profitable for their exempt purpose and can actually provide more service for their members if they are run more entrepreneurially." Because of the need to attract leaders who can drive revenue-creating services, Jones says, many mid-career executives are being sought from for-profit businesses. As a result, deferred compensation (to deliver a meaningful replacement ratio of post-retirement income) is increasingly important to the compensation mix of base salary, bonus, and long-term incentives.

James Zaniello, director of organization and executive development, Association Strategies, Inc., Alexandria, Virginia, also observes that "organizations are as focused on an experience set as they are on how an individual will fit into an organization's existing culture. There's been a bit of a shift--and perhaps the search committees are placing more emphasis on questions related to experience than they did in the past." In addition, says Zaniello, "this focus on performance is indicative of the fact that during the last 5-10 years associations have worked hard to create specific cultures, and now that this has helped move their industries or professions forward, they understand that even greater success comes when you combine the leader's experience in a similar culture with performance in a job requiring a similar skill set."

In the end, says Paul Gavejian, managing director, Compensation Solutions, LLC, Stamford, Connecticut, "there is a need to keep the compensation flowing. Even though we've seen in the past couple of years that not-for-profit organizations are paring down their annual conferences, contributions are down, and salary budgets remain lean, good executives take their jobs seriously, and often their boards want to keep them in place. So, the way that organizations are finding to do that is through some form of incentive or variable pay that's tied to performance."

Boosts in bonuses

In a world of shrinking salary budgets, bonuses--often based on overall organizational performance, nondues revenue programs, and cash flow resulting from for-profit subsidiaries--have taken on a greater significance. This, according to the consultants interviewed for this article, holds true at both the executive and staff levels.

Executive opportunities. Gavejian, who consults with many nonprofit compensation committees as well as their executives, found in his company's 2003 Not-For-Profit Compensation Survey, published in December, that two thirds of the organizations represented in the entire survey sample provided bonus opportunities at the executive level.

Zaniello has observed a similar trend in providing executive bonuses. "When organizations are recruiting for the [chief staff executive] spot, they try to be as competitive as they can, because they want to attract the right level of talent. In situations where organizations have not had a bonus program in place--either for the CEO or at all--they are often interviewing individuals who have had that type of compensation elsewhere. So, at the negotiating stage, they may be addressing the bonus idea for the first time."

Often, says Zaniello, they will put the bonus arrangement in place for years two and beyond, so that the first year for the CEO is focused more on building relationships; getting to know the association, its members, and staff; and understanding the environment, rather than focusing on pay for performance.

For senior management staff, Zaniello hasn't noted a significant shift toward bonus programs, "It's harder," he notes, "for organizations to put that in place when they are filling a senior staff spot if [the bonus program] doesn't already exist, because putting something in place for one [person] means that you really need to address it across the board." Areas of nondues revenue, membership, educational programs, and products, says Zaniello, are sometimes exceptions to the no-bonus barrier.

Jed R. Mandel, a partner with Neal, Gerber, and Eisenberg, LLP, Chicago, is also seeing executive employment contracts that are more creative in terms of compensation. For example, says Mandel, "if someone is the CEO of a 501(c)(6) association, [he or she] may also be providing services to the related foundation, the political action committee, or the for-profit subsidiary." While compensation for these activities may not be structured as bonuses, the executives are accruing salaries from all of these different groups, so compensation gets broken down into smaller pieces. (For more on negotiating executive contracts, see "Don't Ask, Don't Get," on page 53.)

Staff staying power. "This is the first year in the past 10," says Aon's Jones, "that the median average budget for salary increases is below 4 percent for the industry. For example, I talked with an organization recently that had established 2.5 percent for regular increases and 1 percent for a promotion or merit pool. We're seeing a desire to separate thoroughbreds from employees who are less committed."

Another of Jones's clients identifies employees as A, B, or C players. The A players are in the top 10-15 percent of the bell curve in terms of productivity. "Those individuals," says Jones, "are eligible for more robust rewards in terms of increases and bonuses than the rest of the pool." Individual payouts depend on the success and financial strength of the organization each year, but Jones says that studies show that as many as 50 percent of associations have some kind of annual incentive programs.

Gavejian sees similar salary statistics in the organizations on his client list: "Average increases in staff salaries are holding at 3-3.5 percent." Organizations that are budgeting 4 percent, he says, are basically trying to catch up for several years of offering less. "They recognize," he says, "that there is going to be a pop in the employment market at some point, and providing 4 percent increases is the very least they can do to retain their top performers right now."

Where Zaniello and his colleages have seen organizations offering mainly bonus programs that reward all employees, Gavejian sees a shift to alternatives for cost-of-living or merit increases, with some organizations keeping salaries static and putting the 3-4 percent salary budget into an incentive pool geared more to individual performers. "The employee won't see a salary increase this year," he says, "but he or she will have the possibility of perhaps a 5 or 10 percent bonus based on performance." Gavejian points out that in such an arrangement the employee gets a greater compensation opportunity, while the organization doesn't have the fixed cost that goes onto its books and affects all of the salary-pegged benefit programs.

No matter how you decide to structure an organizational incentive plan, says Christina Greathouse, partner, Strategic Performance Group, Vienna, Virginia, "as with all other human resources initiatives, incentive compensation should be strategic. That is, it should support the association's objectives and culture, as well as enhance individual and/or team motivation and performance." Greathouse adds that the most powerful incentive plans that she has seen--at both not-for-profits and corporations--combine those two elements in their payout criteria, "Goals are established based on what the organization thinks is important," she says. "For example, if the association wants to be a leader in quality, customer service goals are emphasized."

Deferred compensation duels with IRS rules

"Association executives are seeking deferred compensation more today than in the past," says Zaniello. And, while not all organizations have been in a position to offer such benefits, when they seek a CEO to take them to the next level of organizational development, it is certainly an opportunity for them to review their overall performance structures.

Jones pairs the increased emphasis on deferred compensation options in part with the increased quality level of the nonprofit executive. More and more you are seeing "a better bred manager--one who has significant experience in many of the relevant areas that are required to be a leader," he says.

Gavejian also sees a focus on executive benefits as well as total compensation packages. "Organizations are paying attention," he says, "to how to offer [executive benefits] in the form of nonqualified deferred compensation of some sort without making it seem to the Internal Revenue Service as an 'excess benefit.'" (For details on intermediate sanctions--penalties imposed by the 1996 Taxpayer Bill of Rights 2 (TBOR2) on excess-benefit transactions for most 501(c)(3) and all 501(c)(4) organizations, see the "Legal" column, "Understanding Intermediate Sanctions Rules," in the August 2003 issue of ASSOCIATION MANAGEMENT.)

Justifying benefits. Gavejian indicates that his organization is doing much more in the way of CEO pricing, a process by which his group reviews the entire compensation package, including nonqualified deferred compensation, being paid to CEOs of 8-10 peer organizations and then reports back to the client's board of directors. "The result is what's called a TBOR2 letter that discusses the total compensation package of the executive and how it compares to that of the CEOs of the peer organizations. It's like an insurance policy," says Gavejian, "that satisfies the intermediate sanctions requirements by establishing the 'presumption of reasonability.'"

Jones has also seen more market pricing (comparing CEOs' compensation and benefits) going on as a result of intermediate sanctions rules. "I think that there is a heightened level of concern about excessive amounts of compensation," he says. "But the best protection for boards and senior staff has always been good governance and good market pricing efforts on a timely basis with periodic updates."

Ultimately, it's the most controversial or visible benefits that are likely to disappear from compensation packages first, says Mandel of Neal, Gerber, and Eisenberg. For instance, "having a driver and limousine; it's the showy kinds of perks that just seem exorbitant."

Preparing boards. Cautious compensation committees are in part a result of the recent Sarbanes-Oxley regulations imposed on for-profit companies. It hasn't gotten past many nonprofit groups that New York State Attorney General Eliot Spitzer has them in his sights for similar rules. Gavejian thinks, however, that some nonprofit organizations may be taking the "corporate governance thing a little too far. Boards of directors have formed audit committees that actually meet more frequently than the executive committee. Unless your organization is under constant scrutiny by the [Internal Revenue Service], then every two years--or perhaps every three--may be often enough to put the CEO pricing letters in the file."

Jones points out: "It hasn't been lost on the world that Philadelphia's Drexel University was one of the first nonprofit organizations to adopt the New York Stock Exchange recommendations in toto for its compensation committee. And in our practice, other not-for-profit organizations are beginning to adopt parts or most of the recommendations that for-profit entities are required to do."

Economic thaw--or not

As for the economic recovery and its implications for compensation and benefits, reviews are mixed. Says Gavejian, "There simply has to be a big bubble of hiring that occurs sometime this year, because business is increasing in volume--company revenues and orders are building. And that's not just in manufacturing but in the kinds of things that hospitals do, that trade associations do, that their members want them to do." You can't do that with a limited number of people, he says, and the staffs of some of these organizations are stretched to the limit right now. Does that translate into a more competitive job market with pumped-up salaries? "That's a tough one to call," says Gavejian. "The pent-up supply of lots of people who have been out of work for a long time may mean that people will take the job at whatever it is paying now simply to get back to work."

And back to those bonuses: Greathouse of the Strategic Performance Group finds that "in addition to rewarding performance, incentive compensation can enhance recruitment efforts as well as retention--both of which create value for the association." So, if you've been keeping up with that part, your employees may feel fairly compensated and not so ready to bail when the recovery comes.

In any case, for association executives, the situation is an interesting one. On the one hand, Jones reports that turnover at the executive level is minimal--if only because "it's such a complex [process] to find the right person. Once the compensation committee has found the right person, they tend to want them to stay for awhile." On the other hand, Mandel says that it's job security that has been the big deal in executive contracts. And, the Compdata survey, while finding that executive perquisites remained static from 2002 to 2003, also reported that outplacement services are being offered by 5 percent more organizations.

Likely, it's the smart executive who builds some protections into his or her contract and continues to build on experience and professional development. After all, the real opportunities for salary and benefit growth lie in moving to an organization that's larger in size and complexity. Zaniello says, "Numerous organizations are growing at all levels--whether they are moving from volunteer leadership to their first paid professional executive or whether the profession or industry is growing and requires a higher level of talent. It's all about professional development and the right next step."

Carole Schweitzer is executive editor of ASSOCIATION MANAGEMENT. E-mail: [e-mail].