In a previous article, Pay transparency for nonprofits: Why it's time to embrace it, we explored how salary transparency can help organizations strengthen recruitment, build employee trust, and make more thoughtful compensation decisions.
Does your nonprofit have established salary ranges or a formal process for determining compensation? A pay system helps nonprofits establish fair and consistent compensation practices, make informed salary decisions, and use limited financial resources thoughtfully. It also provides a foundation for pay transparency a trending strategy for talent acquisition and retention in the nonprofit sector.
What is a pay system?
A pay system is a framework that helps organizations determine how much to pay employees in different positions and make consistent decisions about compensation.
It identifies positions within an organization, establishes reasonable salary ranges, and provides guidelines for determining where employees fall within those ranges.
A basic pay system should help answer several questions such as:
- What is an appropriate salary range for existing or new positions?
- How do our salaries compare with similar positions in the market?
- How do we determine where an employee falls within a salary range?
- How will we make decisions around salary negotiations and future increases?
Many organizations seek outside consulting support from businesses like ours who have expertise in developing compensation systems and helping with other HR processes specifically for nonprofit organizations. We love to help!
If you’re considering building or revising your pay system, there are some things you can do to prepare…whether you work with a compensation consultant like us or build one yourself.
Steps to building a basic nonprofit pay system
Identify your organization's positions
Begin by making a list of the positions within your organization, including job titles, current pay ranges, and primary responsibilities.
Review job descriptions to ensure they accurately reflect the work employees perform. Titles alone can be misleading, particularly in smaller nonprofits where employees often assume responsibilities beyond their formal roles. Accurate compensation benchmarking requires accurate information on jobs.
Determine your compensation philosophy
A compensation philosophy is a formal written statement that defines an organization’s guiding principles and overall approach to employee compensation, benefits, and total rewards.
It provides a consistent strategic framework that helps the organization attract, retain, and motivate talent while aligning compensation decisions with its mission, values, culture, and business goals.
A strong compensation philosophy should clearly address market positioning, internal equity, performance linkage, benefits strategy, and how pay practices support organizational objectives.
Gather market information and establish pay ranges
To properly develop or update pay ranges, valid and reliable compensation data is necessary so that you can determine the market rate for your positions. Do not rely on self-reported information, which is often free but not valid. Also, be suspect of information provided by recruiting agencies. Since they are often compensation based on the pay of their placements, pay levels may be overstated.
Resources for good compensation data are:
- U.S. Bureau of Labor Statistics: Occupational wage information by position and geographic area can provide a useful starting point. Be careful though because these data may be older depending on the position.
- Nonprofit compensation surveys: Reports from nonprofit associations, compensation research organizations, and other industry resources may provide salary information more closely aligned with nonprofit positions. These survey are usually affordable especially if your nonprofit is a member.
- Survey databases: There are many survey databases available, but they can be costly. However, they are broader than just the nonprofit sector and can give you insight into the cost of labor outside the nonprofit space, which is important if you are competing with the broader economy for some roles.
Compare positions with similar responsibilities rather than relying solely on job titles. Use this information to establish a minimum and maximum salary for each level.
Compare current pay levels with market rates and develop pay ranges
Once you have benchmarked your positions against market data, stand back and see if jobs cluster around certain market levels. This is an indication that these jobs may belong in the same pay grade. Develop pay grades with pay range midpoints set to the market rates, and determine pay range minimums and maximums from the midpoints. Here is an example of what a pay range looks like along with details on how it is developed.
Then compare the proposed ranges with what you're currently paying employees. Any differences should have reasonable explanations, prompt a review of your proposed salary ranges or position classifications, or be addressed through compensation adjustments.
You may discover compensation disparities that your organization can't afford to address immediately. Developing a pay system doesn't require resolving every issue at once. It gives you a clearer picture of where adjustments may be needed and allows you to establish priorities over time.
When might your nonprofit need more help?
For many smaller nonprofits, a basic pay system can provide a useful framework for making more consistent compensation decisions.
But in many situations, a more comprehensive approach may be appropriate.
Organizations with numerous positions, multiple departments, significant salary inconsistencies, or specialized roles will benefit from a more sophisticated compensation structure.
A comprehensive compensation assessment might include detailed job evaluations, market benchmarking, formal salary grades, internal pay equity analysis, and more extensive compensation policies.
Professional expertise can also be helpful when leadership needs to address difficult compensation decisions or develop a structure that supports future organizational growth.
Organizations should also ensure their practices comply with applicable wage and hour, pay equity, and other employment laws.
If you're unsure where to start, short on time or capacity, or want expert guidance along the way, we can help. We are experienced in benchmarking compensation, developing pay structures, and providing tools to manage your program in a fair and consistent manner.