Nonprofit Staff Compensation: 3 Key Financial Considerations

Your nonprofit’s staff does it all, from organizing fundraising events and campaigns to cultivating relationships with donors to providing services to beneficiaries. They frequently have to take on a wide variety of responsibilities to allow your organization to achieve its goals and further its mission. So, of course, they deserve to be compensated fairly for their hard work!

However, determining compensation is often a delicate financial balance in the nonprofit sector. While providing competitive salaries and benefits is important for employee motivation and retention, nonprofits often have to work with limited resources, making it more difficult to develop a solid compensation strategy.

To make this process easier for your team, this guide will review three financial considerations related to nonprofit staff compensation, including:

  1. Evaluating Your Hiring Options
  2. Developing Complete Compensation Packages
  3. Classifying Compensation-Related Expenses

Creating staff compensation plans should be a team effort between your nonprofit’s leadership team, board, and financial professionals. Let’s get started by discussing a strategic element that you’ll need to assess before you get into the weeds of salaries and benefits—to hire or not to hire new team members.

1. Evaluating Your Hiring Options

When your current employees’ workloads are at or above capacity, your first instinct may be to hire a new staff member to take on the extra responsibilities necessary to operate your nonprofit effectively. However, hiring is expensive—most organizations spend anywhere from $2,000 to $20,000 to bring on a new employee, not including their compensation package.

In some cases, you can outsource certain duties to a freelancer or skilled volunteer: here is a quick breakdown of when each option is most appropriate:

  • Hiring: You envision a long-term need that is best fulfilled by one person who is dedicated to your nonprofit full-time. For example, if you’re building out your major giving program, you’ll likely need to hire a major gifts officer to oversee that ongoing initiative.
  • Outsourcing: You require specific expertise on a recurring basis, but the tasks could be completed on a part-time basis by a team of people who also work with other organizations. Commonly outsourced nonprofit services include accounting, website development, and legal counsel.
  • Volunteering: Your tasks are engaging, or motivate your community members to participate with the goal of their personal development instead of financial compensation. You could recruit volunteers to help with sorting in-kind donations or create additional marketing materials for your year-end giving campaign. Some positions may require more specialized skill sets than others.

No matter which option you choose in a given situation, make sure to communicate your needs clearly so you can recruit the best people to fill each role at the lowest possible cost.

2. Developing Complete Compensation Packages

A common misconception about nonprofits is that their staff members don’t—and shouldn’t—make living wages. A similar problem occurs when organisations think volunteers are free workforce, and don’t account for the additional costs of running a volunteer program.

Even when people may be willing to take a pay cut in exchange for working for an organization and cause they believe in, that doesn’t mean they shouldn’t receive fair compensation for their efforts! Plus, initially setting compensation too low can result in higher costs related to employee turnover down the line.

When developing compensation packages, many nonprofit HR professionals recommend taking a total rewards approach. This means your organization should offer—and budget for—various forms of direct and indirect compensation, including:

  • Salaries and/or hourly wages for each employee
  • Bonuses or other monetary incentives
  • Healthcare and retirement benefits
  • Paid time off (this includes regular vacation and sick days as well as special circumstances like bereavement or parental leave)
  • Professional development opportunities such as tuition reimbursement or organization-funded industry certifications

If you have the financial flexibility to do so, consider setting aside some of your compensation budget for initiatives that help create a positive workplace culture, which is also part of a total rewards approach. Whether those perks are as large as an annual all-staff holiday party or as small as a team pizza lunch to celebrate achieving a fundraising goal, they can go a long way in cultivating motivated, loyal employees for your organization.

3. Classifying Compensation-Related Expenses

In most nonprofit budgets and financial reports, expenses are organized based on the way they further the organization’s mission. These functional expense categories include:

  • Program costs, which are directly related to your nonprofit’s mission-driven work.
  • Administrative costs, which are necessary to operate your organization day-to-day.
  • Fundraising costs, which are the upfront expenses associated with launching campaigns, planning events, and cultivating donor relationships.

At first glance, you might think staff compensation falls under the category of administrative costs, since your employees are integral to running your organization on a daily basis. However, your staff members touch every aspect of your nonprofit’s functions, so their compensation similarly touches every functional expense category.

To determine how your employees’ compensation should be categorized, consider implementing a time tracking system so you can see how much of their time at work they spend on different types of tasks. Here is a quick breakdown of how to categorize various activities:

  • Administrative: Time spent on internal or operational work, such as answering emails, attending team meetings, and completing required training.
  • Fundraising: Time spent on marketing, event planning, and donor engagement work (conducting prospect research, drafting donation requests, developing and executing stewardship plans, etc.)
  • Program: Time spent interacting with beneficiaries or working on other mission-related initiatives, which will look different for every organization. For example, animal shelter workers’ program time may involve caring for rescue pets and communicating with potential adopters, while staff members at an environmental education organization might spend their program time preparing and delivering presentations at local schools.

Organize these expenses in your financial documents by determining what percentage of your staff members’ time is spent on each type of activity and dividing up their salaries or hourly wages accordingly. Note that bonuses, incentives, and indirect compensation for employees on your organization’s regular payroll all fall under administrative costs.

Also, if your nonprofit works with contractors or outsourced employees, how you categorize your payments to them will vary depending on the services they provide. For instance, fees paid to an outsourced accountant would fall under administrative expenses since their work contributes to your organization’s management. Meanwhile, a contracted web developer’s fees would be considered a fundraising expense because their focus area—your website—is a tool for collecting donations and marketing your nonprofit.

As you develop and execute your organization’s compensation strategy based on the above considerations, make sure to keep thorough records. This way, you’ll be able to create accurate reports that comply with legal requirements for nonprofits in your area. Plus, you can be transparent with donors, stakeholders, and prospective employees about how your organization rewards its team members’ hard work.