If the argument for bonuses is to attract and retain talent, and motivate high achievement, then why not use bonuses to drive the performance of nonprofit executives as well?
Makes sense because:
- Nonprofit executives need to be compensated appropriately in order to attract and retain the best talent, especially to lead organizations to be strategically and financially successful, with high-impact programs and measurable outcomes.
- Although they want to be compensated fairly, the executives who lead nonprofits are driven to a great extent by the mission, not by the money; bonuses miss the boat…they degrade the drive that is fueled by passion.
Bad idea because:
- It’s difficult to create the right metrics to measure success for the nonprofit CEO bonus since the goal is not profits; there’s a high risk of creating the wrong metrics; and the wrong metrics will create incentives that will pervert organizational behavior and good will.
- Fundraising and revenue development to achieve financial success is a team effort, involving staff and board members. So if the CEO is rewarded for dollars raised, how will foundations and philanthropic donors or staff react when the CEO is essentially getting a piece of the action?
- The drive to attain short-term and possibly less substantive outcomes can undermine more meaningful purposes if that’s where the reward lies.
- Nonprofits need to be run by executives who are highly strategic, effective in resource development (fundraising in addition to social ventures), and driven by a passion for the mission. So nonprofit boards should provide fair and reasonable compensation packages in order to attract and retain outstanding candidates.
- Boards need to consider the costs to the organization of having to replace an excellent CEO if the board fails to create a suitable compensation package.
- When seeking to hire a nonprofit CEO, boards should consider the comparable skills and qualities that they would want in a for-profit CEO – the enterprising nature, business skills, and leadership ability, as well as interpersonal and communications skills – and factor that into to creating a competitive compensation package.
- In order to comply with governance practices ("intermediate sanctions"), boards should gather data on salaries of comparable organizations and also consider engaging compensation advisors, while still keeping #3 above in mind.
- Boards should work with their nonprofit CEOs to create clear expectations for the CEO’s annual performance based on the organization’s vision and revenue model, and conduct annual performance reviews of the CEO that are respectful and productive.
- Boards should conduct annual board assessments, since the board’s and CEO’s performances are inter-related, and their mutual effectiveness drives organizational success. ("Strengthening Leadership" ch. 8)
In for-profits, bonuses can be more easily tied to measurable performance indicators, and the drive is for profits. But as we see with AIG, even that’s not so straightforward.
With nonprofits, the bonus approach is counter-productive. The best practice is fair compensation.
[See also recent Fast Co. post on "Why Incentives Are Irresistible, Effective, and Likely to Fail."]