Nonprofit Resources
The Trickle-Down Effects of Compensation on Organizational Culture
Compensation is a profoundly significant aspect of work. It affects all areas of a nonprofit organization, from individual employees and their families to the organization’s leaders, budget, and perceptions held by other internal and external stakeholders.
While traditionally defined as the amount an employee is paid in exchange for their work, compensation carries different meanings depending on who you ask. Each stakeholder’s perception of employee compensation is viewed through the lens of its relevance to them.
Here’s how different stakeholders might define compensation:
- Employee: “What the organization believes my work is worth, based on my skills and contributions.” Employees see a tangible correlation between the work they do and the compensation they receive for that work.
- Organizational leadership: “A reasonable amount determined by the employee’s experience and expertise at the time of hire and reviewed and adjusted periodically.” Organizational leaders view employee compensation as a cohesive approach or a strategy to reach pay equity.
- Budget planners: “The cumulative amount paid to all employees, which affects what can be allocated to other line items.” Budget planners focus on the bottom line for that category, knowing that compensation cannot be drastically altered unless the organization is in immediate financial trouble.
- Internal stakeholders (board members): “The amount that organizational leadership thinks is necessary and reasonable to hire and retain employees, and that we determine for the top executives.” While the organization’s leaders should handle employee compensation overall, compensation for the highest-level executives should be determined in advance by a disinterested (independent) board.
- External stakeholders (community members, donors, vendors): “A reflection of what the organization’s employees can afford based on visible lifestyle choices.” External stakeholders have the least awareness of individual employees’ compensation, aside from assumptions drawn from their observations of employees’ financial choices, such as the purchase of a new car or a nice vacation.
Because employees often equate their compensation with their perceived value, even small assumptions or misunderstandings by employees can impact the organization’s culture. Human nature drives comparison, and in the workplace, this might sound like the following examples:
- “I have been here three years longer than he has. Why did he get promoted first?”
- “I overheard two coworkers talking about how much they make. One just graduated two years ago – why is she making the same amount as me?”
- “How can he afford to take his family on a European vacation?”
- “Must be nice to go out for lunch every day. I’m just barely getting by and eating ramen.”
Every organization has a culture, whether or not it is intentionally formed and maintained. One seed of uncertainty or a sense of injustice can grow until it disrupts all elements of an employee’s work experience.
Clear communication and transparency build trust and help create an environment where employees can thrive. Here are some tried-and-true ways your organization can provide clarity about your approach to compensation:
- Document a comprehensive compensation philosophy and policy. Develop a written policy that outlines your organization’s beliefs and expectations about compensation and includes specific elements to ensure consistency. This document can be shared with anyone who has questions without revealing individual salaries.
- Highlight the “total rewards package.” Help employees see beyond the dollar amount on their paycheck by emphasizing the full value of the benefits your organization provides, such as paid time off, employer contributions to medical or retirement plans, cell phone or auto allowances, flexible schedules, remote work, professional development, employer-covered travel and meals, and tuition discounts, if applicable.
- Foster conversations that allow for honest feedback and questions while emphasizing personal responsibility. You can’t prohibit employees from discussing their compensation with each other, but you can explain the criteria used to make compensation decisions and how these same criteria are used for each new hire and merit-based increase. This requires your organization to have consistent criteria and apply them objectively.
Consistency and objectivity are essential in determining compensation. However, it’s equally important to recognize that employees’ perception of these decisions can greatly influence their engagement and the overall organizational culture. Helping employees feel valued beyond their paychecks can go a long way in creating and preserving a healthy culture in which employees engage, contribute, and thrive.
If your organization has questions about compensation, or would like help evaluating your approach to it or creating a compensation philosophy and policy, please contact us. We are here to help.
Authors: Stan Reiff, Partner and Professional Practice Leader – Consulting and Kelsey Helmick, Executive Compensation Program Consultant