What’s the foundation of effective executive compensation benchmarking?
Peer group selection is pivotal to establishing competitive, reasonable, and defensible pay for executives. Yet relying on organizations that aren’t truly comparable can undermine critical compensation decisions.
In our latest video, C3’s Diana Ilic shares practical considerations for selecting executive compensation peers, avoiding common pitfalls, and ensuring your peer group remains relevant over time.
VIDEO TRANSCRIPT
Hi, I’m Diana Ilic, Consulting Manager at C3 Nonprofit Consulting Group. C3 exists to partner with the world’s most impactful organizations to navigate people and culture solutions. Our vision is a society in which nonprofit employment is synonymous with meaningful work, a thriving culture, and competitive, fair, and sustainable pay.
Many organizations rely upon customized peer groups for executive compensation decision-making and reasonableness testing. A key to peer group effectiveness and defensibility is ensuring the criteria that serve as the basis for peer selection reflect factors that are correlated with how executives are paid in a nonprofit environment.
Here are three ways to quickly test for both effectiveness, meaning organizations that are truly your operating and talent competitors, and defensibility, meaning it will stand the test of time and regulatory scrutiny.
First, size and scope are the factors most highly correlated with how executives in nonprofits are paid. Finding organizations that operate on a similar regional, national, or global scale or identifying those with similar revenue, operating budgets, or headcount will result in pay ranges that will be correlated with the scope of your executive positions.
Keep in mind that the defensibility of the peer group will be largely evaluated on whether organizations of like size are considered. Including too many organizations that are significantly larger or aspirational in nature will erode the defensibility of the data and should be avoided. A common, widely accepted range is one-half to two times your organization’s size.
Second, identifying organizations that are relevant from a talent market perspective is key, meaning from which the organization recruits executive talent or the organizations to which executive talent may be lost.
While roles in the program or development functions are often only found in other nonprofit organizations, there are roles in other functions you’re likely to compete for talent beyond the nonprofit sector. For example, finance and human resources jobs are often sourced from any organization type, including for-profit companies.
Third, location also impacts pay. Executives located in large metropolitan areas often command higher compensation. However, it’s best to have a national sample of similarly situated peer organizations and adjust for the local cost of labor after the fact.
The biggest mistake we see with peer group selection is limiting the peers to just one area. You’ll be hard-pressed to find enough comparable organizations in a single geography that can also satisfy the criteria of like size, scale, and reach.
Other best practices include evaluating your peer group on a regular basis, meaning every other year or so, to ensure ongoing relevance. And keep the peer group to a minimum of 15 to 20 organizations to lessen the chance of year-over-year volatility in the data.
Ultimately, thoughtful peer group selection fosters transparency and confidence in executive compensation decision-making while supporting the overall defensibility of your executive compensation program reasonableness.
