7 Steps Toward Pay Equity: Installment #6 – Feasibility and Budget Adjustments

Developing fair and equitable pay in organizations is an ethical practice that contributes to a healthier, more productive workforce, better operations, and more consistent budgeting.

You can find practical tips in Installments 1-5 of this series on the right sidebar.

Now that you (the board, leadership staff and a few program managers) have reviewed the existing pay scale and wage comparability study – and talked about the desired changes that would bring about more equitable compensation for employees – you’re ready for the next steps.

Feasibility

1. Use the pay analysis worksheet from Installment 4; save it as a new document: proposed pay scale
   • Add desired new wages in a new column to the right (this is a first pass, not final).
   • Add another column for the organization’s current pay scale; enter that data.
   • Add a third column and write a formula to calculate the % difference between the two.
   • Calculate the total expenses related to proposed salary changes over the next two fiscal years.

2. Undertake a revenue cycle analysis. Analyze the potential impact of proposed changes to compensation on operations, cash flow and reserve funds (whether those are regular operating reserves, emergency or endowment funds).

3. Once the potential impact on revenue and expenses is understood, decisions can be made about whether additional income is needed to support increased salary and total compensation costs.

4. If so, review all sources of current and potential funding needed to support any cost increases. Examine billing, fees for service, donor contributions, grants, in-kind donations, and more.

Prioritize increasing revenue over cutting expenses – an austerity mindset has a very different psychological impact on employees.

Pooling department resources to raise more money together is also more likely to be sustained.

This process may lead back to the discussion outlined in Installment 5, and you may want to reduce some desired wages if the impact on the organization’s finances is too much all at once. First, try to increase the lowest-paid employees’ compensation to a living wage for your geographic area.

New Operating Budgets

Creating a new revenue plan is a collaborative effort between the CEO (or Executive Director), CFO (or Finance Director) and department managers, with the fiscal manager leading.

A new expense budget should include projected increases for updated salaries, increased hourly wages, overtime consideration related to classification changes, payroll taxes and fringe benefit costs – with enough detail in notes that laypeople can understand the context behind changes to various categories of expenses.

It’s usually helpful to develop a few versions of an operating budget – conservative, grounded, ambitious. This supports better planning and decision-making, and helps ensure pay increases are made in a fiscally responsible manner.

A fringe benefit cost analysis is important if a total compensation study is undertaken, and/or the benefits package will be changing enough in the coming year to affect annual budgeting.

General Notes

Payroll is the most expensive budgetary line item for most organizations, typically ranging from 40-80% of annual expenses.

Deficit budgets are not always bad. When investments are made over 1-2 years to correct a structural deficit or enhance an organization’s staffing and capacity to deliver services, it can be viewed positively by donors and funders alike.

We recommend mid-year reviews of operating budgets for all nonprofits. Revise the budget for board approval when changes are substantial.

Check back next week for the last post in this series. I’ll have tips on implementing these changes successfully, and offer additional resources from other experts.

Thanks for reading!