Compensation Planning for the Coming Year: A Practical, Equitable Approach for Nonprofits and Small Businesses

Compensation planning can feel like walking a tightrope—especially for nonprofits and small businesses. You’re balancing tight budgets, mission pressure, retention risks, and the very human reality that pay is deeply tied to morale and trust. But done well, compensation planning isn’t just a finance exercise. It’s a strategic tool for performance, equity, and long-term sustainability.

This guide breaks down how to plan for next year’s compensation increases in a way that is performance-informed, transparent, and fair across your organization.

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Why Compensation Planning Matters More Than Ever

If you’re running a small organization, you already know hiring and retention are expensive. For nonprofits, turnover costs your mission. For small businesses, it costs your momentum.

Even modest, thoughtfully planned increases can:

• Build trust

• reduce quality-of-life turnover (people leaving due to pay concerns)

• motivate growth and accountability

• preserve internal equity and trust

• help you compete in a talent market that’s still tight in many roles

The key is planning early, using clear criteria, and building equity checks into the process.

Step 1: Plan Early

Before you decide “who gets what”, identify your actual compensation pool and determine a compensation philosophy and strategy that fits your organization’s values and needs. Common strategies include:

• Cost-of-living adjustments (COLA): smaller increases spread evenly

• Merit-based increases: tied to performance, impact, and growth

• Market adjustments: raises to align underpaid roles with benchmarks

• Equity adjustments: targeted increases to fix internal pay gaps

While your organization or small business may choose any one of the strategies above, most organizations end up using a blend of strategies to create clear criteria.

Step 2: Use Compensation Benchmarking to Inform Decisions

Compensation benchmarking helps leadership make informed, defensible pay decisions. It is not about chasing top-of-market salaries — it’s about understanding how current pay compares to relevant peers so you can prioritize adjustments fairly, consistently, and transparently.

Effective benchmarking answers three core questions:

• Are we paying people fairly for the scope and impact of their roles?

• Where are we intentionally leading, matching, or lagging the market?

• Which pay gaps reflect performance versus structural misalignment?

Benchmark against organizations that are truly comparable in size, sector, geography, and role scope — not just job titles. When possible, use multiple data sources and refresh them regularly to avoid anchoring decisions to outdated or overly broad data.

Use benchmarks to:

• identify underpaid roles or compression risks

• inform salary ranges and promotion pricing

• distinguish merit-based increases from market or equity adjustments

• prevent raises that push pay far above market without a clear scope change

Transparency doesn’t require sharing exact market numbers. It means being clear about how market data is used in decision making. For example:

“We review market data annually to ensure our pay ranges are competitive and equitable, and we use that data alongside performance and budget considerations when making compensation decisions.”

Tip: For nonprofits, compensation benchmarking is especially important for executive roles. IRS rules encourage the use of comparable market data and independent decision-making (often referred to as rebuttable presumption) to demonstrate that executive compensation is reasonable and defensible.

When paired with clear performance criteria and equity checks, benchmarking strengthens leadership confidence, supports governance best practices, and builds employee trust — even when resources are constrained.

Step 3: Establish Clear Criteria for Salary Increases

If compensation increases are uneven or appear to be biased, they often work against your organization and lead to lower morale and higher turnover. This is why establishing clear criteria is so important.

 Merit-Based Increases

Performance-based pay can unintentionally widen inequities. So the goal is not “raise based on performance.” Instead, it should be “raise based on performance using a fair and consistent system.” Often, this system is a strong performance review process that:

• Uses a shared rating scale across departments

• Trains managers on how to evaluate

• Requires evidence for top ratings

• Standardizes goal-setting.

• Builds in employee self-reviews.

When a fair system with clear criteria is in place, compensation increases should reflect:

• results and measurable impact

• growth beyond role baseline

• living your values (especially in mission-driven orgs)

• collaboration and reliability

Step 4: Decide on Transparent Increase Guidelines

Once performance results are in, set guidelines before managers start requesting raises.

Example structure:

• Meets expectations: 2–3% increase

• Exceeds expectations: 4–6% increase

• Outstanding impact / high growth: 6–8% increase

• Needs improvement: 0–1% increase + development plan

This gives leadership control of the pool and helps managers see the “why” behind decisions. It also helps to ensure that all merit-based increases will align with the budget. Finally, providing these guidelines to employees helps to create transparency around how salary decisions are made, ultimately reducing friction between leadership and staff.

Step 5: Ensure Equity Across the Organization

Equity doesn’t happen just because people mean well. You need a process that actively checks for imbalance and a commitment to regularly assessing equity across the organization.

What Equity Means in Compensation Planning

Equity = fair pay for comparable work and impact, regardless of identity, tenure quirks, or manager style. Basically, equity means employees are paid based on the clear criteria outlined in Step 2.

It includes:

• equal pay for similar roles

• consistent reward for similar performance

• correction of historical underpayment patterns

• visibility into how decisions are made

In smaller organizations and businesses, there are common “equity traps” that often lead to inequitable pay. Some of the “equity traps” we see often are:

1. Different managers grade differently:  Some rate generously, others harshly.

2. Raises based on negotiation style: People who push harder get more.

3. Tenure distortions:  Long-time staff earn less than newer hires due to market shifts.

4. Mission-tax assumptions: “They’ll accept less because they care” is a mindset that damages sustainability and culture.

5. Unwritten exceptions: One-off raises pile up into inequity over time.

How to Run a Simple Equity Check

A simple equity check done on a consistent basis can help ensure you’re maintaining equity across the organization. After managers propose increases, do a cross-org review:

1. Look for outliers by role and level

   • Are similar roles receiving similar increases?

   • If not, what’s the justification?

2. Compare increase % by performance rating

   • Are top performers consistently receiving more?

   • Are some teams clustered unusually high or low?

3. Examine pay gaps inside comparable groups. You can do this with basic spreadsheets:

   • sort by role/level

   • compare salaries within each group

   • note differences over ~5–10% without strong reasons

4. Watch for patterns that may signal bias

   • Are certain groups regularly rated lower?

   • Are their increases smaller even with similar ratings?

Remember that you’re not trying to “prove bias” with a spreadsheet– you’re trying to notice patterns early so you can correct them.

Equity Tools That Don’t Require a Big HR Team

Small organizations without large, internal HR departments can do equity well when the process is intentional. Some of the best tools for equity that small businesses and organizations can use are:

• Compensation ranges for each job level

• a consistent rating rubric

• a leadership calibration meeting

• a simple spreadsheet comparison

• documented justifications for exceptions

Step 6: Calibrate as a Leadership Team

Before finalizing increases, schedule a calibration session. This will allow your leadership team to:

• align expectations

• check consistency across departments

• ensure the budget pool is respected

• minimize manager-to-manager variation

During the calibration session, ask your leadership to answer the following questions when considering compensation increases:

• “Would we make the same decision if this person reported to someone else?”

• “Do we have evidence for this rating?”

• “Are we correcting inequities while rewarding performance?”

• “Are any roles now under market?”

This step protects both equity and morale.

Step 7: Communicate Clearly

Your compensation planning only works if employees understand how decisions were made. However, remember that transparency doesn’t mean revealing everyone’s salary.

It means explaining:

• your compensation philosophy

• what the organization could afford

• how increases were determined

• what people can do to grow their pay over time

Even a short message helps:

“This year’s increases were based on performance evaluations using shared criteria. We also conducted an equity review to ensure consistency across roles and departments, and reviewed market data and benchmarked salary ranges.”

Offer managers a script and FAQ so they can communicate without awkwardness.

Step 8: Plan Beyond Raises

Raises are one lever. If budgets are tight, there are other ways to acknowledge and reward employees without increasing salaries. Consider:

• flexible schedules or remote options

• professional development stipends

• recognition programs tied to values

• one-time bonuses when sustainable

• internal promotions as a priority

Honest communication about constraints matters more than pretending constraints don’t exist.

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A Simple Timeline You Can Use Every Year

October–November

• budget forecast

• clarify compensation strategy

• Review market data and confirm salary ranges

• update performance tools

December–January

• staff self-reviews

• managers complete evaluations

• preliminary raise proposals

January

• leadership calibration + equity check

• finalize the pool

February

• communicate increases and development plans

• set goals for the next cycle

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In nonprofits and small businesses, compensation planning isn’t just math. It’s a statement about what you value:

• performance

• fairness

• transparency

• sustainability

• the people who carry your mission and growth

When increases are tied to strong performance evaluations and checked for equity and consistency across the organization, you create a system employees can trust—even when the numbers are modest.

Trust is worth planning for.

Need support with developing and/implementing an equitable compensation approach? Reach out to Cause Capacity for support! Our HR experts can support with:

• performance management

• compensation benchmarking

• establishing a compensation philosophy

• managing executive compensation with the board