Careless Whisper and talent retention

So there I was at a bar at Burning Man, quietly minding my own business, when a heavy metal rendition of Wham!'s "Careless Whisper" played over the bar's speakers. To a person, we all belted out the lyrics. It might be charitably said that I warbled rather than belted out but what the heck, I gave it my best. Sometime after the final impassioned rendition of "Please stay!", my thoughts turned to talent retention (Please stay!) in the non-profit sector.

A client of mine set an ambitious fundraising goal when she assumed the Executive Director mantle at a local nonprofit. She wanted to raise $100 million in the first ten years of her tenure. This goal was audacious and aggressive as the non-profit's annual budget had never exceeded $2 million.

In her first three months, she raised $42 million to be paid over three years. She has her eyes set on loftier goals. Suffice it to say, her phone and email exploded as recruiters sought to pry her away from the nonprofit. She is a talent that needs to be retained and frankly, locked down. But how might this be achieved?

One answer I would offer for your consideration is a 457f non-qualified deferred compensation (NQDC) plan with a rolling vesting schedule. The 457f is funded entirely with contributions from the nonprofit. The contributions are tied to how much she raises. And since fundraised amounts are usually paid over a number of years, each amount can have a vesting schedule.

By having a separate vesting schedule, the 457f plan incentivizes my client to stay at the nonprofit, continuing to work her magic. The power of the NQDC plan then can be seen in recruiting, rewarding, and retaining talent. Let's look at each of these in turn.

From my layman's point of view, there seems to be a talent war in the nonprofit sector for fundraisers who are good at bringing in money. This might be a sign of a slowing economy but funding for non-profit work seems to have dried up a bit. Charitable giving (nonprofit funding) dropped in 2022 by 10.5% and an additional 2.1% in 2023. 76% of nonprofits reported funding challenges in 2023. An NQDC plan such as a 457f can be a recruitment tool (in conjunction with a competitive salary, etc.) as it is a tangible benefit for a successful recruit.

The plan can be structured to reward in any way the nonprofit desires. This is different than a standard ERISA 403b plan where certain rules have to be followed. A 457f plan can be designed with one person in mind and can write its own rules as to when money is paid out. In this way, the plan can reward a successful fundraiser like my client and encourage her to keep up the good work. In this case, the reward formula stated that my client would receive a bonus which is a percent of the money she raised. The bonus would pay into the 457 plan each year based on how much money was raised.

Having a rolling vesting schedule is helpful in retention. In this case, the vesting schedule for each bonus payment was three years cliff vesting. Using the first bonus as an example, my client would not vest in the money until three years after the bonus was paid. By structuring the vesting this way, we are trying to ensure that she stays at the nonprofit and, in fact, realizes that there is no good day to ever quit as she would be leaving unvested money on the table.

Recruit, reward, and retain. Non-qualified deferred compensation plans can help with all three. NQDCs come in variety of flavors but pretty much all fall under the idea of "golden handcuffs". And they are much more pleasant to contemplate than the enthusiastic singing that was emanating from a certain bar at Burning Man one month ago.