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Not-for-Profit Organizations Case Studies

Nonprofit Deferred Compensation & Annual Incentive Plan Design Case Study + -

Project Type

L&A’s nonprofit compensation consultants developed a deferred compensation plan and annual incentive plan design for a nonprofit company.

Project Description

The nonprofit company had originally established a deferred compensation plan for the CEO of the company to retain his services through retirement. The board of directors for the company asked Longnecker & Associates (L&A) to review the current plan to ensure it was compliant with 409A requirements, provide vesting alternatives, review the plan’s funding status and assess the competitiveness of the plan versus other non-for-profit compensation companies in the industry. Additionally, L&A was asked to review the company’s annual incentive plan to ensure: 1) the competitiveness of the plan, 2) the plan recognized both individual and organizational performance, 3) the plan encouraged the achievement of stretch goals and provided meaningful opportunities if those goals were attained, 4) the plan is easily understood, and 5) the plan attracted, motivated and retained the executive level talent it needed to be successful.

Benefit To Client

L&A reviewed the original deferred compensation plan for the nonprofit CEO and concluded that the plan was 409A compliant. The vesting schedule for the plan was to pay out at age 55 yet the CEO wanted to continue his employment with the company until the age of 60, so the plan had to be adjusted to accommodate the new retirement age. Additionally, the plan’s funding was falling short of required expectations and additional funding was needed in order to make up for the shortfall in the account, L&A gave several recommendations to the board to alleviate the shortfall amount. L&A reviewed the non-profit company’s current annual incentive plan and determined the plan was not easily understood by plan participants, had too many performance metrics associated with the plan and should involve qualitative goals as well as quantitative goals for the executive team. L&A recommended the board and management consider more “line of sight” goals for the team that involved not only company goals but departmental and individual goals as well. L&A recommended the company’s annual incentive plan have between 3 to 5 performance metrics and that each metric was competitively weighted to ensure that the potential payout aligned with both company and departmental performance as well as had an element of individual performance.

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