Setting Executive Compensation

It can be a challenge setting executive salaries in most organizations but it can be especially difficult at a nonprofit where you want to attract top talent while avoiding criticism.

Nonprofits need to offer solid compensation plans in order to attract and keep talented people. There’s a fine line as even the IRS can step in if it considers a nonprofit’s executive pay excessive.  And while budgets are strained at most nonprofits if incentives can be used to ensure executives are fulfilling the organization’s goals then the better for all concerned.

Attracting Top Talent

Compensation averages tend to get skewed by a few overly generous nonprofits but for the most part those are anomalies.  Usually, it varies on the organization’s size, budget, geographic location, and mission. That’s primarily why an organization’s board should find comparable information to set salary benchmarks.  Some organizations will even utilize a salary survey from an independent company in their review.

For the most part, comparable executives have similar qualifications, can do similar functions and work for the same kinds of organizations.  When a nonprofit is part of a larger organization, there may even be a compensation survey of others within the organization that could be helpful.

It’s always wise to compare fairly when reviewing compensation and include other benefits and bonuses, health insurance and retirement plans.

Nonprofit executives can also be inspired by the factors such as location and the organization’s mission. A passion for the work, culture and values of a particular organization can also have a meaningful affect in persuading top talent to come aboard.

Accountability and compensation

In business, executives are held accountable for the company performance. The same should apply at nonprofits. As part of compensation, incentives should be tied to clear measurable goals based on the organization’s mission. The organization can build additional variables where pay can increase when certain goals are met.  Although, it’s not a good idea to link pay with fundraising goals as that will usually be something the IRS will take a dim view of.

But accountability can show stakeholders and watchdog groups that results are very important to the organization and that compensation won’t be scrutinized, especially, if assigned goals are met.

Avoid IRS Red Flags

Aside from protecting the organization’s reputation with important donors, it’s important to make sure compensation for executives won’t raise suspicions from the IRS.

To keep things transparent, all nonprofits are required to fill out Form 990 to explain the process used to in approving executive compensation.

Important questions that need to be answered include:

  • Was compensation reviewed and approved by an independent body such as the nonprofit’s executive board?
  • Did the committee review comparable compensation data?
  • Were compensation discussions and decisions documented?

Many nonprofits fail to document the compensation terms and could face further scrutiny as a result.

All nonprofits should strive to attract top talent with a competitive compensation package. It’s the only way to ensure you’re getting and keeping the brightest people.  But it’s also important that executives be accountable for the organization’s performance. Linking performance with incentives can help but pay should not be so out of line compared with other nonprofits so as not to raise unnecessary scrutiny from the public and IRS.


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Posted in Nonprofits.

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