How Nonprofit Boards Should Set Executive Compensation

Setting compensation for a nonprofit CEO or Executive Director is an important board responsibility. The compensation package needs to support recruitment and retention, reflect the scope of the role, and follow federal requirements.

A clear process protects the organization, the executive, and the board members who approve the decision. It also gives donors, employees, and community partners confidence that the nonprofit uses its resources with care.

Boards can build a sound compensation process by using current market data, selecting comparable organizations, managing conflicts of interest, and documenting the final decision. Form 990 filings and compensation studies can provide the information needed to make an informed choice.

Why Executive Compensation Requires Board Attention

The CEO or Executive Director often holds the broadest staff leadership role in a nonprofit. This person may oversee programs, finances, fundraising, employees, partnerships, and public communication. Compensation should reflect the responsibility and experience required to perform this work.

Compensation also affects the organization’s ability to recruit qualified leaders. A salary that falls far below the market can reduce the candidate pool. It may also increase the chance that an experienced leader leaves for another opportunity.

The board must also consider its legal responsibilities. Internal Revenue Code Section 4958 addresses excess benefit transactions involving certain tax exempt organizations. An excess benefit transaction may occur when an organization provides compensation or another financial benefit that exceeds the value of the services received.

The IRS may impose excise taxes connected to an excess benefit transaction. These taxes may apply to the person who received the excess benefit. They may also apply to organization managers who knowingly approved it.

A structured review helps the board show that it used appropriate information and acted in the interest of the nonprofit. This record can be important if the compensation package receives attention from regulators, donors, employees, journalists, or charity review groups.

Understanding the Rebuttable Presumption of Reasonableness

Federal regulations provide a process called the rebuttable presumption of reasonableness. When a nonprofit follows this process correctly, the compensation decision receives an important level of protection.

The process creates a presumption that the compensation arrangement is reasonable. The IRS would then carry the burden of presenting evidence that the arrangement is excessive.

Three main requirements support the presumption. An independent board or committee must approve the compensation in advance. The decision makers must use appropriate comparability data. The board or committee must document the decision at the time it is made.

Each requirement matters. A strong market study alone will provide limited protection if people with conflicts control the decision. A proper vote will also be incomplete if the minutes fail to describe the information reviewed.

Boards should treat these requirements as connected parts of one governance process.

Use an Independent Approval Body

The compensation arrangement should be approved by the board or an authorized committee made up of independent members. The people participating in the decision should have no financial or personal interest in the compensation arrangement.

The executive whose pay is under review should be excluded from the vote. A board member with a close family, business, or financial relationship to the executive may also have a conflict. The organization should review its conflict of interest policy and consult legal counsel when the situation is unclear.

Some nonprofits assign the work to a compensation committee. Others use an executive committee or the full board. The organization’s bylaws should state which body has authority to approve compensation.

The executive may provide useful information about responsibilities, goals, and performance. The board can gather this information before beginning its independent discussion. The final review and vote should be completed by the authorized board members.

The meeting record should identify everyone who attended, everyone who voted, and everyone who left the discussion because of a conflict.

Gather Appropriate Comparability Data

The board needs reliable information about what similar organizations pay leaders with similar responsibilities. This is called comparability data.

The value of the study depends on the quality of the comparison group. A board should select organizations that share relevant characteristics with its nonprofit. These characteristics may include annual revenue, operating budget, mission area, location, staff size, program reach, and leadership scope.

For example, a community organization with annual revenue of $3 million may gain limited guidance from the compensation paid by a national nonprofit with revenue of $75 million. The two executives may hold similar titles, and the scale of their responsibilities is different.

Geography also matters. Compensation levels can vary across cities, states, and regions. The cost of living and the local demand for executive talent may influence salary expectations.

The board should also examine the actual duties of each role. One Executive Director may lead a team of ten people and focus on local programs. Another may supervise one hundred employees, manage several locations, and lead a national fundraising strategy. Titles alone provide too little information for a useful comparison.

Using Form 990 Data

Form 990 filings are a common source of nonprofit executive compensation information. Many tax exempt organizations must make these filings available to the public.

Part VII of Form 990 reports compensation for officers, directors, trustees, key employees, and certain highly compensated employees. Schedule J may provide additional compensation details for organizations that meet the filing requirements.

Boards can use these filings to review the amounts paid by potential peer organizations. The information may include compensation from the organization and related entities. It may also include certain benefits and deferred compensation.

Form 990 data has several strengths. It comes from public filings, identifies actual organizations, and allows the board to examine financial and organizational information alongside compensation.

The data also requires careful review. A filing usually reflects a prior reporting period, so the figures may be older than the current hiring market. Organizations may also use different fiscal years. A reported amount may include a bonus, retirement contribution, deferred payment, or compensation connected to part of a year.

The board should review the relevant sections of each filing and record why each organization belongs in the comparison group. This creates a clear connection between the data and the compensation decision.

Add Other Compensation Sources

A strong study can use several sources. Published compensation surveys may provide broader market information across organizations, roles, and locations.

Nonprofit associations sometimes publish salary reports for their members or for organizations in a specific field. Compensation consulting firms may provide data based on organization size, geography, and executive responsibility.

Executive search firms can also offer current information from active leadership searches. This perspective can help a board understand candidate expectations and changes in the talent market that may appear later in public filings.

Each source should be relevant to the role. The board should record the name and date of the source, the organizations or positions included, and the way the information influenced the decision.

Using several sources gives the committee a broader view of the market. It can compare public filings with survey results and current recruitment information.

Review the Full Compensation Package

Executive compensation includes more than base salary. The board should review the full value of the arrangement.

The package may include an annual bonus, incentive compensation, retirement contributions, health benefits, life insurance, disability coverage, housing support, a vehicle allowance, professional membership fees, or other financial benefits.

Deferred compensation and severance terms may also form part of the arrangement. The board should understand the value and conditions of each item before approval.

Paid time off, remote work arrangements, flexible schedules, and professional development support can influence a candidate’s decision. These terms may have limited direct financial value and still matter in a competitive search.

The board should review the package as a whole. A base salary may appear consistent with market data, and the addition of benefits or incentive payments may move total compensation to a different point within the range.

Consider Performance and Organizational Context

Market data gives the board a starting point. The committee should also consider the nonprofit’s specific circumstances.

The scope of the executive’s responsibilities may support compensation near the middle or upper part of the market range. Relevant factors can include financial complexity, staff size, fundraising expectations, program growth, regulatory duties, public visibility, and the difficulty of the organization’s current goals.

The experience and record of the executive may also influence the decision. A leader with specialized knowledge, established funding relationships, or experience managing a major transition may bring value that is scarce in the market.

The nonprofit’s financial position remains important. The compensation package should fit the organization’s budget and long term financial plan. The board should consider how the decision relates to staff compensation, revenue forecasts, and other organizational priorities.

These factors should be discussed and recorded. The minutes can explain why the board selected a specific point within the market range.

Document the Decision at the Time of Approval

The third requirement for the rebuttable presumption is contemporaneous documentation. The board or committee should create a written record at the time it approves the compensation.

The minutes should state the terms approved, including salary, incentive compensation, benefits, and other key items. They should identify the market data and comparison organizations reviewed by the decision makers.

The record should include the date of the meeting, the members present, the names of people who participated in the vote, and the result of the vote. It should also identify any member who left the discussion or vote because of a conflict.

The minutes should explain the reasoning behind the decision. A short summary can describe the market range, the organization’s circumstances, and the factors that supported the approved amount.

The board should review and approve the minutes within its normal governance process. The nonprofit should store the minutes, comparability study, compensation surveys, relevant Form 990 filings, and supporting materials with its governance records.

Review Compensation on a Regular Schedule

The board should conduct a compensation review when hiring a new CEO or Executive Director. It should also complete a review when making a significant change to salary, bonus terms, deferred compensation, severance, or other financial benefits.

Many boards review executive compensation every year. An annual schedule allows the organization to monitor the market, consider performance, and maintain a clear record of board oversight.

An annual review may confirm that the current package remains appropriate. Documenting that conclusion still shows that the board examined the arrangement.

Regular reviews also support recruitment and retention planning. The board can identify market changes early and make thoughtful budget decisions.

Practical Steps for the Board

The board can begin by confirming which group has authority to approve executive compensation. It should identify conflicts of interest and determine who can participate in the review.

The authorized group can then collect Form 990 filings from suitable peer organizations. It can add current salary surveys, association reports, and market information from compensation or executive search professionals.

Committee members should receive the materials before the meeting. This gives them time to understand the comparison group and prepare questions.

During the meeting, the committee should review the full compensation package and discuss the factors connected to the role. It should then conduct a formal vote and record the decision in the minutes.

The organization should keep all supporting documents in a central governance file. A clear record will make future reviews easier and provide evidence of the board’s process.

When Outside Guidance Can Help

Some boards have access to experienced human resources, finance, and legal staff. Smaller nonprofits may need outside support to complete the process.

A compensation consultant can help select peer organizations and prepare a market study. An attorney familiar with nonprofit tax and employment law can advise the board on legal requirements, conflicts, contract terms, and documentation.

An executive search firm can provide current information about compensation expectations for similar roles. The firm can also help the board design a package that attracts qualified candidates and fits the organization’s resources.

Outside advisors can provide useful information and guidance. The independent board or committee remains responsible for reviewing the data and approving the compensation arrangement.

Building a Responsible Compensation Process

Executive compensation decisions affect recruitment, retention, legal compliance, and public trust. A careful process helps the board balance these responsibilities.

The board should use an independent approval body, gather relevant comparability data, review the full package, and document the decision when it is made. Regular reviews keep the information current and support future leadership planning.

Maneva Group helps nonprofit boards develop compensation packages for CEO and Executive Director searches. We provide market insight based on comparable roles and current candidate expectations. If your board is preparing to hire or review the compensation of a senior leader, our team can help you approach the process with clear information and a strong recruitment perspective.