As a nonprofit organization, it’s important to pay close attention to employee salaries. You want to ensure that salaries are both competitive and fair. This is especially important when setting the salary for your CEO or executive director. While there is no one-size-fits-all formula, we can guide you through key questions to help you determine a reasonable and appropriate salary for the leaders and decision makers of your organization.

In this article, we want to discuss:

• Why does CEO (or executive director) compensation matter?
• What is a reasonable CEO salary?
• What is a compensation survey?
• What should be in a nonprofit compensation policy?

Why does CEO (or executive director) compensation matter?

CEO compensation matters for a variety of reasons. If you pay your CEO or executive director too much…

• You could lose your tax-exempt status
• You may be operating out of alignment with your values and intended purpose
• Donors could be critical of how their funds are being used
• You could lose trust within the community

But it’s also important to pay your CEO enough. While the pay must be reasonable, it also needs to be competitive. A competitive salary will attract skilled leaders who can help further your mission.

What is a reasonable CEO/executive director salary?

If you’re asking yourself this question, you should also ask: Reasonable to whom? When thinking about whether an executive’s salary is reasonable, there are effectively two viewpoints to consider: (1) the IRS, and (2) the public.

IRS Standard: Reasonable Compensation

The IRS defines reasonable compensation for nonprofit executives to be “the value that would ordinarily be paid for services by like enterprises under like circumstances.” The IRS is seeking to determine if the CEO received pay that was outsized for the services they provided. The IRS will consider nearly all forms of compensation, including their base salary, bonuses, severance payments, benefits, foregone interest, and certain insurance policies.

The IRS doesn’t define reasonable compensation any further, but they do say that if an organization takes the following three steps, CEO compensation is presumed to be reasonable:

1. An independent party reviews the compensation agreement.
2. The independent party obtains and relies on appropriate data when making their determination of whether the compensation agreement is reasonable.
3. The independent body documented their conclusion.

Typically, members of the board will form a compensation committee to act as the independent party. All members of the compensation committee should be free from conflicts of interest with the executive in question.

But the IRS isn’t the only party to consider when determining if compensation is reasonable. You should also consider the public.

General Public: Reasonable Compensation

Public sentiment and expectations matter because nonprofits rely heavily on the trust and goodwill of the public. If they pay their executives too much, their reputation could erode, and public support could be at risk. To determine what salary the public will expect, compare your CEO’s salary to key benchmarks. If you can determine what similar CEOs are earning, you’ll know if you’re on the right track.

To select the right benchmark, you’ll want to consider the following factors:

• Organization size: Nonprofits with smaller budgets will likely have lower CEO salaries than nonprofits with larger budgets.
• Sector: CEOs for nonprofits operating in certain sectors may demand higher compensation. For example, organizations in healthcare or higher education often require leaders with specialized knowledge to navigate regulatory oversight, which can warrant higher pay.
• Location: Nonprofits operating in states or regions with higher cost of living will likely need to pay their CEOs more.
• CEO experience: Nonprofit boards looking to scale their organization or improve existing operations might be willing to pay a higher salary for a CEO with experience and a history of past successes.

As you can see, there are no flow charts that lead you to the exact salary your CEO should be making. But there are plenty of objective data points you can use to inform your decision. One of the best tools that nonprofits can use to find objective benchmarks that will satisfy both the IRS and the public are compensation surveys.

What is a compensation survey?

Compensation surveys are detailed reports that collect data on salaries, benefits, and job roles across many organizations. Nonprofit-specific compensation surveys can be useful for organizations looking to determine optimal CEO salaries.

The compensation survey (or surveys) you should use depends on all the factors we already discussed, like nonprofit size, location, and sector. Great places to find compensation surveys are:

• Candid: Candid publishes compensation reports each year that help you benchmark salaries for executive leadership positions.
• Industry reports: If your nonprofit works in a specific industry, you may be able to find industry-specific compensation reports. Some are available for nonprofits in healthcare (look to the American Hospital Association), higher education (Council for Advancement and Support of Education), and social services (Human Services Council).
• State nonprofit associations: The National Council of Nonprofits collects and organizes state-level reports that you can refer to, but you can also go to your state nonprofit associations directly to find compensation reports. Find your state association here.

Once you have your benchmarks, what can you do to ensure that you’re paying your CEOs appropriately?

We recommend that you implement a compensation policy.

What should be in a nonprofit compensation policy?

If you don’t already have a compensation policy, it might be smart to create one. Here are a few things that should be in your compensation policy:

• Compensation philosophy: Your compensation policy should state the principles and values that drive compensation decisions. This might include your conflict-of-interest policy, your commitment to equal pay among all employees, your strategy for rewarding good performance, etc.
• Salary structures: Your compensation policy might define base pay rates and ranges for different positions. These ranges can give you room to adjust individual salaries based on specific job responsibilities, experience, geographic location, etc.
• Benefits: Your policy should outline the benefits you offer to which classes of employees.
• Compliance: Explain how you are compliant with employment law and tax law.
• Annual expectations: Your policy should state how and how often you perform CEO salary reasonableness calculations.
• Communication: Describe how compensation decisions are communicated to employees.

A well-drawn policy helps ensure that your CEOs are paid fairly but not exorbitantly. If you want to discuss CEO compensation or any other nonprofit governance concerns, reach out to your Meaden & Moore advisor. Our nonprofit experts will be more than happy to help.