Nonprofit compensation: What’s too much? Who decides?
From the National Council of Nonprofits
Are you tired of hearing, "That nonprofit pays its employees too much!" If every nonprofit board followed IRS guidance on setting the compensation of its key staff leaders, perhaps we wouldn’t hear that refrain as often. So board members, please do your part by embracing your role as defenders of the nonprofit sector’s right to pay its employees reasonably and fairly. Help us change the conversation from, "What compensation is excessive?" to "What compensation levels will help our organization build its capacity by hiring and retaining terrific staff?"
First, know the process for reviewing the annual compensation of the executive director. Second, be aware of the downside of NOT engaging in an annual compensation review, such as bad press, lack of donor confidence and potentially IRS penalties. Need we say more?
Background: Under federal law, a charity may not pay more than "reasonable" compensation for services rendered. Although the Internal Revenue Code does not require charities to follow a particular process for determining the appropriate level of salary and benefits, it is clear that compensation for board members, officers, key employees and others in a position to exercise substantial influence over the affairs of the nonprofit should be determined by persons who are informed about what comparable nonprofits pay their employees, and who have no financial interest themselves in approving the compensation.
