What should a nonprofit compensation policy include?
A nonprofit compensation policy should define how pay decisions are made, what evidence supports them, who has approval authority, and how the organization reviews compensation over time. A useful policy covers market benchmarking, salary structures, internal pay relationships, decision authority, executive compensation governance, documentation, and review frequency.
This page provides an organization-wide policy template plus an executive compensation governance addendum, decision-authority matrix, comparability-data checklist, board documentation checklist, and policy-readiness checklist. The sample is a starting framework—not organization-specific legal or tax advice.
Why this template is different
Many online samples focus almost entirely on executive compensation. JER HR Group’s framework also addresses the operating decisions HR teams make for staff compensation: job matching, labor-market selection, salary ranges, compression, offers, promotions, and market adjustments. JER HR Group has more than 40 years of compensation consulting experience and has worked with 400+ nonprofit organizations.
Use this resource when the immediate need is creating or revising a nonprofit compensation policy. For broader compensation strategy and advisory support, see nonprofit compensation consulting. For a defined market and diagnostic engagement, see nonprofit compensation studies.
Related JER HR guidance for implementing the policy
A written policy works best when it is supported by the underlying compensation system. Use staff compensation consulting when the organization needs to connect policy language to an organization-wide staff pay program; job evaluation consulting when roles, levels, or job relationships need a consistent framework; and salary administration guidelines when HR needs clearer operating rules for offers, promotions, market adjustments, and exceptions.
If the policy covers variable pay, review JER HR Group’s incentive and compensation plan design services and the practical nonprofit incentive compensation guide. If the organization is selecting outside support to implement the policy, use the buyer guide on how to choose a nonprofit compensation consultant. For a broader planning framework, the nonprofit compensation planning guide connects job design, market pricing, internal alignment, and compensation structure.
Editable template: the Word version of this policy toolkit is now attached to this article for download.
A nonprofit compensation policy is most useful when it answers practical questions instead of relying on broad statements such as “we pay fairly” or “we follow the market.” For organizations building the broader pay framework around this policy, JER HR Group’s nonprofit compensation consulting services connect policy decisions with benchmarking, structure, governance, and implementation.
HR leaders, executives, and boards should be able to use the policy to answer questions such as:
- Which labor markets should be used for different jobs?
- How should jobs be matched to compensation data?
- How are salary ranges created and reviewed?
- Who can approve offers, promotions, and market adjustments?
- How should internal pay relationships and compression be reviewed?
- Who approves executive compensation?
- What should the board document?
- How often should the policy and the underlying compensation program be reassessed?
The sample language below is designed as a practical starting point for nonprofit organizations. Replace bracketed language with organization-specific information and have appropriate HR, legal, tax, or governance professionals review provisions that apply to your organization.
What should a nonprofit compensation policy include?
A compensation policy should separate the organization’s governing principles from the day-to-day procedures HR uses to administer pay.
The policy should govern the decision process. It should not hard-code conclusions that may become obsolete. For example, writing that every employee will always be paid at one fixed market percentile can create an unnecessary constraint when different job families compete in different talent markets.
A documented compensation philosophy should guide those choices.
Sample nonprofit compensation policy
Template note: Replace bracketed language with organization-specific information. This sample is general information and should be reviewed for your organization’s facts, governing documents, locations, and applicable requirements.
1. Purpose
Sample language
[Organization Name] maintains this compensation policy to establish a consistent, evidence-informed framework for compensation decisions. The organization seeks to provide compensation that supports its mission, workforce needs, financial resources, internal alignment, and ability to attract and retain qualified employees.
Compensation decisions will consider the responsibilities and requirements of the role, relevant labor-market information, internal compensation relationships, organizational resources, and other factors appropriate to the decision.
The purpose statement should define the organization’s approach without promising an outcome that cannot always be maintained. Avoid permanent promises such as “our salaries will always be above market.” Market position should be a deliberate organizational decision.
2. Scope
Sample language
This policy applies to employees of [Organization Name] and governs the principles used to establish and review base compensation, salary ranges, market adjustments, promotional adjustments, and other compensation decisions covered by the organization’s compensation program.
Executive compensation decisions subject to board or committee oversight will follow the additional governance process described in the Executive Compensation section of this policy.
Benefits, incentive compensation, grant-funded positions, union-covered positions, or other specialized arrangements may also be governed by separate plans, agreements, or policies.
This distinction helps prevent a staff compensation policy from unintentionally overriding specialized arrangements. If the organization needs to translate the policy into a broader staff pay program, staff compensation consulting can connect job architecture, market pricing, salary structures, and administration rules.
3. Compensation philosophy
Sample language
[Organization Name] seeks to maintain compensation practices that are:
Market informed. Compensation decisions will consider appropriate external labor-market information.
Internally consistent. Jobs with comparable organizational scope, responsibility, and requirements will be evaluated using consistent principles.
Financially responsible. Compensation decisions will consider organizational resources and long-term sustainability.
Mission aligned. Compensation practices will support the organization’s ability to attract, retain, and engage the workforce needed to deliver its mission.
Administered consistently. Offers, promotions, market adjustments, and other compensation decisions will follow documented approval practices.
A compensation philosophy explains how the organization thinks about pay. The compensation policy explains how those principles govern actual decisions.
4. Defining the relevant compensation market
One of the most common mistakes in nonprofit compensation policies is assuming every job should be benchmarked only against other nonprofits.
A nonprofit accountant, nurse, technology specialist, fundraising executive, and program coordinator may compete in very different labor markets.
Sample language
Relevant compensation markets may vary by position or job family. When identifying appropriate market references, [Organization Name] may consider job responsibilities and organizational level, industry or sector, organization type, organization size and complexity, geography, availability of specialized talent, employee work location, relevant nonprofit, public-sector or commercial employers, and other organizations competing for comparable talent.
Peer organizations will be selected based on their relevance to the position and labor market being evaluated rather than organizational name or tax status alone.
When the organization needs evidence instead of a policy assumption, a formal nonprofit compensation study can evaluate the appropriate market, job matches, ranges, and internal relationships.
5. Market data and salary benchmarking
A policy should define how market evidence is evaluated—not simply state that “market data will be used.”
Sample language
[Organization Name] may use published compensation surveys, customized surveys, relevant peer-organization information, and other credible compensation data when evaluating external competitiveness.
Market information should be evaluated for relevance of the job match, data effective date, geographic relevance, organization size or complexity where applicable, industry or sector relevance, number and quality of observations, compensation elements included, and other methodological limitations.
Job content and responsibility should take precedence over job title alone when determining benchmark matches.
When no single source adequately represents the relevant market, multiple appropriate sources may be considered.
Organizations with insufficient published data may need a custom salary survey rather than forcing weak job matches.
For a deeper explanation of benchmarking, see JER HR Group’s nonprofit salary benchmarking and salary-range guide.
6. Job evaluation and salary structure
A policy should explain how jobs enter and move within the compensation structure. A consistent job evaluation methodology helps define role relationships before jobs are placed into grades or ranges.
Sample language
Positions will be assigned to the organization’s compensation structure based on the duties, responsibilities, organizational impact, required capabilities, and other job-related factors relevant to the organization’s job-evaluation methodology.
New positions and positions with materially changed responsibilities should be reviewed before permanent salary-range placement.
Salary ranges may be reviewed periodically using relevant market information, organizational structure, internal relationships, and compensation strategy.
The policy should not contain every grade or salary range itself. Those values are usually better maintained in the compensation structure and associated administrative documentation.
If grades or ranges need redesign, that work belongs within pay structure consulting and salary range design rather than inside policy language. Once the structure is approved, clear salary administration guidelines help HR manage offers, promotions, market adjustments, and exceptions consistently.
7. Internal alignment and pay compression
Market competitiveness is only one side of compensation. A policy should also explain how internal relationships are considered.
Sample language
Compensation decisions may consider internal relationships among employees and positions in addition to external market information.
[Organization Name] may review employee placement within salary ranges, compensation relationships among comparable roles, employee-manager compression, new-hire versus incumbent relationships, promotional relationships, materially different responsibility levels, and unexplained pay outliers.
Identification of a potential internal inconsistency does not automatically require a particular pay adjustment. The organization will evaluate relevant facts, available evidence, budget considerations, and applicable requirements before determining an appropriate response.
A policy should govern investigation and decisions. It should not promise automatic adjustments every time a difference exists.
8. Compensation decision authority
This is one of the most useful sections of a real compensation policy and one of the most frequently omitted from generic templates.
A nonprofit should clearly define who can approve what.
This matrix is illustrative. The organization’s actual policy should reflect its governance structure, bylaws, delegated authority, and operating practices. Do not create approval requirements that the organization cannot consistently follow.
9. Compensation reviews and adjustments
Sample language
Compensation may be reviewed in connection with hiring, promotion, changes in job responsibilities, market review, organizational restructuring, performance processes where applicable, or other legitimate business circumstances.
A market review does not guarantee an adjustment. Compensation decisions may consider market information, employee placement, internal relationships, performance where applicable, financial capacity, and organizational priorities.
Individual compensation changes must receive the approvals required under this policy.
The important distinction is simple: a benchmark is evidence, not an automatic salary decision. If variable pay is part of the organization’s policy, review how incentive and compensation plan design differs from base-pay administration, and use the nonprofit incentive compensation guide for governance and plan-design considerations.
Executive compensation governance addendum
Staff compensation and executive compensation should not always be treated as the same process.
For certain applicable tax-exempt organizations and transactions involving disqualified persons, IRS regulations describe a process that can establish a rebuttable presumption of reasonableness. The core elements include advance approval by an authorized body without conflicts, reliance on appropriate comparability data, and adequate contemporaneous documentation. Review the IRS guidance on rebuttable presumption and intermediate sanctions.
The executive-governance provisions below should therefore be reviewed with appropriate professional advisers for the organization’s circumstances.
10. Executive compensation approval
Sample language
Compensation for the Executive Director/CEO and other positions designated for independent governance review will be approved in accordance with the organization’s bylaws, board policies, and applicable requirements.
The individual whose compensation is under review will not vote on approval of their own compensation.
The authorized decision-making body will review appropriate information before approving the compensation arrangement.
Organizations requiring deeper support can review JER HR Group’s nonprofit executive compensation consulting.
11. Comparability data for executive compensation
Sample language
Before approving executive compensation, the authorized body should evaluate appropriate comparability information relevant to the position and organization.
Depending on the circumstances, relevant factors may include responsibilities and scope of the position, organization size and complexity, geographic market, industry or mission sector, workforce size, operating or program complexity, total compensation, relevant compensation surveys, comparable organizations, and other evidence appropriate to the decision.
The organization should document the data considered and the basis for determining that the selected comparators are appropriate.
Do not hard-code a rule such as “we will always use five organizations from one database.” The number of comparators matters less than whether the evidence is relevant to the position and organization being reviewed.
12. Conflict-of-interest procedure
Sample language
Any member of the authorized decision-making body with a conflict of interest concerning a compensation decision will disclose that conflict and follow the organization’s applicable recusal procedures.
Actions taken to address conflicts will be documented as required by the organization’s governance policies and applicable requirements.
For organizations formalizing board processes, JER HR Group’s nonprofit board governance consulting addresses compensation oversight, decision authority, and documentation.
13. Executive compensation documentation checklist
For applicable transactions, the organization should maintain a clear record of the decision process. The exact documentation should be determined based on the organization’s circumstances and professional guidance.
Board or committee checklist
- ☐ Executive or position reviewed
- ☐ Compensation components considered
- ☐ Date of approval
- ☐ Board or committee members present
- ☐ Members participating in the vote
- ☐ Conflicts disclosed
- ☐ Recusals or other conflict-related actions
- ☐ Comparability sources reviewed
- ☐ Why those sources were considered relevant
- ☐ Relevant total-compensation information
- ☐ Final decision
- ☐ Basis for the decision
- ☐ Meeting minutes or equivalent documentation completed
Organizations dealing specifically with Section 4958 considerations can also review JER HR Group’s Intermediate Sanctions review service.
14. Policy review and compensation review frequency
A useful policy separates different review cycles rather than assuming every compensation activity occurs at the same time.
Sample language
This policy will be reviewed periodically by [HR/Executive Leadership/Board or Committee] and updated when changes in organizational structure, compensation practices, governance requirements, or applicable laws make revision appropriate.
Market information and compensation structures may be reviewed on a separate schedule based on organizational needs.
Executive compensation will be reviewed according to the organization’s governance process and applicable requirements.
What not to copy blindly from a nonprofit compensation policy template
A template should help the organization ask better questions. It should not make strategy decisions automatically.
Do not automatically write: “We pay everyone at the 50th percentile.”
Different roles can compete in different labor markets. A technology role, clinical role, fundraising executive, and community-program position may not require the same market strategy.
Do not write: “We benchmark only against nonprofits.”
Tax status does not define every labor market. Job function, geography, role scope, and talent competition also matter.
Do not write: “Form 990 data determines our CEO’s salary.”
Form 990 information can be useful, but role scope, organization complexity, geography, total compensation, data age, and the relevance of the comparators still matter.
Do not make salary adjustments automatic whenever someone is below market.
A compensation study identifies evidence. It does not eliminate management judgment, financial constraints, internal relationships, or other relevant considerations.
Do not give an executive authority to approve their own compensation.
Executive compensation should follow the organization’s independent governance and conflict-of-interest process.
Do not create approval rules nobody follows.
A policy that requires a process the organization routinely bypasses creates inconsistency. Build decision authority around the real governance model.
Compensation policy vs. compensation procedure
These terms are related but should not be treated as interchangeable.
Compensation policy
Answers: What principles and authority govern compensation decisions?
Examples include relevant-market principles, compensation decision authority, executive governance, documentation requirements, and review expectations.
Compensation procedure
Answers: How does HR administer those principles?
Examples include how a new job is submitted for review, which survey sources HR checks, how offer approvals are routed, how salary-range changes are entered into systems, how employee communications are created, and which records are retained.
This distinction keeps the policy more durable because operational procedures may change more frequently than governance principles.
Before the board approves the policy
Use this policy-readiness checklist before final approval. If the organization expects to use an outside adviser to implement or validate the framework, the buyer guide on how to choose a nonprofit compensation consultant explains how to compare methodology, market data, deliverables, governance support, and implementation capacity.
- ☐ Purpose is clear
- ☐ Policy scope is defined
- ☐ Compensation philosophy is documented
- ☐ Relevant labor-market principles are defined
- ☐ Market-data standards are documented
- ☐ Job-matching methodology is clear
- ☐ Salary-structure governance is defined
- ☐ Internal alignment and compression are addressed
- ☐ Offer and adjustment authority is documented
- ☐ Executive compensation has a separate governance process
- ☐ Conflict procedures are addressed
- ☐ Board documentation expectations are clear
- ☐ Review responsibilities are assigned
- ☐ Policy is consistent with actual operating practice
- ☐ Appropriate professional review has been completed
When a template is not enough
A policy can document the process. It cannot tell you whether current salaries are competitive, whether ranges are appropriately designed, which organizations belong in the relevant market, or whether meaningful internal compression exists.
Those questions require evidence.
If the policy project exposes underlying compensation issues, the next step may be a market study, salary-structure review, executive compensation analysis, or broader nonprofit compensation strategy rather than more policy language. JER HR Group’s nonprofit compensation planning guide also provides a broader framework for connecting job design, market pricing, internal alignment, and compensation structure.
Frequently asked questions
What is a nonprofit compensation policy?
A nonprofit compensation policy documents the principles and processes an organization uses to make compensation decisions. It can address market benchmarking, salary structures, internal pay relationships, approval authority, executive compensation governance, documentation, and review frequency.
Does every nonprofit need a written compensation policy?
Not every nonprofit is subject to the same requirements, and requirements can vary based on organization type, location, and circumstances. A written policy can nevertheless help establish consistent compensation governance and document how important pay decisions are made. Organizations should obtain appropriate professional advice regarding requirements that apply to them.
Who should approve a nonprofit compensation policy?
Approval depends on the organization’s governance structure. HR and executive leadership may develop staff compensation provisions, while the board or an authorized committee may have responsibility for governance policies and executive compensation processes.
Who should approve a nonprofit CEO’s compensation?
For applicable nonprofit organizations, executive compensation should be reviewed by an appropriately authorized independent body without conflicts of interest. IRS guidance on the rebuttable presumption also emphasizes appropriate comparability data and contemporaneous documentation.
What compensation data should nonprofits use?
Appropriate data depends on the job and labor market. Useful sources can include compensation surveys, nonprofit-specific studies, cross-industry data, custom salary surveys, and relevant peer information. Job content, geography, organization context, data age, and sample quality should be considered.
Should a nonprofit compensation policy include salary ranges?
The policy can explain how ranges are created, reviewed, and administered, but the actual salary-range table is usually better maintained separately so the governance policy does not require formal revision whenever market ranges change.
How often should a nonprofit compensation policy be reviewed?
The policy should be reviewed periodically and whenever material changes in organization structure, compensation practices, governance, or applicable requirements warrant revision. Market reviews and executive compensation reviews may operate on separate schedules.
Is a nonprofit compensation policy the same as an executive compensation policy?
No. An organization-wide compensation policy governs broader staff compensation practices. An executive compensation policy or governance addendum focuses specifically on how designated executive compensation decisions are evaluated, approved, and documented.
This article provides general compensation and governance information and is not legal or tax advice. Requirements and appropriate practices vary by organization type, jurisdiction, governing documents, and facts. Use qualified legal or tax advisers for organization-specific decisions.
