Determining how to compensate executives of a nonprofit organization fairly requires a unique approach. To attract top talent, compensation packages in the nonprofit sector should be as competitive as possible; however, they cannot be deemed excessive or unreasonable–a requirement of the utmost importance as the IRS expands its workforce.

This article will help you understand the importance of a carefully crafted executive compensation guide, what to include in the package and how to source outside help when necessary.

Do Nonprofit Executive Compensation Packages Differ from Private Companies?

Yes, a nonprofit organization and a for-profit organization compensate their executives differently.

IRS Considerations

First, nonprofits must adhere to specific rules laid out by the IRS for a nonprofit executive compensation policy. Nonprofits fill out the IRS form 990 when filing annual taxes. Nonprofits must demonstrate to the IRS that their executive compensation packages are reasonable to be eligible for tax-exempt status.

Non-Salary Compensation

Second, nonprofit organizations tend to provide more non-salary benefits to their executive members than comparable private companies. Churches, for instance, may provide housing, relocation and transportation benefits to their ministers.

Salary Expectations

Third, nonprofits typically pay their executives less than private companies. This is because nonprofits are often subject to more stringent government regulations, require larger budgets for fundraising activities, and prioritize their community’s needs.

How Much Do CEOs of Nonprofits Make?

In the US, the average nonprofit CEO salary is $113k per year.

Nonprofit chief executive officers may earn a lower or higher salary than the average rate depending on numerous factors. These include the size of the organization, its mission and purpose, the type of services it provides, location, budget size, and existing personnel.

Nonprofit organizations in larger cities tend to pay their CEOs more than those located in rural areas. Nonprofits with larger budgets also tend to have higher compensation for nonprofit executive directors.

What Is a Nonprofit Executive Compensation Policy?

An executive compensation policy formally outlines how nonprofit executives earn compensation for their work and services. This should apply to all executive positions including the CEO, COO, CFO and others.

A compensation policy should include a base salary and subsequent benefits to be awarded to all executive members.

The compensation package should outline the following:

• Salary
• Bonuses if applicable
• Health insurance
• Retirement plan contributions
• Vacation and sick days
• Housing and transportation allowances
• Other non-salary benefits
• Performance expectations.

The ultimate purpose of a nonprofit executive salary and benefits guide is to ensure that everyone is on the same page regarding executive compensation and that it meets compliance requirements.

What Should Nonprofit Executive Compensation Packages Include?

When crafting an executive compensation package for your nonprofit organization, there are four key elements you should be sure to include.

Compensation Philosophy

A compensation philosophy ensures that executive compensation packages align with the organization’s leadership strategy and core values. It should attract, retain and demonstrate value for your organization’s talent.

Compensation Governance Model

A compensation governance model guides an organization’s board of directors on how to compensate nonprofit executives that align with its mission and belief system.

Compliance Review

A compliance review is necessary when procuring compensation packages for a nonprofit organization. This requires intermediate sanction reviews by an independent body to ensure the total compensation a nonprofit executive member receives is reasonable within the current employment market.

Total Compensation Analysis

A total compensation analysis identifies and defines the design of a compensation program. It ensures that the final executive salary aligns with an organization’s values and that its pay practices meet the requirements of all governing regulations and bodies.

Tips to Develop a Nonprofit Executive Compensation Package

When developing a comprehensive executive compensation package that meets the needs of your organization and compliance considerations, be sure to take the process seriously. How you compensate your CEO and executives can significantly impact your organization’s culture, reputation, and even federal tax status.

If you need help developing a compensation package, consider including nonprofit HR professionals in your compensation committee.

They can shed light on critical areas your team may accidentally overlook and guide you in the following areas:

• Salary Structure. Knowing what comparable organizations are paying for similar roles is essential when determining executive nonprofit pay levels.
• Establish a Competency Model. What skills and education should you expect from potential nonprofit executives? How will an organization measure effective job performance?
• Career Pathing. Career growth opportunities should be part of a strategic compensation plan that promotes employee retention and increases job satisfaction.
• Compliance. Compliance with the IRS, the Fair Labor and Standards Act (FLSA), local laws and other relevant governing bodies is essential for any nonprofit compensation policy.

Drive Your Nonprofit Organization Forward with JER HR Group

At JER HR Group, we specialize in people, ideas and solutions. This includes helping nonprofits with their executive compensation planning and development.

Our team of qualified professionals has years of experience designing, developing and executing effective plans that ensure compliance and core values are met.

Contact us today to create enticing and responsible nonprofit CEO compensation packages and incentive-based nonprofit executive salaries.