Nonprofit Executive Compensation

A nonprofit board of directors holds the crucial task of recruiting, hiring, and retaining an effective Executive Director/CEO, and a key factor is executive compensation. The IRS mandates that nonprofit executive pay must be “reasonable and not excessive,” and yet the Board must offer compensation sufficiently attractive to draw and retain the highest caliber of leadership for the organization.

To achieve that balance, best practices recommend that Boards undertake an annual review and approval of the CEO’s compensation, ensure appropriate benchmarking data is analyzed, and meticulously document this process. Moreover, the process must be explained in the nonprofit's annual IRS Form 990 filing.

According to IRS guidelines, the compensation review must establish “rebuttable presumption” by meeting three requirements.

1. The arrangement must be approved in advance by an authorized group of individuals with no conflict of interest;

2. Prior to making compensation decisions, the group obtained and relied upon appropriate comparability data; and

3. The group "adequately and timely" documented the basis for compensation decisions concurrently with making those decisions.

For many years, my long-time colleague James Abruzzo and I have been assisting nonprofit Boards with executive compensation studies and CEO contract negotiations. Our approach provides a step-by-step methodology that follows best practices and helps create “safe harbor” for the Board and the executive, including:

• Reviewing and/or establishing guidelines and expectations for a Compensation Committee;

• Developing a compensation philosophy;

• Researching and analyzing up-to-date, targeted benchmarking of industry comparables;

• Sharing guidance on nonprofit compensation trends and components of executive pay (incentives, deferred, etc.);

• Providing thorough documentation of the analysis;

• Drafting executive contracts and guidance on key components (severance, retention, etc.); and

• Other guidance to help ensure compliance with "safe harbor" components as described in intermediate sanctions.

To learn more about nonprofit executive compensation studies, email me at mcounter@dhrglobal.com to schedule a conversation.