Tag Archive for compensation

Setting Executive Compensation: How Much is Too Much?

This is part of a series of articles focused on issues relevant to non-profit boards of directors

shutterstock_46389259In recent articles, I have outlined the roles and responsibilities of non-profit boards and focused on the legal and ethical responsibilities of individual non-profit board members. Now, I want to spotlight one very important task non-profit board members must complete carefully and strategically: setting executive compensation.

A non-profit’s chief executive is often the heart, soul and public face of the organization. The chief executive is responsible for leading and coaching staff members; overseeing revenue-generating and fundraising activities; making final strategic decisions to ensure the organization’s mission is advanced; and countless other day-to-day tasks.

Clearly, the chief executive position is vitally important to the overall success of any non-profit organization. So, how do you put a dollar value on something so important? In today’s hyper-competitive environment, non-profit organizations across the country are struggling to answer that question.

As we discussed in my previous article, the board of directors has the responsibility of hiring and setting compensation for executive leadership.

Study the marketplace: Of course, every non-profit organization wants to hire their first choice for the executive director role–but many quickly learn they’ve only budgeted for their third, fourth, or fifth choice.

Before going through the process of selecting a new chief executive, non-profit boards must find out the “going rate” for that position. That means analyzing the salaries and benefits of comparable positions in private, public, and non-profit sectors and comparing those salaries to what the organization is prepared to offer. Having in-depth knowledge of the current marketplace will help your board set expectations and budget appropriately.

Protect your bottom line: The board needs to find middle ground between compensation that attracts the top talent and cost-cutting strategies that help the organization fund its services. That means offering a salary range that the IRS calls, “reasonable and not excessive.”

The National Council of Nonprofits encourages non-profit boards to think carefully before finalizing a deal with a new executive leader and ask itself: “Are the assets of this non-profit being used prudently and to advance the mission?”

Play by the rules: The IRS has rules and regulations that aim to prevent non-profit organizations from overpaying their executive staff. If the non-profit board knowingly overpays an executive a salary the organization can’t afford, the IRS sees that as “excess compensation.” Penalties range from hefty fines to an organization losing its tax-exempt status.

Keep detailed records: Hiring a chief executive is one of the most important decisions a non-profit board has to make, and it should be documented as such. Non-profit board members will be asked by donors, supporters, reporters and perhaps the IRS to explain their hire and justify their salary and benefits.

Guidestar recommends a three-step process to ensure the board complies with IRS regulations and board members remain unbiased:

  • The board should approve compensation before an offer to the candidate is made and to ensure no board member has a conflict of interest related to the transaction.
  • The board should research comparable positions before approving compensation.
  • The board should document the decision-making process throughout the process.

Guidestar’s recommendations follow the IRS “rebuttable presumption of reasonableness” rules. In other words: The board is doing its due diligence and covering its bases while it makes a strategic, well-thought-out decision on executive compensation.



Michelle Hatch is a partner in our Non-Profit Services Group. She oversees audit and accounting engagements for non-profit organizations, including independent schools, trade associations, health and human service organizations and art, cultural and membership organizations. Michelle is also a member of the Employee Benefit Assurance Group and oversees audits for 401(k), 403(b) and defined benefit retirement plans.


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Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statues, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.

990 Policy Compliance Series – Compensation Policies

Compensation is one of the hottest topics facing non-profit organizations in recent years. The IRS has developed questions for non-profits to answer in order to shine a light on the compensation practices for the top earners of the entity. Again, these are not legally mandated policies, however, there are very specific requirements relating to the entity’s process in order to favorably answer the questions surrounding compensation practices.

The process for determining compensation for the individuals listed in Part VI, questions #15a and 15b must include following three elements:

1. Review and approval by a governing body or compensation committee. The members of the governing body or committee must be free of conflicts of interest surrounding the compensation arrangement under review. A conflict of interest by a member of the committee is deemed to be present if:

a. The member or his or her family member is participating in or economically benefitting from the compensation arrangement.
b. The member is in an employment arrangement subject to the direction or control of any person participating or economically benefitting from the compensation arrangement.
c. The member receives compensation or other payments subject to approval by any person participating or benefitting from the compensation arrangement.
d. The member has a material financial interest affected by the compensation arrangement.
e. The member approves a transaction benefitting the person participating in the compensation arrangement, who then, in turn, has approved or will approve a transaction providing economic benefit to the member.

2. Use of comparability data regarding the compensation arrangement being determined. The data being used must be for similarly qualified persons in functionally comparable positions at similarly situated organizations. Typically, non-profits will review the compensation for officers and key employees, which is disclosed in the 990s of other similar organizations. Form 990s of other organizations can be downloaded from websites such as Guidestar, or in Massachusetts, the Attorney General’s website for public charities.

3. Finally, all of the processes above should be documented in a timely manner with proper records kept as to what data were used, who participated in the process (and if they were free of conflicts of interest), when the discussion occurred, what deliberations transpired and what decisions were made.

If you follow the above process and you answer yes to either #15a or #15b, you must include a description in Schedule O. In that description you are required to identify the positions that were covered in the process to determine compensation above, and the year the process was last performed. If the organization did not compensate its officers, directors, top management official or other key employees, or if any of the above elements were not met, the answer should be “no”. A disclosure of why the answer is no is not required, but is allowed and could be helpful to explain the reason for answering “no”.

Read other articles in our “990 Policy Compliance” series:

Jeanne Pagnozzi Boston Accountant

Jeanne Pagnozzi is a manager in BlumShapiro’s Accounting and Auditing Department, based in Quincy, Massachusetts, Jeanne oversees attest and tax engagements and is responsible for engagement planning, staff supervision and coordination with client personnel to ensure successful completion of projects.