Comments on: Nonprofit Executive Compensation

By: Greg McRay

Greg McRay — Fri, 27 Jan 2012 23:00:46 +0000

Probably not, Denise. The only time an insider of a foundation can be paid for services is if they are performing essential “personal” services, usually defined as legal or professional in nature. This is a complicated topic…to much so for this forum. I highly recommend contacting us for a consultation block before proceeding.

By: Denise

Denise — Thu, 19 Jan 2012 18:09:30 +0000

Hi Greg, my father had started a 501c3 organization which I run with my siblings. We are all on the Board and we are active in the grant making, fundraising, etc. Are we entitled to compensation/salary since we are children of the founder?? And if so, how do we determine the amount??

By: Miriam

Miriam — Wed, 18 Jan 2012 05:22:37 +0000

Hello Again Greg, in a previous response you said usually the compensation is based on job description, budget and also the individuals qualifications….I am brand new to the CEO world or being a founder for that matter and I have decided to start a non profit organization full force, putting this together is my only job. I am unemployed as you know it takes a lot of work to put an organization together from the ground up. I only have a human resources background of 6 years. Will that be a problem in getting reasonable pay? To help me get by till more funds is available. It will be hard to do this project and still have a job on the side just to get by with me and my two kids. I will be the only one getting paid till the organization gets more structured. I will be having employees but that wont come till I finally get a facility for the emergency shelter. What do you recommend?

By: Greg McRay

Greg McRay — Wed, 18 Jan 2012 05:04:38 +0000

Great question…be careful about bonusing EDs regardless of the formula. That gets into incentive-based pay, which the IRS does not like in a 501c3. Best practice dictates fixed compensation based on job description, the staff member’s qualifications and the organization’s overall budget. If you want to reward success, give him a raise, not a bonus.

By: Greg McRay

Greg McRay — Wed, 18 Jan 2012 04:59:39 +0000

I don’t really see a reason for you to set up your own 501c3 if your for-profit business is simply donating portions of its profits. Your tax deduction potential is the same whether you are giving to a 501c3 you set up or to an existing 501c3 animal charity. Plus, you would have the overhead of running the 501c3. Hope that helps.

By: Greg McRay

Greg McRay — Wed, 18 Jan 2012 04:56:37 +0000

It’s possible, Grant…I just don’t know if it’s practical. Nonprofit publishing for literary or educational purposes is a possible 501c3 candidate. I think the problem for you will come with the lack of personal control, ownership interest and earning potential. Even if you could match or exceed your current earnings (and you probably could), the other issues may make the risk too great to take. Maybe not. If you are serious about bouncing around this idea, call us for a consulting appointment. It might help you sort out the pros and cons. Good luck!

By: Grant

Grant — Sat, 14 Jan 2012 18:17:32 +0000

I’ll add my thanks to everyone else here for your patient and helpful answers.

I’m a university professor, but on the side I have started a small but successful and sustainable publishing business (sole proprietorship, no employees) specializing in college textbooks, starting with two that I wrote myself and self-published. I’m now taking on other authors as well and paying them royalties. I have long toyed with the idea of expanding the size of my operation (i.e., many more titles, an employee or two) and turning it into a sufficiently profitable business that could my supplant my current day job, which pays around $100K + benefits.

The twist to this story is that my self-publishing endeavors were ultimately motivated by my deep unhappiness with (1) the exorbitant prices commercial publishers charge students for textbooks and (2) the paltry royalties paid to authors. The first means that students are getting literally ripped off (the free market model is broken, because the students don’t choose the books they have to buy); the second means that needed textbooks aren’t getting written because the incentives to authors are too small, especially in niche fields.

So, I’ve recently begun wondering whether I could convert the business to a non-profit whose express purpose was to encourage college textbook writing in niche fields and to make those books available to students at a truly fair price (half or less of typical retail prices). Could such a business qualify as “educational” for 501(c)3 purposes? Just as important, would I be able to have confidence that if I went to all this trouble, I wouldn’t be “punished” with an executive salary that falls far below my current regular salary plus current proceeds from the books?

In short, I like the idea of a non-profit publishing model for fostering the creation and availability of instructional materials, but I don’t want to go there if it’s going to mean a huge and permanent personal financial setback in comparison to the effort invested in running the business. I’m wondering whether you see a pathway that addresses the concerns I raised, or whether I’m just barking up the wrong tree.

By: Greg McRay

Greg McRay — Thu, 12 Jan 2012 03:37:09 +0000

It’s not a good idea, Robert. There is no practical value to the other organization to do this…and it certainly is not a best practice for yours. While it’s true the other company could deduct the cost as a contribution to your nonprofit, it can also deduct it as a consulting fee if she is paid directly. It’s not necessarily private benefit…she’s earned her money. It’s just not your nonprofit’s responsibility and your resources should not be used to facilitate this.

By: Robert

Robert — Wed, 11 Jan 2012 22:28:10 +0000

Hi Greg,
Thank you for this site and your cheerful answers to so many questions. I have one more that I hope you can answer or guide me to resources on.
I’m board chair of a small 501c3, and sometimes we can afford to pay our ED a modest salary, sometimes we cannot — but she is devoted enough that she continues her work even without pay.
When she’s not getting paid, she will take on outside consulting jobs, often in the public sector or non-profit world. Recently, some of the folks to whom our ED is consulting want to pay her through our 501c3, instead of on a 1099.
So it’s really her revenue, but can it essentially be run through our 501c3 (whatever comes in goes out to her) without it being considered an improper “private benefit” or creating other issues?
Thanks in advance for whatever thoughts you can provide.

By: Greg McRay

Greg McRay — Wed, 11 Jan 2012 02:49:01 +0000

Usually after, Miriam. I looked up your client file and saw that we just got started on your case. I’ll have your consultant follow up with you about the registration process. Great to have you on board!