Executive compensation is a hot-button topic for both nonprofit and for-profit companies. With the nature of compensation changing dramatically for technology and other high-growth industries, it is important to understand what is fair and competitive when setting your employee salaries. For nonprofits in particular, the IRS places a great deal of significance on this issue when evaluating new nonprofits seeking 501(c)(3) status.
Before deciding what to pay your nonprofit employees, the first step is conducting due diligence to determine the market value of the services the job requires. This process includes gathering public information from sources such as the Labor Department and census data. Due diligence can also include comparing the salaries for job postings of companies in similar sizes and locations. Completing your due diligence is most helpful in giving you an idea of what is reasonable and fair for the positions you’re setting compensation for.
Unfortunately, the IRS “reasonable” standard is quite subjective. But, it does include such things as job duties, geography, industry norms, and the size of the organization itself. Setting a reasonable and fair salary for a nonprofit employee first begins with the budget of the charity. Realistically, if an organization cannot afford a particular compensation package, it’s not considered reasonable for the organization. The next level of consideration is for the actual job description – what is required, what is the employee responsible for, how many hours a week are necessary and the like. An additional level of consideration would be based on the candidate up for consideration, such as their level of education and relevant experience.
Arm’s Length Consideration
The issues discussed in this article are applicable to any nonprofit employment arrangement. But, they take on even greater importance when it’s a key employee situation, like an Executive Director. The most important thing to remember about setting compensation for nonprofit executives is that they should be set by an impartial, nonbiased party. No executive, nor anyone related by blood or business interest, should be involved in discussions regarding their own compensation. This scenario is most sensitive when employees occupy board seats, such as frequently occurs with founders of small organizations. Employees and their relatives should recuse themselves from any related discussions in order to avoid the appearance of impropriety (see our recent article on private benefit and inurement).