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Nonprofit Executive Compensation

Nonprofit Executive Compensation

Nonprofit executive compensation tops the current list of IRS hot button issues. In recent years, the IRS has been ramping up its oversight and enforcement of nonprofit executive compensation.  With all the rancor surrounding executive perks and bonuses on Wall Street, expect that populist sentiment to spill over into the nonprofit sector as well.  It all adds up to the equivalent of a message written in the sky:  get your house in order!

So, how do you do that?  Let’s take a look at a few key points that will go a long way toward ensuring that the compensation package for your nonprofit’s leader(s) is appropriate.

Reasonable compensation. It all starts here.  The IRS requires compensation packages for nonprofit executives (and other nonprofit employees, for that matter) to be reasonable.  Unfortunately, the IRS doesn’t really define reasonable…at least not in a way that you could look up in Websters.  Reasonable compensation is best understood in light of factors the IRS examines when determining whether or not a charity is exceeding reasonableness with its compensation arrangements.  These factors look something like this:

  • Actual job description
  • Required level of education or experience
  • Compensation averages in your area
  • Number of hours worked
  • The overall budget of the charity

Its also important to note that each factor is weighted differently depending upon the circumstances.  It is a very subjective exercise.  We’re often asked, “How much is too much?” Good question, but hard to answer.  Frankly, it just depends.  I know, I know…“not very helpful”, you say.  There are legitimate, charitable organizations whose executives make up to, and sometimes more than, $250,000.  For a very select few, a lot more.  But let me put it like this…if you have an employee whose compensation package exceeds $100,000, you better be prepared to defend it.  Needless to say, Wall Street-style perks and bonuses are out of the question.  And, depending on your organization’s budget, a $10,000 salary package could be considered unreasonable.

Due diligence. Due diligence is the brother of reasonable compensation.  In order to have a compensation package considered truly reasonable, the figure must be the result of a substantive evaluation of what makes sense for the job.  That is the responsibility of the board of directors or compensation committee.  It is considered a best practice to document the method used to determine salary packages.  There are various resources that can be used to come up with the information:  The Labor Department, census data, job-oriented websites, national and local charities, etc.  It’s best to use multiple sources.

Arms-length. This is often the one that hangs folks.  You can do all the due diligence you want and come up with the nation’s most reasonable compensation package, but if your compensated executives effectively control the mechanisms of their own pay, then trouble awaits you.  For example, let’s say the president of the board is also the salaried Executive Director.  That’s OK, as long as your board structure and meeting minutes show arms-length.  In other words, the president better refrain from discussions and votes about his/her own pay package…plus, a majority of those voting on the package better not have any relation to him/her, by blood, marriage or outside business.  Intermediate sanctions penalties await those that mess this part up.

Nonprofit executive compensation scrutiny is not going away anytime soon.  In fact, it is only likely to increase.  If you know your nonprofit has problems in this area, be proactive and get it fixed immediately.

Greg McRay, EA

Greg McRay is the founder and CEO of The Foundation Group. He is registered with the IRS as an Enrolled Agent and specializes in 501(c)(3) and other tax exemption issues.

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Hi Greg,

I am the bookkeeper for a 501C in New York and I am very uneasy paying one of the Board members for his contracting services. He came in as a friend of one of the Board members and he now sits on the Board at our place of business and has been paid over $100,000 in the past three years. Is this legal? Please advise.

Chris Widener

I am starting a small non-profit with 501c3 status that I will serve as CEO. I was told I can serve on the board as long as I do not vote. I will have three separate board members already lined up. Is it better in the eyes of the IRS… if I am not on the board at all? I would love a second opinion.

We are an AAU basketball organization and still waiting on our letter from the IRS for our Non Profit status but have our EIN number. My question is the owner, CEO wants to take a salary monthly. I can not find any guidance anywhere with the IRS and even waited on hold for an hour for them to tell me the publication I have that tells you nothing! How do I figure out what what he can do? He does everything and I mean really everything!! Getting ready for the spring season he is on the go from 8am-12am! Can… Read more »
I am on the board of a non-profit with annual revenue of about 2mil. Have just completed our first year with a paid executive director and we are doing an annual review. Many of the board members want to base his salary and/or bonus on how much he raises from sponsors. I particularly dont agree with this because many of these sponsors were donating prior to his arrival and many of the new ones are gained through other board members and associate members. I would rather giva an annual raise. what I am looking for is the average salary for… Read more »
I am starting a small non-profit with 501c3 status that I plan to be the executive director to promotes the arts in my community. I am now working on asking people in the community to be on the board. My concern is that I have heard horror stories of boards that have taken over organizations and thrown out the person who founded the organization so I am really timid about selecting people. My plan is to possible be the president and as well as the director since I will be doing most of the work. My other concern is after… Read more »

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??

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… Read more »
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,… Read more »
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… Read more »

Hello, I am in the beginning process of starting a non profit organization, in specific a domestic violence shelter for abused women and children in CA. I have not been deemed by the IRS as a 501c3 organization yet (still doing paperwork). Can I start requesting grants before my official status, or asking for donations to support my cause (with disclaimer that their donations will or might not be tax deductible)?


Great forum, I’m glad I found it.
My question concerns the formula for a bonus for the Executive Director of a 501c3. A sizable portion of the organization’s annual net income is investment income. Does the IRS require that the investment income be disregarded in computation of an annual bonus for the Executive Director? Thanks.

Jeanette Foss
Hi Greg! Wow, what a fantastic article. I have read over all the posted questions and learned a lot from your responses. Thank you. I am in the process of starting a for-profit business and I would like to have a charitable side to it as well. My business is animal focused and I would like to donate to animal rescue groups, shelters etc. I originally wanted to donate part of proceeds from the business to those groups but have been considering setting up a 501c3. I have recently designed items specifically for charitable purposes. All proceeds from the sale… Read more »
Hi Greg, great article..thank you! Hoping you can answer a few questions for me. -In a non-profit school, is it ok to pay substitute teachers under the table? Is there a max amount that is acceptable to not report? I’ve read $100, but wanted to ask. -Can you trade services for cash? Example: parent is allowed to do work at the school (that would otherwise be paid for) in exchange for reduced tuition, under the title of a “scholarship” (note, parents are hand picked by President without full review by board.) Is this person technically an employee? Are there tax… Read more »

Ok, lets say I am starting a company which solely works to provide a service which will only be “sold” to 501c’s- for their benefit (another means of recieving donations or advertising, etc etc, for example)… Since my business exists solely to help out 501 reigstred entities, is it even allowable that we ourselves file as 501c? I have not found a whole lot about our (basically) 3rd party kind of situation… Thoughts?


I am currently in the beginning stage of creating a NPO. I currently write a blog the has gained a lot of recognition in my community and I want to go the next level of helping my community. I do want to earn a salary as this will be my only "job". I am passionate about helping my community, but I do need to earn a living too. How can I have control of the direction of my organization and earn a decent salary? Is it possible and how? What do you recommend for individuals who are just starting out?

Orville Roache

My board has begun discussion on increasing my compensation commensurate with the other E.D.’s in the county of like organizations. I’m about 15k away from the average. I do receive a 3% cola annually. I actually would prefer a retirement plan rather than the raise. We do not offer a company paid pension to employees and it isn’t fiscally readable at the moment. Do the rule allow the board to offer a plan for just the E.D.?

stephen stuart

Thank you for your time in advance. I am trying to start a non-profit restaurant where 100% of all proceeds are allocated to select charities. Will I run into major hurdles qualifying as a non-profit in the restaurant industry?

Jeannette Turnage

I’m a bit confused…. I want to start a christian based non-profit for at risk teen girls in rural neighborhoods. I want to provide counseling services, life skills, educational and mentoring services, job skills, residential services for run aways and teen mothers. How would I decide on compensation for all parties involed?


This is an awesome article! I have found more info on this site than I have in the several days of countless researching. I am at the beginning stages and am eager to to get started! Thanks so much!

Charnell T. Green

I sit on a nonprofit board and we are planning a fundraising event soon. Can board members receive a percentage of the fundraising proceeds as an incentive to get sponsors, donations, contributions, etc.? In my 12 years of working for a non-profit as an Executive Director, I’ve never heard of this. I tried explaining to them that board members do not receive compensation, other than reimbursement for travel, lodging, meals, etc. that are related to the organization’s activities. Please enlighten me on board compensation and fundraising percentages for board members.

Jayne Stubbs
I have a question. I sit on a board and over the past few years there has been a steady decline in fundraising. They have two full-time salaried fundraisers and the Executive Director devotes part of her time to fundraising as well. I made the suggestion that for next fiscal year we put tiered fundraising goals in place with incentive compensation tied to each tier. I was told that it was highly frowned upon to link compensation to fundraising goals. The organization has approximately $7,000,000 annual revenues and fundraising totals less than 1/8 of the total revenues. The two full-time… Read more »
Beth Addison

This is a great article! I am the founder and director of a small 501(c)(3) animal rescue. We are very new and have not yet started raising funds. I am examining grant and will start soliciting funds from private funders. My question is: how does a small nonprofit like mine get funding and able to pay a salary? Can grant monies be used to pay a salary? Can you use grant funding for programs to pay the director a salary?

Any guidance is appreciated.

Yaacov Haber

Are there any IRS restrictions pertaining to paying a fundraiser a percentage of what he/she brings into the non profit organization?


Stephen Gambrell


So how much of the organization's total revenue can be allocated to pay its staff?


The Board Compensation Committee of a 501(c)(3) foundation whose mission is to develop and provide funds and programs for a specific organization, is looking at providing an incentive compensation plan to the executive director. The ED's base salary satisfies the reasonable test. We also understand that total compenation needs to be capped. Is there a 'rule of thumb' for the maximum percent of salary that the should incentive be?

Hi Greg, Thanks in advance for any response. I do development for a small nonprofit in NYC with the following characteristics: – 6 FTE – a ~$900k budget (w/ 2 foundation supporters giving us $300k of that and a fundraising event bringing in $100k or so) – we know next year we will lose 2/3 of that foundation support. Despite this, our director and newly promoted COO took raises of $10k and $8k respectively this year, so they now have salaries around $170k and $90k. Remaining employees have salaries of $25k to $45k. Can any serious funder look at this… Read more »

Great article!!! Does the same premise apply to small non profit booster clubs? Can the board be legally, reasonably compensated?


Hi Greg, thanks much for both the article and for replying to questions in the comments. I've been searching in vain for some kind of standard in determining executive pay, or at least data detailing ranges and medians by sector, geography and budget size. Are there online resource where such information is collected and shared?

Great article! Thank you! I have a question: I'm starting a non-profit for education and counseling purposes (credit counseling). I am going to be compensated as the president and as counselor. Obviously as I will have more clients, I have to do more work. Can I increase my salary from one month to another, the same with my employee? I have to pay her more if she see more clients. Is that a problem? Does the IRS see it as wrong? My salary is going to be $60000 per year and my counselor $20000 but at the beginning she is… Read more »

If I as the founder do not draw a set salary due to lack of working capital may I allow the organization to purchase me a vehicle and pay the expenses associated with that vehicle, i.e. gas, oil ,tires and normal day to day cost and still allow me to use it as a personal vehicle for normal running.

I serve on a board for a 501(c)3 organization (a nonprofit community theatre). Our Vice-President of the board is also our Managing/Artistic Director. We bring in enough income now that we can pay her a salary of about $25,000 annually to retain her for her services. The president of another local board, running the county cultural alliance, has advised us to get her off the board if we are going to pay her (for managing the theatre and directing), or the IRS will pull our 501(c)3 status. The IRS website states that "No part of the net earnings of a… Read more »

Great article! I think the term "Non-Profit" is a bit of the problem with trying to figure out the appropriate compensation for the staff. My thought is, I would like to run my non-profit to accomplish its goals, but I need to keep the roof over my family's heads as well. I guess that is the balancing act the IRS would be looking for.

Julie Mayberry

In regards to the non-profit's executive…is there a formula to compare the amount of money raised vs the amount given to the executive for salary?

Sharri Boyett
I am the founding director of an animal welfare nonprofit. My roles include fundraising, program management, administration (and anything else that needs to be accomplished). After ten years of either no pay, or a stipend, I was successful in gaining a city grant specific for program management (we collaborate and manage programs for the city). This grant was renewed last year but this year has been cut by 2/3. The roles have grown, the responsibilities have grown. We have no staff. Now I’d like a compensation package that involves a % of grants and % of donations to try to… Read more »
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