Some recent reports on compensation may provide insight on market levels, but may not be enough to determine appropriate compensation for nonprofit executives.  The IRS wants nonprofits to collect data from comparable organizations and use that data to determine reasonable compensation for their executives.  While the IRS does most of the compliance investigations, there is also increasing scrutiny at the state and local government level – when governments use taxpayer dollars to buy services to be provided by nonprofits, high pay for those nonprofit executives has become a hot-button issue.  Nonprofits need to be able to justify their executive pay levels.

According to GuideStar’s latest annual compensation report, the CEOs of Washington-area nonprofits are the highest paid in the nation by far, earning a median salary of $151,872 in 2010. That’s 11 percent more than the next highest metro area, New York, where the median CEO earned $137,387. The Washington-area median also is 50 percent more than most metro areas.

When the Washington Business Journal did research on nonprofit CEO compensation, it looked at pay at the 25 largest nonprofits based in the region. The median compensation in 2010 was $666,723, up 7 percent from 2009, a very different picture from the GuideStar findings.

But the calculation of the medians in these two reports masks what is really needed to find the market rate for compensation.  ERI’s research over the past decades has found that what an executive gets paid depends on the location, size, and mission of the organization.  So, averaging compensation at all nonprofits in an area – or even all large nonprofits – does not provide the detail necessary to set compensation.  The GuideStar calculation for the region included nonprofits of all sizes, while the Washington Business Journal looked at 25 of the largest in the area, leading to the huge difference in the medians reported in the region. GuideStar also calculated medians by type of organization, but then did not provide a breakout by size or geography.

What is missing in both reports is a breakout by type of organization, size, and geography, as all these factors influence pay.

Using a database of all Form 990 compensation data, ERI’s Nonprofit Comparables Assessor allows the user to search for comparable organizations by choosing a specific revenue size, geographic location, and type of organization.  Then, the comparables included in the analysis will truly be relevant. The basic demonstration version can be downloaded for free.  These analyses provide the detailed information that nonprofits need to show the IRS when setting executive salaries.  While the more general reports may be useful for spotting trends, the IRS and others who review salaries will require more precise information.