6. January 2016 12:44
Headlines may cover the instances of high pay for nonprofit executives, but a closer look at all the data reported on CEO pay indicates that compensation averages are actually pretty low. Using ERI’s Nonprofit Comparables Assessor, the table below shows the average annual pay for CEOs of all US Human Services organizations (plus averages for the 25th and 75th percentiles). These calculations are based on pay reported by charities on Forms 990, the annual report required by the IRS.
These averages show why nonprofit boards might be more worried about paying their executives too little, rather than too much. The IRS focuses on preventing “excess compensation” and only defines "reasonable compensation" as "an amount as would ordinarily be paid for like services by like enterprises under like circumstances." An average CEO salary of $75,000 for heading up a $1 million human services charity hardly seems excessive, but let’s examine some of the reasons for the salary levels.
- Influence of who is on the board. For example, a volunteer board member earning $50,000 a year in his regular job may think paying a $100,000 CEO salary is too much. At the same time, another board member who is president of his own company and earning $450,000 per year may assume that no qualified person could be recruited for the job for less than $100,000. Some board members may have jobs with generous pension plans and health insurance (not offered by the nonprofit) and don’t think about those benefits when considering total compensation packages for the CEO.
- Funding the salaries. Most CEOs realize that there is a direct relationship to their salaries and fundraising. Yes, they can get increases, but that just means the CEO has to increase funding efforts to pay for those increases. Other salaries within an organization are also related to the CEO salary, so increasing the CEO level also means that there will be increases in other positions to maintain the relationships. Again, that means more fundraising for the CEO.
Boards setting CEO compensation must focus on their goals – attracting and retaining the talent needed by the charity. The following should be kept in mind:
- Keeping competitive with other comparable organizations. This requires a review of salaries in similar nonprofits, looking where the current CEO might come from or find their next job. While nonprofits may be the most likely type of organization, also include government or even for-profit companies if relevant, and remember to consider total compensation, accounting for any variation in benefits, if substantially different.
- Maintaining relationships within the organization. Setting a salary using other organizations may require some more adjustments for other positions within the organization. The appropriate spread between the CEO salary and the salaries of other employees may be important to recruiting and keeping a qualified committed workforce.
- Considering budgeting constraints. Obviously the Board is responsible for keeping the total costs of the organization (including the CEO salary) under control. So make sure that salary increases can be implemented without causing financial stress.
- Reviewing “other” compensation. Sometimes other benefits are important to employees and can act as incentives. While some might be costly (for example, dental insurance, improved pension), others (like an extra week of vacation, flexible work schedule) can make a compensation package more attractive without needing substantial funding. When collecting information on comparable organizations, get as much information on such benefits as possible and see what might work. And ask the CEO what he/she wants!
While IRS Instructions for Form 990 (page 68 covers "reasonable compensation:) will give the requirements, there is a lot more to determining nonprofit compensation levels that will serve a charity well – that is, not too high and not too low. Using ERI’s Nonprofit Comparables Assessor (link to http://www.erieri.com/nonprofitcomparablesassessor) to get basic compensation data on comparable organizations is a great first step.