There always seems to be plenty of interest in levels of nonprofit executive compensation – not only from federal and state government regulators, and even Congress on occasion, but also the media. The threat of financial penalties has heightened, but the loss of public support and credibility for charities is also a major factor.  This is the time for tax-exempt organizations to increase the time and attention devoted to investigating, deliberating, documenting, and reporting executive compensation.

While nonprofit executives may be very focused on the mission of their organizations, they still have themselves and their families to support.  Regardless of size or tax status, all organizations need to attract, motivate, and retain the right employees to ensure their continued success.  That means setting compensation at market rates that are also in accordance with IRS rules and regulations for those with tax-exempt status. Every nonprofit with employees should take a number of organizational steps to make sure that there are policies and procedures in place to ensure compensation decisions are in line with its goals and compliant with laws and regulations.  These are outlined in ERI’s new white paper entitled, “Guide to Setting Nonprofit Executive Compensation.”

Requirements for Setting Nonprofit Executive Pay

The IRS says that reasonable compensation is the amount that would ordinarily be paid for like services by like enterprises, whether taxable or tax-exempt, as defined below:

  • Like services.  This entails jobs with substantially similar duties and responsibilities, including such factors as the number of employees managed, the size of the budget or assets managed, hours worked, and scope (national or local).
  • Like enterprises.  This is defined as enterprises that are similar in size, usually measured by budget, assets, number of employees, or number of persons served, and also enterprises providing similar services.
  • Like circumstances.  This includes all forms of compensation in the comparison, as well as geographic area (perhaps a cost-of-living adjustment).

The Rebuttable Presumption

The IRS has decided that compensation will be presumed reasonable, unless proven otherwise, if the organization follows a set of standard procedures, creating what is termed a “rebuttable presumption of reasonableness.” This presumption means that it is the responsibility of IRS to prove that a transaction involved excess benefit, not the Form 990 filer to prove reasonable benefit. The organization must follow these steps:

  • Approve the compensation decision – that typically means the full Board of Directors, but with no participation by anyone who might be affected by the decision on compensation.
  • Use “appropriate data” to determine comparability (similar nonprofit employers with similar missions, and similar budget sizes, that are located in the same, or a similar geographic region).
  • Document the basis for its compensation determination while making its decision.

ERI’s Nonprofit Comparables Assessor

This software can easily collect the needed comparable data.  It calculates average salaries for specific nonprofit executive jobs based on the criteria used by the IRS to assess comparability – type of nonprofit, size, and geographic location. The data used in the software include salaries from all Forms 990, updated every time a new form is filed.  This is the most comprehensive data source available, as data from all Form 990 filers are included.  The software also provides a list of comparable organizations that can be refined to a smaller number targeted for further in-depth research.   More guidance on collecting and using these comparable data are included in the Guide to Setting Nonprofit Executive Compensation white paper.

Following the steps outlined above results in compensation decisions that will pass review by the IRS and other stakeholders and meet the goal of attracting and retaining the executives needed to sustain the organization.  ERI’s Nonprofit Comparables Assessor provides a simple and cost-effective way to collect and analyze the comparable data needed in that process.