A Wall Street Journal study published in March 2017 found that around 2,700 employees of 501(c)(3) nonprofits received annual compensation of more than $1 Million in 2014. In 2011, a similar study found that about 2,000 were paid at this salary level, so the number increased about 30% over the three years. The number of employees receiving compensation in excess of $1 million will probably increase significantly in 2018.
The organizations that pay the most are the “meds and eds”—in fact, about 75% of the high-paid charity executives were working for healthcare systems and another 10% were with private colleges and universities. These compensation levels could be (and have been) explained by the size of these organizations and the wide-ranging responsibilities that go with leading them. Yet there were some exceptions, such as an online ministry with executives receiving $4 million in salaries.
But should there be concern about the proportion of the budget going to “charitable” programs and activities versus executive salaries, or the appropriate use of money that comes from donor contributions, direct government support, and tax support through the deductibility of charitable gifts? The last few decades have seen increasing professionalization of nonprofit executive, leadership, and the sector has also recognized the need for nonprofits to compete for talent with the for-profit sector. Increasingly, nonprofit executive compensation looks more like for-profit CEO contracts, with a smaller proportion paid in base salary, and more executive compensation structures tied to achievement of performance objectives. The WSJ study of 2014 salaries reported on Forms 990 revealed that base pay of over $1 million was reported on only one-quarter of the executives; the rest had total compensation of more than $1 million when incentives were added.
Most of thenonprofit organizations paying individuals more than $1 million hired consultants when the board made the compensation decisions, much like for-profit corporations. The IRS, which exercises oversight to ensure that nonprofit executive compensation is not “unreasonable,” actually encourages this approach, requiring total compensation that is in line with similar nonprofit—and for-profit—organizations. The board must lead the compensation decision-making process and be able to show that data was used as a basis for the decision. What is interesting is that nonprofits are learning what for-profits have known for a while—the use of such comparable salary data, may actually drive up compensation levels. After the data are collected and analyzed, who wants to be paid below the average for similar jobs in similar organizations?
Just a review of charity CEO salaries, however, is not helpful to a board when it makes its employee compensation decisions. Again, such actions need to be in compliance with IRS rules and regulations, as detailed in ERI’s white paper entitled Guide to Setting Nonprofit Executive Compensation. In summary, that means that total salaries and wages must be “reasonable”—an amount that would ordinarily be paid for the executive performing like-services by like-enterprises, whether taxable or tax-exempt, under like-circumstances. Therefore, the board must follow these steps:
- Document the decisions on compensation structure in the records at the time of approval by the full board.
- Note the comparability data obtained, how it was obtained, and the actions taken to ensure that no one with a conflict of interest was involved in the compensation analysis decision.
- If it is decided that a reasonable compensation level is higher or lower than the range of comparable data received, then the compensation benchmarking underlying the determination should be recorded.
Whether a consultant is used or not, ERI’s Nonprofit Comparables Assessor provides a simple and cost-effective way to collect and analyze the comparable salary data needed in that process.
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