How to Set Fair and Competitive Salaries in Your Nonprofit

(A Practical and Biblical Guide for Boards and Leaders)

When I read Scripture, I love finding financial principles that speak to how we lead our organizations. One that I often come back to—especially when we talk about salaries—is found in 1 Timothy 5:18 (AMP):

“You shall not muzzle the ox while it is treading out the grain [to keep it from eating],” and, “The worker is worthy of his wages [he deserves fair compensation].”

That verse is a powerful reminder that those who labor for the mission deserve fair pay for their work. And in most nonprofits, that’s not a small matter—it’s your largest budget line item.

If salaries represent the biggest investment you make as an organization, then setting them wisely is one of the most important acts of stewardship your board can perform. Let’s explore how to set fair, competitive, and compliant salaries—grounded in both biblical wisdom and nonprofit best practices.

Why Fair Compensation Matters

1. It’s Biblical Stewardship

The call not to “muzzle the ox” means your staff should be able to thrive while doing the work of ministry or mission. Fair pay is about more than economics—it’s about dignity. When your compensation reflects that belief, you’re honoring both your team and the God who entrusted those people to your leadership.

2. It’s Mission Sustainability

When employees feel valued, they stay longer, serve better, and care more deeply. Low pay often leads to burnout and turnover, which cost far more than a modest salary adjustment. In a sector already stretched thin, retention isn’t just about kindness—it’s strategy.

3. It’s Legal and Reputational Protection

Unreasonable or undocumented salaries can raise red flags with the IRS and donors. Conversely, transparent and documented compensation decisions protect your reputation and affirm integrity.

The Board’s Role in Setting Executive Compensation

One of the most important fiduciary duties a board holds is setting the salary for the Executive Director (or Senior Pastor, CEO, or other top leader).
This is not something to improvise—it’s something to systematize.

Step 1 – Form an Independent Compensation Team

Designate who will lead the process: the full board, the executive committee, or a temporary compensation task force.
Whoever serves must be independent—meaning no one on the team receives compensation determined by that group, and no relatives of compensated employees participate. Independence ensures objectivity and avoids conflicts of interest.

Step 2 – Gather Comparable Data

Your decisions should be rooted in data, not guesswork. Look for salary benchmarks that reflect:

• Similar organization size (by annual budget or people served)
• The same region (since cost of living varies widely)
• The same sector or mission type (youth services, faith-based, arts, etc.)

Use consistent sources across positions. For instance, don’t benchmark your Executive Director’s salary from a private attorney’s “maximum defensible” report while using nonprofit peer data for everyone else.
Good, consistent data ensures equity and credibility across your pay structure.

Step 3 – Document Everything

Record who was involved, what data was reviewed, what decision was made, and when. Note any recusals for conflicts of interest. Then, include the approved compensation in your official board minutes. Documentation is your safeguard if the IRS ever reviews “reasonable compensation.”

Building a Compensation Philosophy

Fair pay doesn’t happen by accident—it starts with a philosophy that reflects your organization’s values and market realities.

Develop a Pay Scale

Create a structured pay scale with a minimum, median, and maximum for each role.
Consider:

•  Your organization’s budget size and ability to pay
• Market data from salary surveys or reports like the Nonprofit Times Compensation Report or Chronicle of Philanthropy studies
• Regional norms and cost of living
• Comparable organizations serving similar missions

Once your scale is built, decide on your hiring posture:
Do you start new hires at the minimum and reward longevity?
At the midpoint and adjust for experience?
Or near the maximum, with future raises tied to scale updates?

The key is consistency and documentation—clarity that protects both your staff and your organization.

How to Determine “Reasonable” Pay

The IRS uses the term reasonable compensation to mean what similar organizations would pay for comparable duties under similar circumstances.
To demonstrate reasonableness:

1. Gather comparative data (salary surveys, public Form 990s).
2. Use that data to make your determination.
3. Document the entire process.
4. Have your independent board approve it in writing.

For most nonprofits, the Executive Director’s salary should fall within the 50th–75th percentile of comparable organizations—high enough to attract talent, but not excessive. (Source: National Council of Nonprofits and IRS intermediate sanctions guidelines.)

Addressing Inflation and Cost-of-Living Pressures

In recent years, inflation has increased dramatically, straining both household budgets and nonprofit resources.
Boards should review compensation annually—not just to reward merit, but to preserve purchasing power.
Even a 3–5% cost-of-living adjustment can communicate respect and prevent turnover when employees face higher rent, fuel, or grocery costs.

How Fair Pay Strengthens Your Mission

1. Attracts Skilled Professionals

Competitive pay helps nonprofits compete with the private sector. Passion doesn’t replace the need for income stability.

2. Retains Institutional Knowledge

Every time you lose a key staff member, you lose relationships, history, and training. Paying fairly protects the mission from disruption.

3. Improves Morale and Productivity

A fairly compensated team is a motivated team. They bring creativity, care, and continuity—essential to fulfilling your mission with excellence.

Practical Steps for Your Nonprofit

• Conduct a Salary Study. Review at least every 2–3 years.
• Establish Written Policies. Include pay scales, review frequency, and procedures for adjustments.
• Document Raises Transparently. Base them on performance, cost of living, or tenure—not favoritism.
• Communicate Clearly. Staff shouldn’t have to guess how salaries are determined.
• Model Stewardship. Fair pay honors both donors and staff by aligning financial management with integrity.

A Word of Encouragement

1 Timothy 5:18 reminds us that “the worker is worthy of his wages.”
As leaders and boards, we have a responsibility to make sure that truth is reflected in how we care for the people who carry out the mission every day.

If your nonprofit doesn’t yet have a structured pay scale or if your salary decisions have been made ad hoc, now is the perfect time to take the next step.
You can do this work internally, or—if you’d like help establishing fair, data-driven compensation systems—our team is here to guide you.

Moving Forward with Confidence

If your leadership team could use practical guidance, download 5 Steps for Nonprofit Leaders to Thrive. It’s free, and it will help you build clarity, protect your team, and lead with confidence.

And if your board is preparing to review staff or executive salaries this year, this is the kind of strategic, high-impact decision our Fractional CFO Services support every day.

We help churches and nonprofits:

• Build compensation structures rooted in fairness and transparency
• Align pay scales with mission and sustainability
• Make strategic financial decisions grounded in real-time data

To start the conversation, visit terisaclark.com/you.