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What You Need to Know for Setting Nonprofit Executive Salaries

best practices board finances fraud reporting May 04, 2023

What You Need to Know for Setting Nonprofit Executive Salaries

     Setting salaries for nonprofit executive staff is an absolutely daunting task. There are so many factors to consider. What are other organizations paying? What's the market rate? What can we actually afford? So today, let's dive into some tips that can help you make some more informed decisions. 

     Setting a salary for the executive in your organization is really a key fiduciary duty of the board of directors. That's who sets the salary. The actual title given to the executive role may vary from one organization to the next. It can be called the Executive Director or it might be called the Senior Pastor. Regardless of which title you use, the goal of the board remains the same- to set a reasonable compensation. So, because this happens every year, it's important to define a process that you can build into your normal calendar and rhythm of events, so it’s not overlooked.  

Define the team

     First, you need to determine who is going to lead the process. You might name the board, as a whole, or the executive committee, (which is the officers of the board), or even a separate task force comprised of some board members and sometimes others. This team can include many variations, but here's what doesn't vary:  That group needs to be independent. 

     What does that mean? Well, primarily it means that no one on that team should receive compensation that is set by that individual, whose salary is under consideration. That would create a conflict of interest and make it hard for people to make a decision if they're ultimately tasked with setting their boss's salary. Another consideration when choosing a truly independent team is whether a board member or executive has relatives employed within the organization. I think we can all agree that family members setting salaries for other family members presents a conflict of interest. Regardless of how your team is composed, be sure each person is truly independent and free from any potential conflicts of interest. 

Find Comparable Data

      Once you’ve established your team, they’re going to need comparable data.  That data should include specifics like the size or the budget of the organization. In order to be most beneficial, it’s best to find an organization with a similar mission, and ideally, a similar region. Those are some of the most significant influences on executive salary. 

     With that said, you’ll also want to consider the sources that are being used for setting compensation for the other positions in the organization. True story- I once worked with an organization in which the board went and found an attorney that could do this comparable study for their chief executive. Well, the attorney came back with a study that I would say was more of a “maximum defendable salary”. In other words,  he determined the highest amount that the organization could pay the executive and still justify the salary to the IRS.  Well, in that case, that’s a drastically different benchmark than what was used for all the other compensation studies in the organization. In this case, the attorney’s study produced a salary  range that was nearly 10 times larger than any other staff position in the organization. His analysis felt a little too extreme. So, when seeking comparable data, look for similar sources that are being used within the organization for other positions. 

Document the process

     The final step is document the entire process. Be sure to document exactly who is involved, what the process was that was used, how the decision was made, what decision was made, and get forward board approval. And of course, if someone on the board is not independent, they should recuse themselves from this decision, which should also be documented. 

     I hope this is helpful to you. You can subscribe to my weekly tips by clicking HERE, or follow me on LinkedIn or Youtube.  If you're interested in a one-on-one conversation about your specific situation, you can book a strategic consult with me HERE. I look forward to serving you in a way that helps you!

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