Any industry that accounts for 5 percent or more of a jurisdiction’s workforce is commonly considered to be a “major industry,” according to a 2018 report from Johns Hopkins University. And in all but one state in the U.S., nonprofits account for more than 5 percent. In over half of states, nonprofits employ more than 10 percent of the workforce.
Employing over 12 million people, nonprofits have a significant impact on jobs in the U.S. Like all business, nonprofit organizations must compete for talent. In a tight labor market, that often means offering higher salaries, better benefits and other perks. But nonprofit organizations face a problem that many for-profit companies don’t face. Namely, public criticism when salaries exceed what one would expect a nonprofit to be paying since most nonprofit organizations rely on tax-deductible donations and government grants for support. Deciding nonprofit executive salaries can be challenging. Meet the challenge.
One aspect of nonprofit salaries that gets a lot of media attention is executive compensation. As GuideStar stated in their white paper, What You Need to Know About Nonprofit Executive Compensation, “Donors, journalists, state officials, and members of Congress frequently express outrage at the salaries nonprofit CEOS receive, especially if the organizations they head are public charities that rely on donations from the public.”
Excessive compensation can also impact an organization’s nonprofit status. The Federal Private Inurement Prohibition requires that public charities that have been granted 501(c)(3) status “operate so that none of its income or assets unreasonably benefits any of its board members, trustees, officers or key employees.”
Violations can result in penalties and revocation of the entity’s tax-exempt status.
Understanding reasonable compensation
Of course, individuals working for a charity may receive reasonably compensated. So what is reasonable? That is determined on a case-by-case basis. The following guidelines should help.
- Know the going rate. Review salary and benefits information for similar positions in other organizations, both nonprofit and for-profit, in the same geographic area.
- Get board approval. The board of directors should annually approve the executive director or CEO’s compensation. They should also review and approve the process by which the organization sets compensation levels or ranges for other employees.
- Consider the job requirements carefully. Before you post an open position, get clear on what the role requires in terms of skills and experience. A function that truly requires a unique background, education, training and experience may cost more to fill than a role potentially filled by a large number of candidates.
- Handle bonuses carefully. If your organization implements a bonus program, the organization should document how the plan furthers the organization’s charitable purpose. Justifiable goals include reinforcing efficiency, improving quality of service or encouraging cost containment. Bonuses cannot simply be a plan to distribute profits to employees.
- Be transparent. Nonprofit organizations filing a Form 990 or 990-EZ are required to report compensation, so it’s easy for regulators and the public to see what the organization paid its highest paid staff members. But transparency goes beyond required disclosures. Consider disclosing salary ranges on job postings, the organization’s website, and annual reports.
Meet the challenge; get the Guide
Determining the appropriate compensation and benefit for nonprofit organizations can be time-consuming, but taking the time to get it right will ensure that your nonprofit is attracting and retaining the talent it needs to advance its mission while avoiding undue scrutiny from the public and the IRS.
To stay ahead of the competition, check out the guide to the rest of the salaries you care about: our 2019 Salary Guide.