Help Desk FAQ: What should you pay your executive director?
What should you pay your executive director? Nonprofit boards are responsible for establishing “reasonable and not excessive” compensation, that is attractive enough to retain the best possible talent to lead the organization.
It’s an art, not a science, but to strike the balance, the board should use a three-step process referred to as the “rebuttable presumption“ used to establish reasonableness (and also used by boards to reduce the risk of penalties).
Step One: Form an Independent Body
The board should arrange for an “independent body” (which means that the person receiving the compensation should not be part of the review process) to conduct a “comparability review.”
Many nonprofits task a “compensation committee,” or use their executive committee, or another sub-group/task force of board members, for this purpose.
Step Two: Gather Data
The independent body should take a look at “comparable” salary and benefits data to learn what nonprofit employers with similar missions, and of a similar budget size, that are located in the same, or a similar geographic region, pay their senior leaders.
Compensation includes salary and benefits, such as insurance, a car, housing allowance, or other fringe benefits, that should be included in the calculation of total annual compensation. (See instructions to IRS Form 990, pages 31-32.)
Where can you find comparable data?
- MANP’s Report on Nonprofit Wages + Benefits is an excellent source of information because it is the only report specific to Maine nonprofits. (The 2016 edition was just released and members receive great discounts.)
- Seek out other national compensation studies. Look for ones that may be specific to your mission area, such as studies of land trusts.
- Organizations that file Form 990 will have to report their executive director’s compensation. Identify organizations of similar sizes and missions and look at their 990s (available through GuideStar).
Step Three: Document
Document who was involved, (and their “independence” i.e., that they do not receive compensation from the nonprofit) and the process used to conduct the review, as well as the full board’s decision to approve the executive director’s compensation (minutes of a meeting are fine for this).
Nonprofits filing IRS Form 990 must describe the process they use to approve executive compensation as part of the nonprofit’s responses on the annual return.
We have more guidance, including a sample policy for your board to adapt, in our Answer Center.