An important part of good governance is setting compensation for your executive director/CEO and other senior leaders. Your stakeholders want to see that you’re using your resources wisely, and this includes paying senior leaders fairly and competitively, but not so much that it raises eyebrows or seems excessive. On your annual Form 990, in addition to reporting the compensation of officers, directors, and key employees (Part VII), question 15 in Part VI asks how compensation is set for (a) your executive director, and (b) other officers and key employees.
Stakeholders may have varying views on what they consider to be fair compensation and the most important consideration is not the exact dollar amount, but how you arrive at the compensation level. For the sake of this discussion, compensation includes not just salary, but also benefits, such as health insurance, a car, or a housing allowance.
The Form 990 gives you a couple best practices as a starting point, built into question 15 in Part VI, which is sometimes called the “rebuttable presumption” of reasonableness for compensation. If you follow these 3 points, the IRS will not refute it without substantial evidence against the data you relied on. The 3 points include:
- The compensation is approved in advance by independent board members who do not have conflicts of interest concerning compensation. Board members who are not independent, or who have conflicts, should recuse themselves during the discussion and voting.
- The board members responsible for the decision rely on salary and benefits information for organizations with similar missions and budget size, that are located in the same or a similar geographic region. When comparing compensation for similar positions, don’t look at just the job title (e.g. director or vice president), but the responsibilities performed, to ensure adequate comparability. If your organization has unique or unusual characteristics, identify these and take them into consideration when comparing your organization’s compensation to those covered in the data you rely on.
- When compensation decisions are made, they should be documented adequately and in a timely manner. Adequate documentation includes the compensation decided on, the date of its approval, the members present during the discussion, information about the compensation data you relied on (e.g. the reports or surveys you used), and recording the vote itself. Timely reporting is generally considered to be within 60 days of the meeting. Additionally, the process you use for evaluating and setting compensation will be reported on Schedule O of your Form 990.
It’s worth investing time in a written policy for how you set compensation. The policy should include details about identifying relevant organizations to look at for comparative data, the points of comparison and differentiation that are relevant for determining how similar your organization’s compensation will be, and what compensation will be included (e.g. salary, bonus, retirement contribution, insurance). Having a policy in place will help keep your practices consistent from year to year, especially when there’s turnover in the group responsible for setting compensation. It will also save you time, as you’re not starting from scratch every year.
You can find sample compensation policies here:
National Council of Nonprofits
Other resources consulted:
National Council of Nonprofits Executive Compensation Article
CBIZ and MHM Presentation (Pages 15-18 of Powerpoint)
BDO Newsletter, Summer 2014 (Pages 4-6)