Nonprofit CEOs have plenty of problems to deal with – too little money, too many staff issues, accomplishing their mission, and massaging their board.
It’s all part of the CEO job description. But it is a job, as in work for compensation. And one of the thorny problems nonprofit CEOs must handle is justifying their own salaries.
Joan Reutter is president of JBR Consulting, which advises many nonprofits on compensation and benefits challenges. She says that donors, in particular, want their money to go to the mission. They don’t want to think about salaries for people who run the nonprofits or the administrative costs that keep the lights on.
“The last thing they want to hear is that donations are paying someone’s salary,” Reutter says. “But how do you run a business without paying the right people?”
For-profit organizations expect to pay top dollar for top talent. An Economic Policy Institute report says that in 2017, the CEOs of the largest firms in the U.S. made on average nearly $10 million in annual compensation, down from its peak of $21 million in 2000.
Compare that to nonprofit CEO salaries. Charity Navigator’s 2016 Charity CEO Compensation Study shows that of 4,587 charities polled, only 10 paid their top executive $1 million or more; 66 paid their CEOs between $500,000 and $1 million. The mean CEO compensation in 2014 was about $123,000.
Too much? Too little? Too hard to say, says Reutter.
“I can’t say a salary is right or wrong,” says Reutter. “You have to look at all the factors. What’s the best decision for the organization about how they spend their money to achieve their goals?”
Of course, economic particulars affect board decisions about top salaries. When the unemployment rate hovers about 3.5%, boards know they must pay more in a hyper-competitive market.
Also, there’s a new, comingling of for-profit and nonprofit talent. In the past, mission-driven and profit-driven executives stayed in their own lanes. These days, talent is fungible, so deep-pocket for-profits are competing for the same CEOs who are doing-God’s-work at nonprofits.
“When you’re looking for talent with unemployment rates as low as they are, you’re competing with a much broader audience,” Reutter says.
Here’s what really influences CEO pay
The Charity Navigator compensation report found that the bigger the nonprofit’s budget, the bigger the CEO’s compensation. Other findings include:
The mission influences salaries. Research charities pay their CEOs about 50% more than human services nonprofits.
Location, location, location.
Regional differences in the cost of living impact CEO pay. Top executives in the Northeast and Mid-Atlantic – Boston, Washington D.C., New York – generally earn higher salaries than execs in the Midwest and Southwest, the locations that pay nonprofit leaders the least in the country.
How to justify (if you must) CEO pay
The IRS is clear as mud about how boards should set CEO compensation, which includes salary, bonuses, and benefits. Compensation should be “reasonable,” the IRS says. Reasonable is defined as “the value that would ordinarily be paid for like services by like enterprises under like circumstances.”
The National Council of Nonprofits, interpreting IRS rules, advises nonprofits to:
- Convene the board, or part of the board, to determine compensation.
- Compare compensation of similar CEOs at like-sized organizations, in the same location, performing the same type of charitable work.
- Document the compensation review process, including who was part of the compensation committee, and the data reviewed.
The Council offers more suggestions on how to attract top talent, stay within budget constraints, and keep out of tax trouble.
Spell out what you’re seeking
When you post an employment announcement, make your job description as detailed as possible. What will the CEO do? What’s the experience needed?
Compare apples to apples
Know what other employers are paying for the type of CEO you want. Check Monster and Indeed websites, and local newspaper classifieds. Also, the Bureau of Labor performs Occupational Compensation Surveys that can justify what you’re willing to pay. This information can help you explain to the IRS how you set CEO compensation.
Use a calculator
If you shortlist a candidate who’s working in a different location, use a cost of living calculator to determine how much more or less you must pay the candidate to maintain their standard of living. Here’s a good calculator.
About the Author
Lisa Kaplan Gordon is a veteran content producer, e-book creator, and social media writer with two Pulitzer Prize nominations and three National Headliners Awards. Her writing has appeared in Washingtonian Magazine, Redbook, Yahoo!, AOL Real Estate, AOL Daily Finance, USA Today, and US Weekly, as well as major metro dailies. She writes several times a month for 501c.com.