Setting Salaries to Grow Your Nonprofit

The salaries of nonprofit employees – especially those of executives – tend to draw more scrutiny and controversy than those of the private sector.

As tax-exempt organizations, nonprofits should establish a series of best practices for selecting salaries. For nonprofit managers, this involves understanding regulatory restrictions, and creating a documented path to provide proper compensation for each member of the organization.

The guidelines below will aid you in defining value for your team members, while protecting your nonprofit from unfortunate IRS penalties.

Do Legwork, Not Guesswork

If you’re in a management position at your organization, we can be sure you’ve got a bright mind. Unfortunately, that’s not enough for you to define what qualifies as an appropriate salary level for every position.

The NonProfit Times crunched the numbers in 2014 to find average salaries for 236 positions within nonprofit organizations. Can you guess how much an average Chief Marketing Officer made in a year? What about a graphic artist? The answers were $110,000 for the former and $45,000 for the latter. If your guesses weren’t within $2,000 of the real answers, you may need some calibration to your salary clairvoyance.

Assuming, estimating, and even relying on your own past experience are all faulty methods for determining the appropriate salary for your employees. Spend time doing the work necessary to compare what other nonprofits offer for similar positions, and create a salary range flexible enough to adapt to variances in experience and market demand. You may want to purchase surveys that show average wages and benefits for nonprofits, especially those of the same size as yours. Survey information generally doesn’t cost much, and you can utilize these surveys to further analyze other positions within your nonprofit, and scour for wage gaps within your organization.

Plan Ahead for Raises

The legwork in the above point will help you determine initial salary levels — but as time goes on, you’ll also need to offer sufficient raises to hardworking employees. Create a consistent set of benchmarks that work for your nonprofit, and apply them to all positions across the board. You may not be able to reach industry standards in your first year or two, and not every employee will agree with the standards you have set, but having a documented and concerted plan will save you plenty of grief in the future.

Assess your current staff, and determine whether or not each person’s absence would greatly affect the team’s output or efficiency — especially knowing what you do about the market value for each job title. This exercise will help you identify exactly who should be given raises first (and soon), before they leave for better-paying positions at other organizations.

Explore More Benefits

Too many managers seem to forget the significance of benefits packages. There are a lot of ways to attract and retain employees beyond increasing salaries. Your staff may appreciate the flexibility of their schedules, or the amount of vacation/sick days they are granted each year. Some nonprofits truncate their schedules in the summertime, or make Fridays work-from-home days. Others provide occasional staff lunches or treats, as fun morale boosters. These benefits aren’t intended to replace a bump in salary (these perks shouldn’t be used in place of a raise), but they can be powerful complementary pieces to include in your compensation plan.

For executives, benefits may include a company-covered car, reserved parking, or travel expenses for a spouse or partner. Benefits can also help employees plan for the future, through supplemental insurance, retirement plans, or company-provided financial counseling. Explore all of the options available and consider which ones may offer the most value to your key employees.

Follow the Law to Avoid IRS Punishment

While you seek to employ the best in their field — and often that means offering competitive wages — your nonprofit’s salary packages must fall under IRS guidelines for reasonable compensation. That means you can’t get overly generous with your salary offerings to key executive employees. Punishments can include revocation of tax-exempt status, or (more likely) hefty intermediate sanctions.

Intermediate Sanctions

An intermediate sanction is an excise tax imposed upon a “disqualified person” who receives an unreasonably large salary and the person(s) who authorized that salary. A “disqualified person” must be in a “position to exercise substantial influence over […] the organization.” This includes executives, board members, other substantial contributors, and family members of the aforementioned list.

The specific excise tax imposed is 25% of the excess amount, with a further penalty of 200% if the first sanction is not paid on time. The managers responsible for permitting the unreasonable salary are punished with a 10% excise tax of the excess amount, up to $10,000 per transaction.

Demonstrating Reasonableness

The good news is the IRS presumes compensation is inherently reasonable unless proven otherwise, so long as the nonprofit abides by standard procedures — known as a “rebuttable presumption of reasonableness.” The spirit of reasonable compensation is that enterprises in the same position as yours would similarly value the role in question.

As long as a nonprofit provides documentation explaining its basis for the salary, uses “appropriate data” (see below) to select the salary, and approves the salary by an authorized body within the organization, the requirements for reasonable compensation have been met. The IRS shoulders the burden of demonstrating otherwise. Nonprofits would be wise to accrue the comparability data, authorization, and documentation in advance of the compensation approval, to further protect themselves from an IRS inquiry.

What’s Appropriate Data?

Using “appropriate data” refers to utilizing comparative studies (undertaken by the nonprofit itself or a third party) to determine benchmarks for salaries, corresponding to the value of the position. For organizations with $1 million or less in gross receipts, compensation for similar positions provided by three comparable organizations fulfills the definition of “appropriate data.”

Forms 990 and Part I of Schedules A (filed with the IRS and open to public acquisition) often provide the necessary figures to determine reasonable benchmarks for nonprofit salaries. Note that nonprofits may, at their discretion, use for-profit organizations to determine market rates — as long as the job title, organization size, and organizational mission are similar in nature.

Setting Accurate Salaries Draws Great Staff

Analyzing salaries is never the most pleasant of discussions, but if you don’t strategize for who you are paying and how much, you risk losing your best employees. Nonprofit workers naturally love the opportunity to fulfill a mission that provides for their community or society; but they can’t work underpaid for long. Establishing salary guidelines and precedents for raises not only bolsters feelings of goodwill within your nonprofit, but when done appropriately, maintains public trust and lessens risk for your organization.