Non-Profit Executive Compensation

Do you have friends who serve as directors on boards of nonprofit hospitals, charities, social welfare organizations, other 501(c)(3) or 501(c)(4) organizations or foundations who are responsible for determining executive compensation? Please warn them about the new, aggressively funded IRS and state audits of nonprofit executive compensation. Those responsible for approving remuneration now face potential personal liability if found to have negligently determined excessive compensation packages (IRC § 4958).

The IRS is staffing offices and adding personnel to question excessively high-paying nonprofit organizations. And many state Attorney General offices are now actively reviewing their state-chartered nonprofit and not-for-profit corporations (New York and California both have new laws specifically focused on reasonable and/or “just” pay).


The IRS basically defines reasonable compensation as average compensation, and half of all tax-exempt executives are paid “above average.” That may be OK, but only if you have a documented rationale for higher compensation levels, including an independent competitive compensation analysis.


If you have anything to do with executive compensation at a nonprofit, educate your Board, CEO/Executive Director and CFO before it is too late. Here are easy steps you can take:
Tax-Exempt Survey Data: Subscribe to the survey that the IRS, the State AG Office of New York and others use to define reasonable compensation.

Online Nonprofit Executive Compensation Data: Smaller organizations can use the SalaryExpert.com executive compensation report for organizations with less than $1 million in revenue.

Compensation Committee Certification: Treasury regulations on intermediate sanctions imply that using good data is not enough if your Board members are not competent to use it. Encourage compensation committee members to become certified in executive pay oversight.

Finally, make sure you and your friends sit only on Boards that have D&O Insurance. Many organizations will try and convince you this is not a expense the organization needs or can afford. As a Board member you can't afford not to have it or comprable coverage.