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How Compensation for Nonprofits Differs From For-Profit Organizations

Organizations must deal with legal and financial considerations when making payroll decisions.

By Bisk
How Compensation for Nonprofits Differs From For-Profit Organizations

Nonprofit organizations often find themselves losing a step to larger, for-profit companies that are able to entice top talent with higher salaries, superior benefits and bonus compensation.

But charitable and not-for-profit agencies shouldn’t lose heart, according to the National Council of Nonprofits. They too can compete for the best of the best in the employee pool. They just need to take a few extra steps.

Nonprofit employees typically receive a comparable salary based on the “going rate” that other, similar-sized organizations offer. Nonprofits unsure of the current going rate can rely on resources such as state nonprofit association reports, which track salary and benefit data.

Nonprofit employers are permitted to award bonuses to their workers. They can and often do. However, they also must be aware of possible review by the U.S. Internal Revenue Service (IRS). Such reviews exist to ensure that no employee is receiving a prohibited benefit or excessive salary add-on.

Nonprofits also must remember to manage expectations where bonuses are concerned. Workers have to realize that such end-of-the-year add-ons are at the discretion of the agency and its board, and may be limited by budget, or based strictly on tangible, verifiable performance results achieved by specific individuals.

Nonprofits face a more difficult task when recruiting an executive director and/or chief executive officer.

Typically, nonprofits hire their top executives with the assistance of a board of directors, which is responsible for hiring and determining the executive’s total compensation. Nonprofits are required to detail this process in their annual federal 990 tax returns.

The IRS stipulates that nonprofits ensure the compensation offered is “reasonable and not excessive,” according to the National Council of Nonprofits.

To do that, the federal tax agency has a three-step process that nonprofit boards must follow.

  1. The nonprofit’s board of directors must put together an independent body, meaning individuals other than the recipient of the compensation.
  2. The independent body researches comparability by looking at salary and benefits data in the agency’s specific industry and/or geographic region.
  3. The board and/or independent body must document who conducted the review as well as its process in determining the salary.

The national council also recommends that nonprofits have a written policy in place stating that its board must approve any compensation packages, as well as a conflict of interest policy that helps reduce potential influence over the process by board members or outside parties.

It is also important for nonprofits and their boards to remember that an executive’s compensation includes both salary and benefits, as well as any additional incentives such as a car or housing allowance.

By establishing and following a set of specific guidelines, nonprofits can ensure that the compensation they offer to both employees and executives is in line with what other nonprofit workers receive, and that it meets federal criteria.

Discover how you can successfully attract, develop and retain nonprofit talent. Earn an Executive Certificate in Nonprofit Human Resource Management from the University of Notre Dame’s 100% online program. 

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Category: Nonprofit Leadership