5 Common Mistakes in Nonprofit Executive Compensation

Setting executive compensation is one of the most consequential decisions a nonprofit board makes. Get it wrong and you risk IRS excise taxes, public embarrassment, or losing a great leader to a better-paying competitor. Here are five mistakes we see repeatedly — and how to avoid them.

1. Using a stale comparability study

A compensation study from 2019 doesn’t reflect post-pandemic labor markets, inflation, or organizational growth. The rebuttable presumption requires “appropriate data as to comparability” — and data that’s five years old is hard to defend as “appropriate.”

Boards often treat a comp study as a one-time project. It should be a recurring process — refreshed at least every two to three years or whenever there’s a significant change in the executive’s role, the organization’s budget, or market conditions.

2. Cherry-picking the peer group

This is the most common form of motivated reasoning in comp studies. Want to justify a high salary? Pick peer organizations that are larger or in higher-cost markets. Want to keep costs down? Pick smaller orgs in rural areas.

A defensible peer group starts with objective criteria — mission type, budget range, geography — defined before the data is pulled. The Treasury regulation requires that the authorized body rely on comparability data “prior to making its determination” (26 CFR 53.4958-6(a)(2)). If you adjust the peer group after seeing the numbers, document why and make sure the rationale is substantive, not outcome-driven.

3. Comparing base salary to total compensation

This sounds obvious, but it happens constantly. One data source reports base salary only. Another reports total compensation including deferred comp and benefits. Mixing them produces a meaningless benchmark.

Form 990 Part VII reports three components: reportable compensation from the organization (Column D), reportable compensation from related organizations (Column E), and other compensation including benefits (Column F). The sum of all three is total compensation. If your internal figure is base salary only, you’re comparing apples to oranges.

4. Ignoring the documentation requirement

Many boards go through a thoughtful compensation process but fail to document it properly. Under 26 CFR 53.4958-6(c)(3), the documentation must be completed before the later of the next meeting of the authorized body or 60 days after the final action. The minutes should record:

• The comparability data reviewed and how it was obtained
• Who was present and who voted
• That conflicted members recused themselves
• The terms of the arrangement and rationale for the level chosen

Without this documentation, you lose the presumption of reasonableness even if the underlying analysis was solid. As the IRS training materials note, the presumption is procedural — substance without process doesn’t count.

5. Treating “median” as the right answer

Boards often default to “let’s pay at the median” without considering whether that’s actually appropriate. A long-tenured CEO who has grown the organization 5x might reasonably be compensated above the 75th percentile. A newly hired executive with no nonprofit experience might start below the median.

The comparability data shows the range. The board’s job is to decide where within that range is appropriate given the specific circumstances — and to document the reasoning. The regulation specifically requires documenting “the basis for the determination” when compensation exceeds the comparability range (§53.4958-6(c)(3)(ii)). Paying at the 90th percentile is fine if you can articulate why. Paying at the median without analysis is just as lazy as not doing a study at all.