Setting Nonprofit Executive Compensation: A Step-by-Step Walkthrough

Every year, nonprofit boards set executive compensation without a clear process — and hope no one asks hard questions. Some get lucky. Others end up facing IRS intermediate sanctions that can impose a 25% excise tax on the excess benefit — rising to 200% if not corrected — plus a 10% tax on each board member who approved it, capped at $20,000 per manager.

This guide walks through the entire process from start to finish: building a defensible comparability set, preparing the board, conducting the vote correctly, and generating the documentation that protects everyone.

Step 1: Decide your criteria before you look at any numbers

This is the most important step — and the one most often skipped. If you define your peer group after seeing the compensation data, you’ve introduced selection bias that undermines the study’s legal standing. The regulation explicitly requires that the authorized body obtain and rely upon comparability data “prior to making its determination” (§53.4958-6(a)(2)).

Before opening RightStart, write down your criteria:

• Mission type — Which NTEE sector best describes your organization? Human services, arts, environment, health? Don’t stretch this to get a bigger sample.
• Budget range — A reasonable window is 50%–200% of your organization’s total expenses. A $3M org shouldn’t benchmark against $50M hospitals.
• Geography — Are you competing for talent nationally, statewide, or regionally? A rural Midwest organization and a downtown Boston organization pay differently for the same role.
• Role — CEO to CEO, CFO to CFO. Write down exactly which title you’re benchmarking and what the role actually involves.

Once written, these criteria become part of your documentation. They show the process drove the outcome — not the other way around.

Step 2: Build your comparability set in RightStart

Traditionally, this step meant hiring a compensation consultant for $5,000–$15,000 and waiting 4–6 weeks for a deliverable. RightStart does the same thing — querying 1.9 million IRS Form 990 filings and returning organizations matching your criteria with their reported compensation — in minutes. The underlying data is identical: public 990 filings, compiled under penalty of perjury, independently verifiable by any IRS agent.

With your criteria written down, open the comparability builder. Select the NTEE sector, budget tier, geography, and role.

Three things to keep in mind:

• Sample size matters. For organizations with annual gross receipts under $1 million, the IRS provides a safe harbor requiring data from just three comparable organizations (§53.4958-6(c)(2)(ii)). For larger organizations, aim for 15 or more peers. The more representative the sample, the more defensible the benchmark.
• Use keyword filters judiciously. Narrowing by mission keywords can improve relevance, but be careful not to use them to filter out legitimate peers whose comp data you don’t like.
• The primary metric is reportable compensation. RightStart uses Form 990 Part VII, Column D — reportable compensation from the filing organization (W-2/1099 wages, bonuses, severance, and deferred compensation). This is the cash compensation figure boards typically set and is the most directly comparable metric across organizations.

Step 3: Understand what the distribution is telling you

RightStart shows the full compensation distribution: 10th, 25th, 50th (median), 75th, and 90th percentiles. Here’s how to read them:

• The 25th–75th percentile range is the “typical peer range.” Most reasonable compensation decisions land somewhere in here.
• Above the 75th percentile is defensible — but only if you can articulate why. The IRS regulation requires a written rationale when compensation exceeds the comparability range (§53.4958-6(c)(3)(ii)).
• Below the 25th percentile may signal a retention risk. The data supports a case for an increase — document that reasoning too.
• The median is not “the right answer.” It’s the midpoint of what peers pay. Where your situation falls within the range depends on the executive’s experience, tenure, role scope, and organizational complexity.

Step 4: Curate your peer set

Raw database results aren’t a defensible peer group — they’re a starting point. The IRS expects that you reviewed the organizations in your comparability set and excluded any that aren’t truly comparable. A hospital system with a $200M budget that happens to fall in your NTEE sector, or an organization whose reported compensation reflects an anomalous one-time payout, shouldn’t anchor your analysis.

RightStart’s curation tool lets you review each organization, exclude those that aren’t comparable, and optionally tag a reason (outlier compensation, dissimilar mission, geographic mismatch, etc.). Your statistics update in real time as you make changes, so you can see how each exclusion affects the distribution. Documenting your exclusion reasons isn’t legally required, but it strengthens the defensibility of your study — particularly if you’re excluding more than a handful of organizations.

Aim for at least 10 included organizations. The IRS doesn’t mandate a minimum, but industry practice considers 10+ peers a strong sample and fewer than 5 questionable. Only exclude organizations with clear, documentable reasons — don’t cherry-pick to push the median in a convenient direction.

Step 5: Prepare the board’s rationale before the meeting

If the proposed compensation falls within the 25th–75th percentile range, you can proceed directly to Step 5. No written rationale is required when compensation lands in the typical peer range.

If compensation falls above the 75th percentile, the IRS requires the board to document its specific basis for the decision (§53.4958-6(c)(3)(ii)). “Market rates are high” or “she’s a valuable leader” is not enough. The rationale must cite specific, verifiable factors.

The most defensible rationale categories:

• Exceptional experience or credentials — “The executive has 22 years of sector-specific leadership, including management of a $40M operating budget at [peer organization], plus a CPA and an MBA from [institution].”
• Competitive geography — “The organization is headquartered in the San Francisco Bay Area. Regional 990 data from comparable local organizations shows median compensation 18% above the national peer sample. The board weighted regional peers more heavily.”
• Expanded role scope — “Since the last compensation review, the executive’s direct reports grew from 2 to 7 and the organization launched two subsidiary programs, adding $2.4M in annual budget responsibility not reflected in the peer sample.”
• Documented retention risk — “The executive received a written competing offer of $[X] from [employer]. The board determined that the cost of turnover — estimated at 12–18 months of salary in recruitment and transition — justified matching market.”
• Measurable organizational results — “Under this executive’s tenure, the organization increased annual revenue by 60% and program reach by 40% over four years, against sector median growth of 12%.”
• Succession or pipeline commitment — “The board is securing a multi-year commitment from the identified successor before an external offer materializes. The premium reflects the transition risk to the organization.”

Write the rationale before the meeting. The board should review and discuss it as part of the formal deliberation, not construct it after the fact. If the board changes the compensation figure during the meeting, update the rationale to match the approved amount before generating the documentation package.

Step 6: Share the benchmark data with the board before the vote

The regulation requires that the authorized body obtain and rely upon comparability data “prior to making its determination.” This means the board must have reviewed the data before they vote — not during the meeting as the motion is being made, and certainly not afterward.

Best practice is to distribute the benchmark summary at least 3–5 business days before the meeting. This gives board members time to read the data, formulate questions, and come prepared for a substantive discussion.

Download the Benchmark Summary PDF from RightStart and send it to all members of the authorized body. The PDF is formatted for this purpose — it presents the full distribution, the peer group composition, data sources, and a summary the board can review and reference in the minutes. Your email to the board can be short: “Attached is the comparability data we’ll be voting on at [meeting date]. Please review before the meeting and bring any questions.” The goal is a documented record that each voting member received the data in advance.

Do your conflicts-of-interest audit before the meeting, not during it. Review your board roster and identify anyone who has a conflict with respect to the executive whose compensation you’re setting. This includes: the executive themselves, their family members on the board, business partners, and anyone who receives compensation from or has a financial relationship with the executive. Send those individuals a separate note confirming they will need to recuse from the deliberation and vote. Handling this in advance avoids an awkward procedural moment during the meeting and ensures your minutes reflect a clean process.

Step 7: Conduct the vote correctly

The compensation determination must be made by an “authorized body” — the full board, a compensation committee, or another body authorized under state law — composed of individuals who do not have a conflict of interest with respect to the transaction (§53.4958-6(a)(1)).

In practice, this means:

• The executive whose compensation is being set must leave the room during deliberation and the vote.
• Board members who are family members of the executive, business partners, or otherwise financially entangled must recuse themselves — they cannot participate in deliberation or vote.
• The remaining board members constitute the authorized body. At least a quorum must be present, as required by your bylaws or state law.

The motion should specifically reference the comparability data reviewed. Something like: “The compensation committee, having reviewed comparability data from IRS Form 990 filings of [N] peer organizations, moves to approve total compensation of $[X] for [Name] as [Title], effective [Date].”

On effective date: use the date the board approves the compensation — not the start of the fiscal year, not a retroactive date. Backdating a compensation decision to an earlier period creates significant legal risk. If the vote happens on March 15, the effective date is March 15 (or a prospective date the board specifies). The documentation must reflect when the authorized body actually acted.

Step 8: Generate the Board Approval Package within 60 days

The IRS requires that the documentation be completed “before the later of the next meeting of the authorized body or 60 days after the final actions of the authorized body” (§53.4958-6(c)(3)). Don’t wait until the 59th day.

RightStart’s Board Approval Package generates a structured PDF exhibit that captures everything the regulation requires:

• The terms of the compensation arrangement and approval date
• The comparability data relied upon and how it was obtained
• Members present, their votes, and any recusals
• The board’s rationale if compensation was outside the range
• Attestation that the process followed the required procedure

This document is an exhibit to your board minutes — it does not replace them. Your minutes should reference this package by name. Have the board chair sign it and attach it to the official meeting record.

Common pitfalls that void the protection

• Building the peer group after seeing the data. If you adjusted your criteria to exclude organizations whose comp you didn’t like, you’ve introduced selection bias. The IRS can and does ask how the peer group was constructed.
• Approving compensation and documenting it later. The 60-day window is not an invitation to reconstruct the rationale after the fact. The authorized body must obtain and rely upon the data prior to the vote. Documentation records what actually happened — it doesn’t create a record that didn’t exist.
• One conflicted member invalidates the vote. If a single board member with a conflict participated in the deliberation or vote without recusing, the independence requirement fails. Check your roster before the meeting, not after.
• Vague rationale for above-range compensation. “She’s an outstanding leader” or “market rates are competitive” will not hold up. The regulation requires documentation of the specific basis. See Step 4 above.
• Missing the 60-day deadline. Late documentation does not satisfy the contemporaneous requirement under §53.4958-6(c)(3). If you miss the window, you may still be able to document the process, but you’ve lost the presumption.
• Using stale data. A comparability study from 2019 does not support a 2026 compensation decision. Refresh the analysis every 2–3 years or whenever the role or budget changes materially.