One of the quickest ways for a nonprofit to get in trouble is to pay officers and key employees excessive salaries. To keep on the straight and narrow, consider these five tips for making your compensation decisions:
1. Establish a compensation committee. Designate a group of board members to act as an independent compensation committee. Have the full board establish goals and objectives for the committee and outline a process for setting compensation levels. Spell out the board’s duties in an official “committee charter.”
2. Mine comparables. The trick with executive compensation is to pay comparable compensation for comparable work. So have the compensation committee gather information about salaries at nonprofits of similar size, location and activity. Larger nonprofits may consider hiring a consultant that specializes in compensation issues.
3. Set salaries at market level (or be prepared to justify the extra pay). If the compensation committee sets salaries far above current market levels, you will need to provide specific reasons why your executives should be paid more.
4. Consider perks. Be aware that IRS Form 990 also asks very specific questions about things like spousal travel, first class travel, social club dues and other benefits that could contain a compensation element. You’ll need to pay attention to all elements of compensation and be sure that the total compensation paid does not exceed what is reasonable.
5. Keep written records of all decisions. Maintain detailed minutes of compensation committee meetings as well as meetings of the full board where salary is discussed. You’ll want to document how compensation decisions were made and retain copies of the information used in making those decisions
Nonprofits that follow these basic steps should be able to pass muster with their compensation decisions.