How Much to Pay the Executive Director?

Nonprofit board members are often puzzled when it comes to setting the salary of the executive director. On one hand, we want to keep our talented staff; on the other hand, we know the budget is tight. Some legal and practical guidelines:

It's maddening and ironic that the press focuses on the extremely rare cases of high salaries for nonprofit executives, when salaries in nonprofits are typically 20% - 40% less than their counterparts in foundations, local government, and the business sector. Mistaken public perception that nonprofit salaries are high has even led to New Jersey now limiting the amount of state funds that can be spent on nonprofit executive salaries.

But despite the press, community nonprofit boards are more frequently worried that they are paying their executives too little, a feeling shared by many executive directors themselves.

Unfortunately, survey data is often of little use, because of small sample sizes, samples weighted towards universities, and the reality that all surveys show enormous variation in salaries for nonprofits of the same fields and sizes. An example of the inconsistency of data: one recent national survey showed average executive director salary to be $60,000 while another reported $158,000.

"Under $50,000, people aren't going to move," says Karen Beavor of the Georgia Center for Nonprofits, publisher of the online nonprofit jobs site Opportunity Knocks. "But any search at $100K, $150K is recruiting from a national pool. Look at a number of surveys, including both national and local."

On the web, salaries for "key employees" who are paid $100,000 a year or more are posted at Guidestar in the Forms 990 that US nonprofits (with annual revenues of $25,000 or more) are required to file. (If the executive is on the board the salary will be in the board section.) In other words, by going to this website anyone can find out the salary of the top staff in most nonprofits.

Legal guidelines

As part of preventing "excess compensation," U.S. federal law (Prop. Regs. Sec. 53.4958-4) notes that nonprofits should pay "reasonable compensation," defined as "an amount as would ordinarily be paid for like services by like enterprises under like circumstances." Not exactly the clearest statement. Regrettably, it's not hard to find law firms that always seem able to discover that the proposed compensation fits these imprecise guidelines. We know one nonprofit with five staff that pays its CEO $375,000 . . . blessed by an expensive legal report.

In California, nonprofits with non-governmental income of $2 million or more are now required to have the board approve the salaries of the CEO/executive director as well as that of the CFO. A good idea in any event, but with a median salary of $75,000 for nonprofits with budgets between $1 million and $2.5 million, excess compensation hardly seems like the biggest problem.

Men still get paid more at the same size organization (surprised?)

More disturbing than generally low salaries are the gender differences in salary. Despite the predominance of women in nonprofit executive positions around the country, male executives make significantly more than their female colleagues do. This is true at five of the six sizes of organizations studied. The gender gap is especially wide at agencies with budgets of more than $5 million. In one study, the average salary nationally for women executives of nonprofits with budgets between $5 million to $10 million was $82,314. At this same budget size, the average salary for men was $98,739.

Relative to whose salary?

In this era when people discuss their sex lives on TV talk shows, information about salaries is still very, very private. Most of us don't know the salaries of our siblings, our neighbors, our colleagues, our best friends. As a result of such a meager data set, people fall back on our own salaries as the main comparison.

To a board member who makes $40K a year, paying the executive director $90K a year seems exorbitant and unnecessary. A board member on the same board who makes $300K a year may feel that $90K is too low to get anybody competent. And to another board member with a government job, the $90K might seem too high, but this board member hasn't taken into account that she'll get 60% of her salary every year for the rest of her life once she retires . . . while the executive director will get 0 when she retires.

Executive director salaries are often very close to the salaries of other employees, in a phenomenon called "compressed salaries." In contrast to Walmart, where the CEO makes more in an hour than low-level employees make in a year, an executive who makes $75,000 is often making just twice that of the lowest paid employee.

Why executive directors are so bad at asking for raises

One executive director told us about steeling herself mentally for an upcoming discussion with the board about her salary. She was determined to ask for a 10% raise. But when she got to the meeting, the board told her they were giving her a 25% raise! She was thrilled! But as she was driving home, it hit her: Now I have to RAISE the money.

Because the executive director's salary typically acts as a ceiling, keeping the executive director's salary low also serves to keep other salaries low. Executives know that a raise in their own salary of, say, $10,000, will mean $50,000 in raises across all other positions . . . $60,000 more to raise next year.

This question of how much to pay usually arises in one of two quite different settings: when hiring a new executive director and when discussing a raise for a current executive director. When hiring a new ED, boards typically choose a salary designed to attract strong candidates. Later, the same board may end up ignoring salary as a retention tool, and instead focus only on percentage increases. Some of the objectives and factors to take into consideration:

1. Competitive: The executive director's salary should make the organization competitive in the market for talent. To where is your executive director most likely to leave? From where are you most likely to recruit your next ED? If the answer is a similar nonprofit, look at the salaries of comparable nonprofits in the area. (But keep in mind that salaries at very similar nonprofits can be different by factors of 10 or more.) If the answer is government, look at the kinds of positions your ED might take, and what salary and benefits are being offered.

2. Fair internally: The salary is fair in the context of other salaries in the organization. How much are other employees making? How distant or how close a spread do you think is appropriate?

3. Future-looking and strategic: The ED's salary for the coming year reflects the contribution we expect the ED to make this coming year, not as a reward for past contributions. Performance in the last year gives us the best clues about how well the ED will do next year, but this year's salary is not a reward for last year's work.

If an executive is underpaid, recruiting his successor will be more difficult within the budget. Even more importantly, if all wages have been kept under a low ceiling, you may find it difficult to recruit and keep a qualified, committed workforce. There are many more reasons than salary why people go to work at a nonprofit, but low salaries narrow the pool of applicants to those who can afford low salaries . . . often inadvertently meaning that only upper middle class people can afford to work there.

4. Sending a message: The ED's salary should send the appropriate signal to the ED, to the staff, and to others. Words are important, but so is money. Praising an executive director while keeping her compensation flat ends up conveying a message that the board doesn't really value her work. In the same way, giving an inadequate executive a raise while quietly considering her termination sends a mixed signal you may later hear about in a wrongful termination lawsuit.

5. Don't over-pay a so-so executive because you're a large or prestigious organization. Over-paying a so-so executive can encourage "cooking the books," and an over-paid person will fight more aggressively against termination.

6. Within the budget: Neither the ED's salary -- or other salaries -- should cause undue financial stress on the organization. The board has a responsibility to keep the total costs of the organization (including the executive director's salary) in an affordable range.

Sometimes when hiring a new director it may be appropriate to invest "venture capital" to offer a higher salary. In an experiment by the Neighborhood Investment Corporation, $5,000 and $10,000 grants were made to local groups to raise the salary offered to a new executive. The theory was that by offering more, a better qualified person could be hired and such a person could raise enough money to meet the new costs as well as bring up all salaries. In some cases, boards did succeed in hiring at a new level of competence and the model was proven correct. But in other cases, boards still were unable to attract talent with which they were satisfied.

7. Consider other aspects of compensation: Retirement benefits, an extra week of vacation, dental insurance, or other benefits are important to attracting and keeping talent. "We're even seeing people pay more attention to benefits than to salary," commented Regina Birdsell of the Southern California Center for Nonprofit Management, which maintains a job site and publishes wage and benefits surveys. "Be sure to put retirement benefits, longer vacations, flexible work hours into your job advertisement."

Whatever you pay your executive director, it's a good idea to have the salary reviewed and approved by the board annually, preferably in the context of performance evaluation and the budget for the upcoming year. The simple step of assigning one person to look up the salaries of comparable organizations can set a helpful context for the board.

Given the importance of the executive director to the organization's success, boards often spend very little time thinking about his or her salary, and perhaps even less talking it over with the executive. Setting the top salaries is a strategic choice that boards should not be shy about bringing into the open and discussing with candor.

Information on salaries may be found at:

  • Guidestar: draws salary data from 65,000 Forms 990, which are filed annually by nonprofits with annual revenues of $25,000 or more. Salaries reported are those of $100,000 or higher. Perhaps more useful than purchasing Guidestar's summaries is to look up organizations in your community with which you are familiar to see the salaries of their key employees. Keep in mind that the data is typically a few years old and does not include hours worked and certain other types of benefits.
  • Abbott, Langer: offers a range of salary surveys, typical cost around $250
  • Nonprofit Times has an annual issue on nonprofit compensation, but focuses on large national organizations such as the American Cancer Society, the SPCA, and others; information may not be relevant for community-based organizations. Other surveys available at a fee.
  • Local or state compensation studies on nonprofits are conducted in some areas. The local United Way or community foundation will have the information if there is one. Local business newspapers or the local Chamber of Commerce often conduct local studies on for-profits.
  • IRS Instructions for Form 990 (with the full language on "reasonable compensation:); see page 68.

Jan Masaoka is editor of Blue Avocado magazine. She has negotiated executive director salaries from both sides of the table. With Jeanne Bell and Steve Zimmerman she recently co-authored Nonprofit Sustainability: Making Strategic Decisions for Financial Viability, available from Amazon and from publisher Jossey-Bass.

See also in Blue Avocado:

Comments (58)

  • Anonymous

    I wonder if anyone has done a survey on the costliness of not retaining an effective ED. I was involved with a non-profit whose board was uncomfortable providing any salary increase over several years, and also felt they were unable to afford to provide benefits. The ED continually received good to excellent performance evaluations but never received a raise or benefits. The ED held on as long as possible, but eventually moved on to a job with a strong compensation plan. But I wonder how to calculate the interruption of continuity to relationships and programs, the difficulty in retaining staff after her departure, the need to increase staff compensation and hours to compensate for work that was falling behind in the absence of the ED, the cost of performing a search for a successor, etc. I wish I had been able to present case studies to help our board better evaluate the cost of a raise against the cost of losing a very competent ED.

    Oct 20, 2011
  • Anonymous

    They want to fire a President of a Florida Corporation which also is a shareholder (5%) the Treasury and the Secretary. The corporation only have two shareholders beeing one of them the President. The reason to fire him is because someone else bought the 95% of the shares and wants to name another person in his/her place. Is that possible? What tools has the President to defend himself and mantain his/her position?

    Dec 01, 2011
  • As Vice-President of a non-profit board which recently had to terminate its ED because it simply couldn't afford her, I immediately clicked through to your article on ED compensation. I was, however, disappointed to very little of use to the smaller non-profits who probably represent 80% of the total. I did get from the article that compensation is all over the map, but some guidance as to the rough percentage of revenue ($275K for our shoestring operation) which should be represented by staff salaries, particularly that of the ED, would be very useful.

    Mar 25, 2012
  • Anonymous

    Interesting

    Sep 22, 2012
  • Anonymous

    It is ok for non-profits to give the Executive Director a salary plus commission on the money they bring in? Thanks

    Apr 17, 2013
  • Anonymous

    I just started working part time with a new NPO as their Managing Director. Because it is new and I was told by the ED that the board had limited the amount of salary he could offer, I decided to accept both the position and the pay (which is less than I was making at age 19 and I am now 59) but insisted that I couldn't work for this type of salary for more than a 90 day period. Then we could sit down and conduct a performance evaluation at that juncture. Based on our initial working relationship (I was a Coach/Advisor to the ED for a brief period), I believed the ED when he confided in me that the almost-entry-level wage they were paying me for what was to be 20 hrs/work per week would be increased as soon as some sizeable donations came into the NPO. My accomplishments working as MD in such a short period of time have astonished him (and many others, including myself) but I sense he does not have ongoing communication with and/or real involvement from his Board. I also learned, after he asked me to write the Business Plan for the organization, that he was earning 8X's what I was getting paid and has been receiving that plus $2K more for health insurance while the rest of expenses which includes my meager salary comprises less than 30% of the budget. Today I have 30 days left to go before the 90 days are up and I find myself working 30 hrs (not 20) and am the point person for almost everything we are undertaking including a Sept event and a large 100+ attendee golf tournament fundraiser. He and I are the only two employees of the company to date. My question is given this scenario (oh, by the way, we have approximately $45K in the bank with an incoming monthly donation of $5K and that's it) is it really kosher and "fair" for the ED to be getting $10K in salary and insurance benefit monthly while I am getting paid barely over minimum wage and we don't even have an administrative asst or clerical person to help with any of this? Curious to get feedback from you all regarding this scenario. Thanks in advance for all responses.

    Aug 24, 2013
  • Anonymous

    The Executive Committee of my Board completed my evaluation and determined a raise amount. They are now asking me how to go about implementing. . Does the raise need to be voted on my the full Board? Most of our committees make recommendations but the full Board usually votes on all major decisions.

    Nov 05, 2013
  • I found this article well done and because we serve the homeless (we call Urban Nomads) of our city of Santa Barbara, it is very hard to get donations and support, let alone a compensation for a director. So paying any of us 100% volunteers is impossible, even after years of serving. SB has more non profits than any city nationwide. People will give to clean the beaches or help a dog before they will help change the life of a person. So paying a salary of $45k per year for our ED is out of the question. Very hard work and very hard position in a city in the top 6 most expensive to live/work in. Not encouraging. We would spend more time fighting for the needed ED bucks than helping the emergency cases we have. Would give anything for this to change.

    Jul 29, 2016

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