Legal and practical guidelines for setting the salary of 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.
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.
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
More information 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:
You’re right about saying that I have to prevent myself from paying my future executive director with too much money so that I can discourage them from fighting aggressively when I want to terminate them, and for this reason, I’ll have to hire a consultant. As a new founder of a startup business, the corporate guidelines are confusing to me, so I’m not sure how I should approach the vacant position’s compensation computation. I think that a consultant will be able to help me out with this since they know just how much an executive director from a garments industry should be paid.
I find your post disgusting justifying the gross salaries of the privileged CEOs. Somehow there is the idea that the person that does paperwork deserves more than the doctor that saves lives, the activist that risks his own life in the middle of the war to help, the vet that cares that wild animals do not dissapear, the doctor that researches and will save thousands of people… What has ever done a CEO that deserves being remembered for? Nothing. CEOs is just a disease of an aristocratic society which believes that there is need for a leader. Does really accounts need to be told to do their job? Do their doctors? Do marketing? Any company without CEOs will do just fine. They may be helpful as trying to align sections of companies but that should be considered a mere assistant job, and obviously paid the same or below that their peers who actually do the REAL job for NGOs.
Wow. If you only knew all that CEOs do, and all the knowledge they have to retain. Not just anyone can manage an entire oganization.
There are CEOs that are also doctors as well/ people who are working in the field. Just FYI…
you are ignorant
I have a question, I am starting Companion K9 Rescue SPCA a Nonprofit 501(c)(3) and was wondering what should the CEO/Executive Director be paid in a New Nonprofit and starting out? He/She will get Raises as we grow but I am stumped on how much for now. Can we just pay $30,000 a year starting out?
Also I am confused, I was told that most Nonprofits are starting to use CEO/President now then the title CEO/Executive Director?
Thanks for writing in Tony, but we are not able to advise on specific salary rates or titles. We recommend you check with your state nonprofit association to see if they might recommend resources on these topics.
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.
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.
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.
It is ok for non-profits to give the Executive Director a salary plus commission on the money they bring in?
Thanks
Interesting
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.
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?
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.
I have a question!! I am starting the non-profit youth organization myself and plan on serving as the Executive Director. Though I do have some buy-in from local colleagues and friends, I anticipate it will be some time before I have my final board in place, yet I need to make projections on the 1023 application form. Will it raise alarm if I project a lower salary for myself for the first year and then project for an increased salary for the second? As much as I would like to make a full, livable sustainable salary my first year, I have been around long enough to know that the funds might not allot for it, so I will accept lower (and work a night job). I do anticipate some very notable contributions (from businesses I already have a relationship with) but still feel like if I even put $50,000 for my salary I am being greedy! (even though in Southern California that might as well be at poverty level… kidding). I do plan on paying well for line staff and administration, to ensure the best for the kids we serve.
Any advice??? 🙂
One piece of advice I’ve gotten regarding that question is to put down a higher amount (what you think would actually be appropriate in future years) for your own salary even if you don’t intend on actually paying yourself that much. That way when you do have the capacity to pay yourself appropriately it will not appear to be out of the blue, and it communicates to others that you are a serious organization with an experienced and capable ED.
Last year the ED of the non-profit for which I worked got at 6% raise. She gave the office staff a 2.5% raise. The hourly staff with many years experience is barely paid above minimum wage for our province. The ED thinks she is underpaid but that the office staff are well paid. Needless to say I resigned.
Beware of the “benefits” beside salary potholes, especially with a small organization. I now receive more annual leave than I will ever be able take. I’ve banked the maximum amount and now I just kind of laugh as days build up and disappear at the end of the year. I actually took a two week vacation in September but it took months to catch up on my work load.
I am offered full insurance benefits (medical, dental, vision etc,) but it it is typical insurance purchased by non-profits – high deductibles and lousy coverage. I now pay a $1,500 annual penalty to be covered by my spouse’s insurance. I do have a 401K with a 4% match which is much appreciated. I am in my early 50’s and am really questioning if a lifetime as a non-profit director is going to be a personal disaster as I plan for retirement. Well at least I have an encyclopedic knowledge of public assistance programs1
Anonymous – we had that same problem of too much leave building up and no time to take it. We now pay the vacation pay with the salary each month. That way the employee is not out the vacation pay. If they do take days off they are not paid for those days as they have already been paid. This is especially useful for small nonprofits that live on grants and have to lay off folks when the grant runs out. If the employee who is laid off did not take their vacation days, and you forgot to factor in that you have to pay them for those days once laid off, that was a problem. So changing to paying for vacation as we go along solved that.
As for retirement, at least you have a 401K with a match. For those of us in very small nonprofits we don’t have matches or pensions. So we have to plan very carefully by saving all that we can to compensate for living our passion. Not even going to lunch at McDonald’s. LOL. As for medical care I’d encourage you to check out an HMO. We have Kaiser with no deductible. Downside is you don’t have a wide selection of doctors. Upside is good coverage including dental and vision paid for by the nonprofit.
Please I need your help. I am doing research on how much the CEO of a not for profit organization should be getting in retirement and I have no idea where to start looking. Seeing that you have been dealing with this, could you PLEASE point me in the right direction. guillaume at indiggoassociates dot com. Thank you in advance
How about start ups? Any thoughts?
Here’s my two cents. You’ve got to pay the top executive no more than 10x what the lowest paid person makes. That’s how they do it in Germany, and they’re an economic juggernaut, because everyone gets to be lifted up if the executive salary is raised. Coincidence? NO! Nonprofits with executives that get paid $120,000 per year are well and good if everyone in the nonprofit makes $40,000 or above per year. Sadly, this is never the case. Sincerely, Mazarine http://wildwomanfundraising.com
Excellent article and discussion. I am definately going to make sure all my board members receive your newsletter. It’s great to see broad base discussion and comments on so many vital issues of the NP world.
I would love to be compensated on par with my colleagues but that means that I will have to raise the money with very little board support. I realize that this is an age old problem and some will say that I should just get another job. However, there are many great things about my organization and I want to continue my work.
The well known local philanthropist who is President of my board is convinced that boards no longer get involved in fundraising. What’s an ED to do when that is the prevelant attitude and there are not enough staff on board? There are many very small non-profits that do important work but struggle with this problem. Does anyone have suggestions? Board development and training should help but it takes a long time to implement that. I have tried it–no success yet but am not giving up YET.
Amen! There are alot of Board members that don’t realize it is not just a resume builder to be on a board of directors.
A non profit is supposed to be just that. When salaries are excessive (and anything over the national average starts the tilt in that direction), then the c3 “non profit” status is suspect. Any salary over $100,000 ought to require full public disclosure (included in fund appeals). If those salaries are so well earned and justified, then why be secretive about them?
If anyone thinks such a disclosure is unnecessary (and may curb donations), then the next step should be for the IRS to do an audit. A private gouging of profit taking does not deserve a 501(c)3 classification.
Hire more, but don’t give excessively to a few.
I must respectfully take issue with your first sentence. In my opinion, “nonprofit” is a tax status, not a business model. NPOs that make money have more resources to reinvest in their services so the organization can be more efficient and effective, or they can even expand their offerings. It seems to me that organizations should pay their EDs whatever they can to ensure the outcome the board specifies.
I have been both an Executive Director and Board member in the arts sector. I also worked in the corporate sector at one point. I think NPOs suffer from major insecurity complexes and passive-aggressive behaviour when it comes to discussing salaries. I also think NOPs don’t really believe they deserve better. You simply cannot attract good talent without paying a competitive market rate. The net effect of sub-par compensation is staff resentment, anger and dysfunction. One of the factors impacting many NPO’s efficiency is the hiring of middling staff who operate at sub-par performance levels. That fact, combined with generally dismal support structures (training and the like) – put the sector at a distinct competitive disadvantage. I’m not Mother Teresa and I’m certainly not willing to “give” my services away or work for less than I think I’m worth. As an ED, I was paid a market-rate salary plus a bonus performance package. This kind of compensation structure works well to motivate and reward performance and is comparable to what I earned in the corporate sector.
The other thing to remember, of course, is that the money paid to the ED is not at the *expense* of the "rest" of the nonprofit’s work — it is the ED who is making that work possible in the first place. Try driving a car without a steering wheel and you’ll see what I mean.
Great discussion and article. Finally! Thank you.
Thanks for bringing this topic up! So many things feed into this issue – from a wide-spread lack of understanding for what it actually costs to run/manage an effective nonprofit organization to the steps we as a sector must take to foster the next generation of leaders’ ability to step into these critical roles. Our stakeholders – and in some cases our boards – have got to understand that investing in our human capital – especially the CEO/ED – is absolutely a best practice in sound nonprofit management. Donors especially need to be given good, solid information about this so that they don’t pull their gifts just becuase they hear the ED is making what they think is “too high” a salary. We also need to continue to communicate to those young people who are looking to make a career out of nonprofit management that it is indeed a worthy profession, and one that will enable them to lead a good life and provide for their family. The fear that they will not be able to do so is a significant barrier to these new potential leaders. (This issue came up in the 2008 study “Ready to Lead? Next Generation Leaders Speak Out”)
Lastly, many regional nonprofit management resource centers publish annual salary surveys, which provide an excellent informational resource. For example, the Center for Nonprofit Advancement here in Washington, DC does this each year, and it’s very helpful.
I think it would be very interesting to track salaries of men who succeed women and the women’s salaries before they left. In my very limited experience, the male taking the reigns from a woman is paid a great deal more than the woman was paid. This sometimes results in very bitter feelings for the woman.
Would have been much more helpful an article to have at least included some sense of what’s “reasonable” based on SIZE of organization. The only mention you have is for organizations $5 million and up (average $82-95K) but the majority of non-profits are probably substantially smaller than that and are the ones who really need more advice in this area as they have no access to high priced consultants.
We also included a note that one survey showed an average of $75,000 for organizations with budgets between $1 million and $2.5 million.
There are two problems with surveys on smaller organizations. First, the samples in such surveys are typically much too small, and typically even more unbalanced. We looked at some surveys that had only 15 or even fewer organizzations in their sample, which means that even one outlyer or in a different region can throw off the averages in very large degrees.
Second, size of an organization’s budget is much less of a useful indicator for executive salary in a small organization than in a large one. To over-simplify a bit, the job of CEO in one hospital is more similiar to the CEO job in another hospital than the top jobs at small nonprofits are similar to each other.
For example, the CEO or executive director of a small — let’s say 5 person — organization (of which there are many more than there are hospitals) will need be a brilliant fundraiser and spokesperson; in another the CEO is more of a Secretariat to the board. In a third organization of that size, the staff acts somewhat like a collective and the CEO doesn’t really have responsibilities or authority different from the others.
I apologize for such a wordy answer. I’m glad you made this point. Blue Avocado’s audience is community organizations, many of which (but not all) are on the smaller size. Such are the organizations, after all, which do so much of the heavy lifting in our society.
Jan, I just appreciate the many ways that you find to say there is no formula that you can just apply across the board to every organization. Especially the relationship between the ED salary and the organizational budget. Every line item in our budget, I think of as an investment in our mission and the bigger investments we make (the largest expenses) represent our top priorities and our values. Where you invest, is where an organization has the most chance at success. The investment in talent and leadership – otherwise known as salaries – is often the smartest choice for a small organization.
Eloquently said, Aspen. Thank you for sharing such a thoughtful comment. Jan
Beginning with the 2008 return, the 990 now only requires reporting of salaries $100,000 and higher.
That isn’t completely correct. Key employee salaries (the ED and CFO, regardless of title) have to be reported even if they are below $100k.
I believe that they only have to be reported if they make over $50,000 a year. That will leave out a lot of small agencies. I would also love to quote you and your article to my next review board for a certain funder. Since they don’t see a reason why the E.D.(me) should benefit form a raise. we have a budget of aprox. $125,000/yr. My salary started at $21,000 has went to $25,600. I have two degrees and have been here 4yrs. I live barely above the poverty level. The people who sit on this review board are execs. in the community that make probably 2x as much. Any suggestions?
Your grammar might be a reason for your low pay. “My salary started at $21,000 has went to $25,600.” should be “My salary, which started at $21,000, has gone to $25,000.”
I am a management consultant to nonprofit organizations and the President of the Board of a local nonprofit. Our Board has established a salary adjustment policy that “pays for performance”. So I differ from your perspective that salary adjustments should be forward looking rather than based on performance. In addition, we have set a goal that all of our organization’s salaries approach the top 75% figures in a regional annual salary survey. While it has taken us a number of years to approach that compensation level, we believe that it was in the best interest of the organization and our employees to be in the upper levels of pay to be competitive for qualified employees and to acknowledge the value our employees add to our organization.
The approach of keeping salaries at the 75th percentile seems to make sense, until everyone in the survey adopts the same standard. All of the cities in our county adopted a similar approach and as a result, all of the cities are way out of control on their personnel costs because they keep moving to that 75th percentile standard.
Pay has to be based on comparable positions in comparable agencies with comparable budgets and staffs, tempered with what you can afford, some sort of cost of living adjustment and then bonuses for performance.
We use an annual regional survey of nonprofits. To arrive at our target salaries, we create a matrix that includes all agencies similar to ours — similar position, budget, # employees, similar services, # supervised (if it is for a manager), education requirements, all other nonprofits in our county, and total # in the survey. Then we average the data from all of these categories to arrive at a target salary and base any adjustment on the employee’s performance. The adjustment amount comes from a line item we have in each year’s budget, specifying the pool of $ managers have to work with. This is approved by the Board along with the annual budget. The Board also reviews the performance of the Executive Director and sets salaries for both the Executive Director and the Chief Financial Officer. While our goal is for all employees to be paid at or near the 75%, the salary adjustment pool limits how close we can come each year. If you woud like more details of the process, contact Louis Chicoine at Abode Services (www.abodeservices.org)
The Lake Woebegone approach to executive salaries: “all of the children are above average”. That’s how corporate CEO salaries have become so obscene–every corporation believes that they deserve a leader who earns in the top quartile of CEO salaries, so they end up creating a compensation beanstalk to the sky. I don’t think this is sustainable.
I think we need to focus on other ways to retain top talent–community involvement and status, good working conditions, constructive board/management partnerships, decent retirement support, etc. Hopefully leaders in our sector are not so self-interested that they’ll always leave a great situation where they’re making a big difference because someone else wants to pay them $1,000 more a month.
Good point. I know one foundation executive whose board has decided that his salary should be at the 80th percentile of foundation president salaries for foundations of their asset size. As a result his salary goes up and up and up. Because everyone is doing the exact same thing.
Perhaps level the field. Pay the top person the
AVERAGE HOUSEHOLD INCOME for the geographic area served. note, i said household not individual. That would mean people here in central Ohio would get close to 70 thou, plus whatever benefits are offered – many times a car, phone, vacation, medical, leave , etc are offered and do make the job more appealing. At some point I do get angry. I see a local Humane Society with a 2plus mil budget paying its exec over 125 thou, and her assistant 90 thou. That is Stupid High in this time of financial crisis and need. The non profit world needs to spend a little more time looking for directors who CARE about the mission, not just the paycheck. A salary that would allow a decent standard of living would depend on the neighborhood. Columbus Ohio costs are different than LA or NYC costs. You can buy a Dream home for well under two hundred thousand here in Columbus, You can’t buy a dumpster space in NYC or LA for that! To compare salaries w/o recognizing the cost of living for the area served isn’t fair, but to pay a director twice the standard of living for a household when the agency starts cutting programs is just wrong. People are getting tired of seeing these huge salaries and then get hit up for donations to “keep the lights on”.
I respect your frustration, especially in a time of tight budgets and program cuts. I also completely agree that comparing salaries without taking cost of living into account is absurd. Thanks for making that point. I disagree with your comparison of execs who accept adequate (or even generous) compensation to execs who "care;" it implies that well-paid execs do not care. This mutually exclusive relationship is not accurate. Even the most devoted execs can have medical expenses, family expenses, student loans, and other reasons to require competitive compensation. I also disagree that it’s automatically stupid to have a six-figure-earning exec because there is so much need right now. 1) There’s always need, even in economic booms. Infrastructure is always necessary for meeting needs effectively and efficiently. An exec is part of infrastructure. 2) I agree that income disparity is horrible. People are taking home huge yearly salaries while nonprofits have to cut programs and close their doors. My question is this: why would we target nonprofit execs to give up their professional compensation but be perfectly happy to let other (mostly better-paid) execs take it all home? Why are we only Robin Hood within nonprofits and not across sectors? -Emily
Viewing the sight of $100,000 program officers asking $70,000 executive directors whether the prospective grantee could do a project for less than the asked-for amount, I wondered if it would help if program officers were paid the average salary of the executive directors to whom they gave grants. But a foundation friend of mine pointed out that such a rule would just mean that program officers would only give grants to organizations with high-paid executives. Sigh.
Not all foundation program officers make 100k salaries. FYI.
Your article on salaries was timely for me after I found the link below just yesterday where the author referred to a $78,800 ED salary as “inflated”. Do you think there is a guideline to be found in terms of percent of overall budget? Here’s the quote about the Tucson Audubon Society:
"Well-known for its many programs focused on the protection of biodiversity and the environment, the Audubon society, based in Washington, D.C., has chapters across the country, run independently of the main office. Its affiliate in Tuscon, Arizona, which fosters interest in and conservation of the bird population of southern Arizona, has seen its administrative costs skyrocket as the recession has eaten into its incoming donations. Partially due to Executive Director Paul Green’s inflated salary of $78,800, which accounts for more than 7% of the group’s expenses, the Tucson Audubon Society spends almost as much for its office as it does on the birds it aims to protect."
This is a perfect example: calling $78,000 "inflated" is a judgment call, but we have no idea on what that judgment call is based. A review of the situation might reveal that this amount is much too low or much too high, or just right, based on the criteria in the article.
ED salary as a percentage of budget just doesn’t work. For example, in a $100,000 organization, a salary of $35,000 might be just right because it’s a small organization of just a couple of very talented folks doing a lot. On the other hand, if we use this percentage of 35%, it wouldn‘t be right for the executive director of a $2 million organization to be making $700,000.
In general, larger-budget organizations pay more than smaller-budget ones, but it’s a mistake to use percentage-of-budget is an appropriate measure.
THERE YOU GO AGAIN ..WHEN THE EXCECUTIVE DIRECTOR MAKES MORE THAN THE PROGRAMMING PART OF THE DESIGNATED MISSION, NEED TO REGROUP
Often in small non profits, the Executive Director is doing all of the programming. Without the ed as staff, it could not happen.
Bravo, once again, Jan! Another excellent article. Keep them coming.
When a board does not have an ED and is making large business decisions, shouldn't they be compensated? ($8M in assets)
Nonprofits do not compensate their board members — no matter the size of the organization's budget.
Thank you for raising this issue and reminding Executive Directors they deserve better pay.
EDs should not be shy about requesting certain salaries, raises, or benefits. We are professionals and should be compensated accordingly. Working for a not-for-profit should not require a vow of poverty. Salaries should not be influenced by what our Board members are paid (many of them are wealthy volunteers who don’t have to earn a living from their work).
Boards should pay as much as they can afford, not as little as they can get away with.
Board Members of a Non-Profit are never paid a Salary to my knowledge and on 3 Boards
What is up with this comment?
Very, very few nonprofits pay board members, but most foundations do, often tens of thousands a year.
I think their talking about the salaries those individuals make for their day jobs, not their volunteer work on the board.
I think she means what board members make at their own jobs, or lack thereof.
Our organization, Exhale, has approached salaries and raises in two different ways. At one point, after 5-years of operation, we reviewed our salaries against others to assess if we need to make salary adjustments. Not "raises" based on performance for individual employees, but to establish organizational salary ranges that were comparable and competitive with other similar organizations. Turns out, all our positions were comparable, if not better paid than other organizations, except for the Executive Director – mine. I was paying my staff more than other organizations, and myself less. The Executive Director salary was the only position we had to adjust significantly.
In terms of how we decided on the range for my salary, we took two approaches – I conducted my own informal survey of several colleagues that I work with in the Bay Area from a variety of fields and from colleagues that I work with in a similar field across the nation. Yes, people were quite open about their salaries when I asked them. I averaged these salaries out. Then, we used the Center for Nonprofit Management’s Compensation and Benefits Survey for Northern California and conducted a similar average. Turns out the average from my informal review and the average from the survey were exactly the same. Where to set the range became pretty clear. Then the board and I negotiated about where I would start within that higher, adjusted salary range.
Also, I did this process simultaneously with another ED colleague who was doing it within her own organization. She had to do it because her staff had come to her and told her she needed to make more, so they could make more, because her low salary was serving as a salary cap for them. Doing this process and asking for the raise was one of the most important things I’ve ever done as an ED – for myself and my organization. I love helping other ED’s ask for raises, or conduct salary adjustments, so the value of their work and contributions are properly reflected in the organization’s budget.
Dear Aspen, is it possible to know what other benefits the ED receives? Are those similar/different than the benefits other employees receive?
-submitted by Carmen on August 27, 2012
I am finding this response you made 3 years ago very useful, Aspen!