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Compensation and Benefits

While we offer guidance on some "hot topics" below, these resources are by no means comprehensive. We encourage you to join your state association of nonprofits and sign up for free newsletters about employment law updates in your state to stay abreast of changes to the laws in this frequently-changing and important management area.

Don't forget to withhold taxes for employees:

Did you know that if a nonprofit fails to withhold income taxes from employees' wages, the board of directors may be held responsible for back withholding taxes and also penalties? As the New York State Attorney General's publication, Right from the Start explains on page 3, if the nonprofit has taxes, it will be responsible for withholding taxes for state, federal, and potentially local income taxes owed by employees. When nonprofits fail to make these withholdings, the IRS has the authority to hold those with fiduciary responsibility for the organization (board members) responsible.

Board's role in approving executive compensation:

This topic is so important we've devoted website real estate to it! Before hiring, nonprofits should review “comparability data,” which means reviewing salary and benefits information about the executives of other nonprofits, in the same or similar geographic area, with a similar budget and mission. Boards are expected to conduct a review of the CEO’s compensation (salary and benefits) every year. Describing how the board does so is now required on the Form 990 Part VI, Section A, line 15. Read more about this good governance practice.

Salary and benefits:

It is helpful to know what the “going rate” is when you are hiring a new staff member or when reviewing whether your nonprofit is able to retain talent. Look for relevant salary and benefit survey reports for your state. Many state associations of nonprofits offer this data to members as a benefit of membership.

"Can we pay staff members a bonus?"

Yes! Bonuses are considered to be part of the overall compensation received by an employee. But care should be taken on two fronts: First, compensation based on incentives, including bonuses, is carefully scrutinized by the IRS to ensure that no prohibited private benefit results. Read about guidelines for bonuses and incentive based pay. Second, be sure to manage employees' expectations so that they realize that just because a bonus is offered one year, does not necessarily mean it will be offered the next. Employees should understand that bonuses are a discretionary add-on to regular salary, dependent upon budget limitations and usually provided in recognition of an employee's extra-efforts or exceptional performance - not automatic. Nonprofits report bonuses (including signing bonuses) and any compensation based on incentives, on Form 990, Schedule J, Part II, Column B 2 (ii). Remember: care must be taken to justify all compensation as reasonable.

Tips:

Compensation is more than just straight salary. The IRS considers “compensation” to include the total of all “income” received by the CEO, which includes, for example:  contributions to retirement accounts, housing, and car allowances, as well as insurance premiums paid by the nonprofit to benefit the executive director and other benefits with a clear “income” value. (See IRS Form 990 instructions, pages 29-31.) Secondly, some board members may not appreciate how easy it is for others to see what their nonprofit pays its chief executives. Nonprofits that file the IRS Form 990 or 990-EZ are required to report compensation to the CEO, and with a few keystrokes on Guidestar, the executive’s compensation is revealed.

Where can I find salary survey data? When you are comparing apples to apples, it’s helpful to have access to salary and benefits survey data. Many state associations of nonprofits collect that data and provide it to their members. There are survey reports for sale from a variety of sources, and a few reports available at no-cost on the internet. National nonprofit compensation data is also available for purchase from Association TRENDS, Guidestar, and The Nonprofit Times.

Contracts with CEOs. Are you considering whether to have a contract for your nonprofit's executive director/CEO? Read about The basics for negotiating contracts with CEOs/executive directors, in this article by the law firm, Venable, LLP.

Additional Resources