Nonprofit Compensation and the Bogus Bogeyman Distorting Reality

It’s a new year, but for nonprofit leaders and board members, many of the same challenges remain. One of the significant issues in the nonprofit sector is that of nonprofit compensation. Many who dedicate their lives to working in the industry think that they are underpaid. As a result, if you pay attention to comments in social media groups, you’ll see complaining when the topic of compensation comes up.

However, the IRS suggests that because nonprofits do not pay taxes, they can only pay “reasonable compensation.” Still, there’s a lot of confusion about what that means, especially since regulators and the public believe that those in nonprofits should pay (and be paid) as little as possible.

The thinking is that nonprofit funds should go to the mission. Yet, the idea creates turnover issues for low-paid nonprofit workers who need to pay the bills. Also, nonprofits tasked with helping to solve the intractable challenges in society might not have the chance to hire the best and brightest with that kind of thinking.

As we saw grandly last year, as philanthropy rapidly changes in the 21st Century, that old way of thinking is getting tossed out the window. Last year, charity: water decided to create a program called The Pool for its nonprofit employees. The Pool is a substantial financial incentive effort to retain the best and brightest in a big way with their nonprofit compensation.

The Candid Nonprofit Compensation Report

In the third quarter of last year, one of the most-read compensation reports was published by GuideStar — now known as Candid. A few of the highlights included a modest increase in CEO compensation. Increases by gender varied with women experiencing higher increases in 2015 and 2016. However, in 2017, it was men who benefited from higher nonprofit salaries.

Unfortunately, one of the challenges that continue to plague the for-profit and also nonprofit sectors is the fact that female CEOs do not get paid equally. In 2017, for nonprofits with budgets of less than $250,000, the gap was 5% to as high as 20% at nonprofits with budgets over $50 million. The social good sector has much more work to do to eliminate the gender gap — but not only at the CEO level.

Nonprofit Pay and Charities

One of the reasons nonprofits keep compensation low is the IRS. If the IRS finds that compensation is not “reasonable,” both the organization and also board members can get fined. According to the IRS, “Reasonable compensation is the value that would ordinarily be paid for like services by like enterprises under like circumstances. Reasonableness is determined based on all the facts and circumstances.”

However, as mentioned above, the bogeyman of the IRS does not mean that nonprofit leaders should have to pay poorly. That’s not the lesson here. Instead, what is essential is for nonprofit leaders and boards to learn about nonprofit compensation. A great place to start is with Candid’s report or other compensation studies. In this case, knowledge is power. And when nonprofits pay competitive salaries, they can hire and retain excellent people who can propel missions forward.

Nonprofit Compensation and Employees

Nonprofit compensation is a topic we have to keep discussing, but also take action in improving. It begins by educating board members and donors. First, the fact that we have any gender gap is unacceptable in a field where we exist to make society better! That has to change, and we have to pay fair living wages for people within organizations — no matter their gender, race or background.

Low wages in the nonprofit sector hurt all employees. We have to get beyond concerning ourselves with the pay of just CEOs. Everyone has to pay rent, get to and from work, eat, etc., and low salaries for nonprofit employees hurt families. It also hurts philanthropic missions because many people who would like to work in the sector can’t because nonprofit compensation is not what they need to make a living.

Nonprofit Salaries and Getting it Right

In a study published by one of the nonprofit market leaders, Classy, it found that while there’s a lot of job satisfaction, 50% of people surveyed thought nonprofit compensation was the top issue to address at their nonprofit. In the 21st Century, I would suggest we get it right. And it doesn’t take much.

For instance: Nonprofit leaders can go a long way by hiring people based on what they learn from compensation studies. Ensure that there are no wage gaps and also that the percentage of salaries between salary bands are consistent and reasonable.

Finally, Nonprofit AF published an excellent article about nonprofit compensation and how to improve it within charities. One of the best takeaways was the SAP (Staff Awesome and Pay) test. Here’s the question to ask yourself,
according to the post:

“Ask yourself these questions about each of your staff: Is [John] pretty awesome at his job? If so, if he quits right now, could we get someone equally as awesome as John for what he’s currently getting paid? If yes, great; go have a beer. If the answer is no, figure out a plan to raise John’s salary! It’s annoying and insulting when amazing staff leaves, and you bring in a newbie who starts at a higher salary even though it’ll take a lot of time to train this staff to be at the same level of effectiveness as the one who just left."

Editor's Note: This article was originally published in the "Legal Matters" column of the January/February 2020 print edition of NonProfit PRO. Click here to read the full article.