Nonprofit CEOs and Executive Salary: How Does a Nonprofit CEO Get Paid?
Nonprofit CEOs and Executive Salary: How Much Does a Nonprofit CEO Make?
The role that a chief executive officer (CEO) plays in a nonprofit organization is close to the role that one plays in a for-profit business. In both circumstances the CEO is a very important component of the system that allows the organization to function. The chief executive officer of a nonprofit has many responsibilities, with the leadership and governance of the organization largely falling on their shoulders. CEOs must have the ability to motivate staff, align the strategic approach of the organization with its overall mission, evolve and execute sustainable methods of fundraising, form and maintain positive relationships with supporters, ensure compliance with appropriate tax and legal regulations, and much more.
There are a lot of misconceptions surrounding nonprofit CEOs, their compensation, and the expected salary of a person employed in this position. It is common to believe that a nonprofit organization should offer little to no compensation to its CEO due to the charitable nature of the business. While a nonprofit should prioritize its mission when making decisions, there are several reasons why its critical to offer CEOs a competitive salary:
- Attracting Top Talent: A nonprofit will function more efficiently with a competent CEO and the only way to employ someone of this nature is to offer the appropriate compensation.
- Complex Role: The CEO of a nonprofit is burdened by many responsibilities and, for this reason, is always under huge pressure to deliver. The role requires lots of experience and expertise, and it is important that the person employed in this position is compensated fairly for what they bring to the table.
- CEO Retention: On average, the salary of a nonprofit CEO is lower than the salary of a for-profit CEO. By offering competitive levels of compensation, an organization can give itself the greatest chance of retaining employees in important roles.
Determining the Compensation of a Nonprofit Chief Executive Officer
There are various factors that influence the level of compensation that a CEO receives in the nonprofit sector. The circumstances of each individual organization have to be considered in order to determine an appropriate salary. A chief executive officer's pay should scale with the size of the nonprofit. An organization's size can be measured by its budget, assets, and workforce - the larger the organization, the greater the compensation of its CEO. The geographic location of a nonprofit will influence the cost of living for employees. Areas with a higher cost of living will offer CEOs a greater salary. A nonprofit will often use financial information from other organizations in its industry to set salary benchmarks. This information is used to determine an appropriate level of compensation for its own CEO.
According to salary.com, the typical salary range for a chief executive officer in the nonprofit sector is $141,310 to $240,777. Regardless of the position of an organization's CEO on this range, it is vital that nonprofits operate fairly and transparently. In most cases, a nonprofit is required by law to disclose the salary of its chief executive officer. Being open with this information is critical to instilling confidence in an organization's donors. They will want to understand the ways in which their generous contributions are being utilized. Displaying information that shows the appropriate distribution of funds will build a relationship of trust between the organization and its supporters. Openness will also establish integrity among board members, ensure that the board is fulfilling its depository duties, and help to guarantee that decisions are being made with the nonprofit's best interests in mind.
Comparing the Pay of Nonprofit CEOs to For-Profit CEOs
When comparing the compensation of a CEO in the nonprofit sector to a CEO in the for-profit sector, there are a wide array of differences to account for. It is important to recognize why compensation structure varies between sectors:
- Profit vs. Mission: In the for-profit sector, profit is the primary concern of the business. Whereas in the nonprofit sector, the mission of the organization is its greatest concern. When profit is the major influence for a business, it is likely that they will pay more compensation to their CEO.
- Public Scrutiny: Due to their tax-exempt nature, nonprofit organizations receive much more public scrutiny and have to be more transparent about their allocation of funds. To maintain a positive perception in the eyes of the public and stakeholders, nonprofits offer lower compensation to chief executive officers than for-profit businesses.
- Distribution of Profits: For-profit businesses can choose to distribute profits to shareholders or reinvest them back into the business. CEO compensation in the for-profit sector is often tied to financial performance. Nonprofits cannot distribute profits, which means that CEO compensation is less associated with the financial results of the organization.
As mentioned earlier, the size of a nonprofit organization and scope of its mission can determine different levels of CEO pay. An organization's size affects its executive salary in the for-profit and nonprofit sector. A larger organization, in general, will have a more complex operation, meaning that the chief executive officer will receive more money. Nonprofits with more intricate missions will require employees in leadership roles to have greater expertise and more in-demand skills. Chief executive officers with these qualities will require greater compensation to be attracted to the role.
Regulations and Guidelines on CEO Compensation
In the United States of America the Internal Revenue Service (IRS) is the governing body responsible for imposing guidelines and restrictions on nonprofit organizations. A nonprofit must act in accordance with these regulations in order to maintain its tax-exempt status. The IRS requires nonprofit CEO compensation to be reasonable and in line with the services provided. If this standard is not met then the IRS can impose taxes on organizations in breach of the regulations. To preserve transparency with the IRS, a nonprofit organization must report the salaries of its highest-paid employees within its annual tax returns. A nonprofit is encouraged to use comparable industry data when deciding how much to pay its CEO. Verifying that compensation plans are similar to industry standards means that the decision is easy to justify to the IRS.
The Role of the Board
A nonprofit organization's board of directors plays a pivotal role in ensuring that salaries align with legal and ethical standards. It is common for a nonprofit to establish a committee, made up of members of the board, that will oversee decisions made on executive pay. The compensation committee should be composed of board members that do not have a personal or financial interest in the pay level of the chief executive officer. It is vital that transparency is maintained when determining CEO salaries. A great way to achieve this is to make publicly available the criteria and benchmarks used to come to the final decision. The entire decision making process should be well documented, in an easily comprehensible format, to show that the compensation setting process was conducted in good faith and in compliance with all regulations.
Controversies and Criticisms
Members of the public hold many misconceptions about nonprofit organizations. These misunderstandings can lead to negative opinions surrounding CEOs that are paid a high salary. Donors may become concerned that their generous contributions are upholding the compensation of the chief executive officer rather than supporting the mission of the organization. If this concern is not alleviated, it can lead to the erosion of trust and reduce the effectiveness of fundraising efforts. Controversies surrounding the pay level of a nonprofit CEO can damage the reputation of the organization and create a public perception of hypocrisy. It is best to be transparent in decision making and explain in simple terms how each decision is made. This information helps the organization to steer clear of controversies and to maintain a relationship of trust with donors and the general public.
Finding a balance between organizational goals and fair CEO compensation can be challenging but is a balance that must be struck. A nonprofit must offer competitive compensation in order to attract and retain executive talent that is capable of moving the organization in the right direction and closer to completing its mission. The skills required to achieve this are in high-demand, which means that an executive with these qualities will command high pay. Chief executive officers can be offered incentive-based salaries that leverage their ability to hit mission-oriented goals against their level of compensation. The responsibility of balancing fair compensation with an organization's mission doesn't fall entirely on the nonprofit itself. CEOs in the nonprofit sector are expected to behave ethically and challenge any compensation-based decisions that oppose the values that the organization promotes.
Q: How are nonprofit CEO salaries determined?
A: Nonprofit organizations have to be very careful when determining CEO salaries. They use a combination of compensation committees, industry benchmarks, and legal regulations to come to a final decision. Nonprofits must make ethical considerations and be transparent with the process used to determine executive compensation.
Q: Why do some nonprofit CEOs earn high salaries?
A: In some cases, an organization will require a CEO with a very in-demand skill set in order to carry out its mission effectively and sustainably. Executives of this nature are in a position to demand a large amount of compensation. This means that the nonprofit must offer a salary that is capable of attracting the necessary talent and this range of pay is usually very high.
Q: What is the average salary of a nonprofit CEO?
A: According to salary.com, the average annual compensation for a CEO in the nonprofit sector is $186,909.
Q: How do nonprofit salaries compare to for-profit counterparts?
A: On average, CEO compensation is higher in the for-profit sector than it is in the nonprofit sector. According to salary.com, the average annual compensation for a CEO in the for-profit sector is $830,338. This is $643,429 higher than in the nonprofit sector.
Q: What percentage of a nonprofit's revenue should go to salaries?
A: There is no one-size-fits-all solution to this problem. The percentage can vary based on the size of the organization, its location, its budget, and many other factors. The Better Business Bureau's Wise Giving Alliance suggests that nonprofit organizations should allocate at least 65% of their total revenue to program activities. Of this 65%, between 75% and 90% should be used to pay employees, as a general guideline.
The importance of understanding nonprofit CEO compensation is high because it plays a significant role in the governance and handling of an organization. Here are some key points to remember:
- Accountability and Transparency: A nonprofit organization can build a relationship of trust between itself and its donors by implementing accountable and transparent practices. Stakeholders should have the right to understand exactly how their contributions are being utilized.
- Mission Alignment: It is critical that the compensation offered to the CEO of a nonprofit aligns appropriately with the overall mission of the organization. The total amount of pay should reflect the values and ethical standards of the nonprofit.
- Legal Regulations: Salaries offered to chief executive officers in the nonprofit sector should fall in line with the legal regulations put in place by the IRS. This will guarantee that the nonprofit organization can maintain its tax exempt status.
- Ethical Leadership: CEOs themselves have to play their role in understanding their compensation. Acting ethically in a leadership role means that the organization's mission takes priority over personal financial gain.
- Attracting and Retaining Talent: CEO compensation in the nonprofit sector must remain competitive to ensure that the required talent can be attracted to the role and retained in the future.
A nonprofit must remain transparent and encourage fairness in the industry to generate a relationship of trust with the public. Ethical governance and responsible stewardship of funds should be promoted to ensure that there is a high level of integrity at all times. Nonprofits should actively engage with donors, making sure that there is as much financial information as possible available to the public in an easily digestible format. By taking these measures, nonprofit organizations can foster a fair and transparent culture that aligns with their mission and inspires the support and trust of the public. For further assistance with the approaches outlined in this article, contact Paybee for an in-depth demo.