Balancing progress with nonprofit executive compensation
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The median executive pay for nonprofits has risen steadily since 2018. However, due to disparities within the sector, the prominence of short and long-term compensation in for-profit rewards programs, and the challenges in narrowing a relevant scope of comparative data, determining compensation for a C-level executive can be arduous.
Tax-exempt organizations are required to ensure the “reasonableness” of executive compensation for their executives, which the Internal Revenue Service defines as “the value that would ordinarily be paid for like services by like enterprises under like circumstances.” Only, it can be difficult to organize the facts and circumstances that should determine the compensation for each executive team.
Compensation Committees and other organization leaders often reach for publicly available peer data from Form 990 tax filings to gather detailed information for base, incentive, and other payments and benefits. A few notable challenges with making decisions exclusively on this information include:
- Person (not position) Focus: It only reports the actual pay for a single employee without a full understanding of the individual’s impact, experience, and tenure in that role and at the organization. Pitfall: You may compare a newly promoted Chief Financial Officer with 7 years of experience to another organization’s Chief Financial Officer who has 25 years of experience.
- Title Inconsistency: It can only be matched based on title alone and does not include a definition of the full scope, span of control, and key areas of responsibilities of that position. Pitfall: it is not uncommon for title inflation to exist within non-profit organizations, and this practice puts you at risk of matching your “Executive Director” who is the top leader at your organization, to an “Executive Director” at another non-profit organization that reports up to two additional levels of leadership.
- Imperfect Peers: It is challenging to find organizations that are truly comparable to the unique attributes of your organization, and it can be difficult to generate consensus on the appropriate set of peer organizations when determining executive compensation. Pitfall: The peer organizations you select may not truly reflect the market for talent that applies to your executive team.
A common alternative to peer analysis is to use employer-reported compensation survey data, ideally from multiple reputable sources. Since published survey data also has imperfections and blind spots, it is optimal for non-profit leaders and Boards of Directors to leverage both published survey data and Form 990 data as they seek to understand the market and make well-informed decisions regarding executive compensation. For-profit organizations often take a similar approach using peer data from proxy statements and Form 10-K, instead of Form 990s.
A blended approach to executive compensation can help organizations avoid the pitfalls of a stand-alone peer analysis based on tax filings; the addition of published survey data can provide the foundation for:
Position Focus: Survey data reports various percentiles of data (25th, 50th, and 75th for example) so organizations can target an individual in the appropriate place in the range and not assume everyone should be at the same place.
Title Alignment: To ensure a closer apples-to-apples comparison, organizations can match their position based on the actual duties and areas of responsibilities of the role, and not based on the title alone.
More Perfect Peers: Organizations can narrow the scope of published survey data to reflect profit-status, revenue, operating budget, number of employees, and geography; by doing this, nonprofits can generate the full range of pay for a position, not just the current pay of a single individual.
Each organization is unique, and the best way to honor and recognize this is to invest in a thoughtful approach to expanding your data set to represent the true market more fully for your executive talent.
Do not let the pursuit of perfection get in the way of progress; compensation is both an art and a science, and a fully engaged compensation committee can work closely with the organization’s leaders and experts such as the MJ Compensation & Total Rewards team to elevate the effect its compensation program has on the organization’s mission and its ability to positively impact the communities it serves.