Nonprofit Resources

5 Common Questions About Nonprofit CEO Compensation

In the unique world of nonprofits, many boards and leadership teams are unsure how to determine appropriate compensation for their organization’s executives, particularly the CEO. This uncertainty is understandable. Nonprofits must balance IRS rules, public scrutiny, and stewardship responsibility while ensuring they can attract and retain effective leadership.

Here are answers to five common questions about nonprofit CEO compensation, including how to determine peer comparisons, review pay increases, and factor in organization size.

Q: How should a nonprofit determine which peer organizations to use for comparison?

Short answer: The board, compensation committee, or other leaders—not the CEO—should determine which peer organizations are used for compensation comparisons.

The individuals responsible for setting the CEO’s compensation (such as board or committee members) should select the peer group used for benchmarking compensation. The peer group should consist of organizations that are similar to your nonprofit in terms of:

• Annual budget
• Number of employees
• Organizational complexity
• Geographic region

A pastor of a rural church with a $1 million annual budget might be friends with a pastor of an urban church with a $20 million annual budget, but they would not be considered peers in terms of compensation.

Key takeaway: Peer selection should be objective and independent of the CEO.

Q: Should a nonprofit CEO receive a higher or lower cost of living or merit increase than other executives and employees?

Short answer: It depends on the organization’s financial health, workforce considerations, and whether the resulting compensation would still be considered “reasonable” under IRS rules.

Nonprofits should evaluate CEO pay increases in light of the organization’s overall financial condition. In recent years, particularly during periods of economic uncertainty, inflation has disproportionally impacted lower-compensated employees. As a result, some nonprofits chose to prioritize increases or spot bonuses for non-executive staff while freezing or limiting executive increases.

If the organization is financially healthy and consistent increases or bonuses across the organization are feasible, the board or committee should weigh the options. This includes considering how offering the CEO a higher percentage increase than employees would be perceived and whether the CEO’s compensation would still be considered “reasonable” under tax law. (You can learn more about the IRS requirements for executive compensation here.)

Key takeaway: Nonprofit boards should balance market data, internal equity, and IRS requirements when approving CEO pay increases.

Q: Does the size of a nonprofit organization affect CEO compensation increases?

Short answer: While the size of a nonprofit can affect CEO compensation increases, it is only one of many factors. Boards typically also weigh the organization’s growth trends, mission impact, and life-cycle stage when making executive compensation decisions.

Boards and executives understand the pitfalls of basing decisions on point-in-time metrics. Many factors should contribute to compensation decisions, including a snapshot view of the organization’s size as well as growth (or lack thereof) in terms of population served, number of donors, number of staff, and total receipts. Boards should view compensation decisions through the lens of the organization’s trajectory and current metrics while maintaining consistency across leadership and staff roles.

To balance organizational scale with performance and long-term sustainability, an increasing number of nonprofits are adopting a bonus structure for executive compensation. Under this approach, executives receive a lower base compensation percentile than employees, but the board approves an annual bonus pool that can be split among eligible executives based on their contributions to key performance indicators (KPIs) set by the board. This model allows boards to reward leadership contributions when the organization is growing and provides a safeguard if strategic initiatives do not achieve expected results.

Rather than being directly tied to revenue, these KPIs should emphasize other metrics that drive the organization’s growth. Examples include:

• The number of programs or locations that have reached defined milestones (such as the number of people served or years of operation)
• Growth in monthly donors or new major donors
• Formation of new strategic partnerships with vendors or peer organizations
• Achieving targeted levels of engagement or resource distribution

These metrics encourage sustainable growth and align executive compensation with outcomes that support the nonprofit’s mission.

Key takeaway: Nonprofit CEO compensation increases should not be solely based on organizational size. Boards should consider the organization’s current stage, growth indicators, and mission‑focused performance metrics to ensure executive pay aligns with organizational health and long‑term impact.

Q: What should a nonprofit do if the CEO does not want a pay increase?

Short answer: Boards should respect the CEO’s decision while planning proactively for long-term financial and retirement needs.

Many nonprofit CEOs and lead pastors have a sacrificial mindset, prioritizing stewardship of donor and congregational funds and leading by example. While admirable, this approach can result in unintended financial challenges later in a leader’s career.

As leaders approach the end of their careers, boards and compensation committees often realize that a CEO who has declined salary increases has been unable to save adequately for retirement. At that point, options to address the issue are limited.

To avoid this situation, compensation committees or boards may consider deferred compensation options that would provide more of a cushion in retirement, such as:

• Increasing or maxing out employer contributions to a 401(k) or 403(b) plan
• Encouraging the CEO to maximize personal retirement contributions
• Exploring additional options in a more comprehensive deferred compensation plan, when appropriate

Key takeaway: A nonprofit CEO’s decision to decline annual raises does not eliminate the need for thoughtful, long-term compensation planning.

Q: How can compensation discussions and decisions made today be carried forward into the future?

Short answer: Document compensation principles and processes in writing.

Board turnover and leadership transitions can make it difficult to maintain consistency in compensation decisions. The simplest way to preserve organizational knowledge is through clear documentation.

Nonprofits should develop two concise compensation documents:

• A compensation philosophy explaining the organization’s beliefs and guiding principles regarding pay
• A compensation policy outlining how compensation decisions are made in alignment with that philosophy

These documents should be reviewed annually and included in board or committee records. This will provide decision-makers with a starting point for future discussions and guidelines for making compensation-related decisions.

Key takeaway: Written compensation guidelines provide consistency and accountability over time.

Summary: Best Practices for Nonprofit CEO Compensation

Nonprofits can strengthen CEO compensation oversight by:

• Using effective peer comparisons set by the board or compensation committee
• Weighing financial health and workforce equity
• Considering organization size and complexity
• Planning proactively for executive retirement
• Adopting and annually reviewing a compensation philosophy and policy

If you would like to discuss any of the topics discussed here or are interested in having CapinCrouse conduct a compensation study for any of your executives or employees, please contact us. We are here to help.

Authors:  Stan Reiff, Professional Practice Leader – Consulting, and Kelsey Helmick, Executive Compensation Program Consultant

This article has been updated.

 

Additional Resources:

Planning for Success: Key Factors for Nonprofit Executive Compensation

How to Create a Compensation Philosophy and Policy for Your Organization

Nonprofit Founder Compensation Considerations

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