Nonprofit Resources
Nonprofit Founder Compensation Considerations
Nonprofit employee compensation requires careful thought and planning. It is often particularly complex at organizations led by a founder who wants to devote funds to mission-focused initiatives instead of their compensation. While this approach is generous, it can lead to unintended long-term consequences.
Here are some key considerations to help founder-led nonprofits and their boards address executive compensation in a way that sets both the founder and the organization up for long-term success.
A Common Trend in Nonprofit Founder Compensation
In our work performing executive and employee compensation studies for nonprofits, we’ve observed a repeated trend at founder-led organizations. While the experiences and outcomes aren’t universal, the scenario often follows a path similar to the following.
A well-meaning, passionate individual sees a need in their community and decides to fill that gap. This individual starts out doing as much as they can on their own, with occasional help from family and friends, until they need to hire a few staff members. The founder adopts the title of CEO or executive director and continues to do whatever is needed to further the organization’s programming and operations. These individuals often take a bare minimum salary or funnel most of their salary back into the budget.
As the years pass, the organization continues to grow and scale with the community’s needs and the founder continues to take a minimal salary, viewing the valuable work they get to be part of as the real reward. After 15 to 20 years, the board starts to think about what will happen when the founder retires and has an executive compensation study done to compare the founder’s compensation to peer organizations.
The compensation study typically reveals that the founder’s current compensation is low compared to executives at peer organizations. In addition, the board often realizes that the founder has been under-compensated since starting the organization.
Despite this evidence, the founder insists they don’t need more compensation because they want to minimize administrative expenses. If nothing changes, the founder continues to be under-compensated until it is time for them to retire. At this point, many boards want to give the founder a significant bonus or pension-type retirement arrangement to thank the founder for their significant contributions over the years and help them retire comfortably.
Recognizing and Addressing Potential Issues
The founder has been selflessly focused on furthering the organization’s mission, so it can be hard to see the challenges in this approach to compensation. Based on our experiences working with founder-led nonprofit organizations, here are some potential issues:
- After many years — or an entire career — of under-compensation, the founder is not financially prepared for retirement and has to look for other work after leaving the organization.
- If the board decides a year or two before the founder’s retirement that they want to provide a significant retirement bonus or pension-type arrangement, there may not be enough time to develop a funding plan that allows for the sustainability of the organization and limits the tax burden on the organization and the founder.
- By allowing the under-compensation of the founder to continue, the board will not be prepared to hire the next CEO or executive director at market rates and will struggle to find a suitable replacement.
Steps for Long-Term Success
To avoid these challenges, we encourage boards of founder-led nonprofit organizations to consider the following steps:
- Engage a third party to conduct an executive compensation study for the position held by the founder. This should include data on peer compensation by geography and organization size (by revenue and number of employees).
- Establish a comprehensive compensation philosophy and policy framework that articulates:
- The organization’s beliefs and behaviors related to compensation
- How often a compensation study will be conducted
- The desired pay range for executives and employees
- Talk with the founder about the board’s desire to adequately compensate them for their contributions and years of service. If the founder wants to limit their current compensation for altruistic reasons, explore options for deferred compensation.
Nonprofit founders have generosity, tenacity, and motivation that sets them apart. Sometimes they just need to be reminded of their worth.
We can help your organization with executive and employee compensation studies, creating a compensation philosophy and policy document, and strategic advisory services related to deferred compensation. Please contact us to learn more and discuss your organization’s specific situation and needs.
Additional Resources:
5 Common Questions About Nonprofit CEO Compensation
Planning for Success: Key Factors for Nonprofit Executive Compensation
Four Questions to Ask About Executive Compensation at Your Organization
Authors: Stan Reiff, Partner; Ted R. Batson, Jr., Partner and Tax Counsel; and Kelsey Helmick, Executive Compensation Program Consultant