How to Set Nonprofit Executive Compensation: What Founders and Boards Need to Know

Setting executive compensation is one of the first governance tasks a nonprofit board handles, and it's one of the most important to get right. The IRS has a clear framework for what it expects. This guide focuses on how to actually follow that framework: where to find salary data, how to structure the board vote, what to put in your minutes, and how to keep the process current as your organization grows. If you want background on what the IRS requires and why, Nonprofit Executive Compensation: What the IRS Expects covers that foundation. This post picks up where that one leaves off.

For a complete view of your organization's compliance responsibilities, the Nonprofit Compliance Checklist: What Every Founder Needs to Know is a good reference to keep on hand.

How Is Nonprofit Executive Compensation Set?

Quick Answer

The board of directors sets nonprofit executive compensation through a three-part process: gathering comparable salary data from credible sources, holding an independent vote without the executive present, and documenting everything in writing before the decision is finalized. Following this process gives your organization the strongest available protection if the IRS ever questions the amount.

Step 1: Gather Comparable Salary Data

Before the board can vote, it needs data. The IRS expects compensation decisions to be grounded in what comparable organizations pay for similar work. "Comparable" means similar in size, budget, geographic location, and mission focus.

Here's where to look:

Nonprofit salary surveys. Several organizations publish annual compensation data for the sector. The Nonprofit Times, GuideStar (now Candid), and the National Council of Nonprofits all publish or aggregate salary information. Many state nonprofit associations publish regional surveys that are more relevant for smaller organizations than national averages.

Form 990 data from peer organizations. Form 990s are public documents. You can search peer nonprofits on Candid's Form 990 Finder or ProPublica's Nonprofit Explorer and pull what similar organizations pay their executive directors. This is free, specific, and carries real weight with the IRS.

Compensation consultants. For larger organizations or complex roles, a compensation consultant can provide a formal comparability study. This isn't required, but it strengthens your position.

Aim for at least two or three sources. Document what you pulled, where you got it, and when. The date matters because data needs to be current at the time of the decision, not pulled six months later to justify a number already decided.

Step 2: Structure the Board Vote Correctly

The board of directors is the right body to make this decision. An individual executive director cannot set their own compensation. A single board member acting alone cannot either. This responsibility belongs to the full board or a properly authorized compensation committee.

Before the vote, confirm two things.

First, identify any board members who have a conflict of interest. A conflict exists when a board member has a personal financial relationship with the person being compensated, such as a family relationship, a business partnership, or any situation where their own interests could influence their judgment. Your nonprofit conflict of interest policy should define what counts as a conflict and require those members to recuse themselves before the discussion begins.

Second, the executive being compensated should not be present during the deliberation or vote. They can provide information in advance if the board requests it, but they should not be in the room when the decision is made.

This separation is what the IRS means by "independent approval." It's also what protects your board members personally. Who is responsible for nonprofit compliance ultimately comes back to the board, and compensation decisions are one of the clearest examples of why that accountability structure matters.

Step 3: Document the Decision Thoroughly

The vote itself is only part of what matters. The documentation is what gives your organization its legal protection.

Your board minutes for a compensation vote should capture:

• The date of the meeting and who was present
• Who recused themselves and why
• The comparability data reviewed, including sources and the range it produced
• The discussion that took place
• The compensation amount approved
• The vote count
• Any conditions attached to the compensation, such as performance review timelines

Minutes that say only "the board approved executive compensation" are not adequate. The IRS wants to see that the process was followed, not just that a decision was reached. Write minutes that would make sense to someone who wasn't in the room.

File the minutes and the supporting data together. If the IRS ever questions the compensation, you want both documents readily available, not reconstructed from memory.

Step 4: Handle Founder Compensation the Same Way

If a founder holds a paid staff role, whether as executive director, program director, or any other employee position, their compensation goes through the same board process. There's no exception for founders.

What makes founder compensation worth extra care is the perception issue. Founders are often deeply involved in governance, which can create the appearance of self-dealing even when the process is clean. The best response to that risk is documentation that's even more thorough, not less. Make sure the comparability data is strong, the recusals are clearly recorded, and the rationale is spelled out.

Can a Nonprofit Founder Be Paid? walks through the specific scenarios founders encounter and what the IRS expects in each case.

Step 5: Report It Correctly on Form 990

Executive compensation is publicly reported. Part VII of Form 990 requires organizations to list compensation for officers, directors, trustees, key employees, and the five highest-compensated employees earning more than $100,000. This information is available to anyone.

Knowing that your compensation decisions will be public is a useful test when you're setting pay. If the amount and the process behind it are well-documented and defensible, public disclosure isn't a concern. If either is thin, that's worth addressing before the filing, not after.

Understanding IRS Form 990 requirements covers what gets reported, how compensation components are defined, and what to expect from the annual filing process.

Step 6: Revisit Compensation Over Time

A compensation decision made at hiring doesn't last forever. The board should plan to review executive pay periodically, and the process each time should mirror the original: new comparability data, independent vote, updated documentation.

Common triggers for a compensation review include a change in the executive's responsibilities, significant organizational growth, a meaningful shift in the regional market, or simply the passage of enough time that the original data is no longer current. There's no fixed rule on frequency, but annual reviews at smaller organizations and biannual reviews at more established ones are common practice.

Build the review into your governance calendar rather than waiting for it to come up informally. The Nonprofit Board of Directors carries this responsibility, and treating it as a recurring agenda item keeps the process from being skipped in busy years.

Final Thoughts

The compensation process isn't complicated, but it does require follow-through. Boards that document carefully, use real data, and keep the process independent will find that compensation decisions are straightforward to defend and easy to stand behind publicly.

If you're still in the process of forming your organization and building out your governance structure, How to Form a Nonprofit Organization in 8 Steps walks through the foundational pieces, including board setup and the governance documents you'll need before any compensation decisions are made. For a broader look at running your organization day to day, Nonprofit Management Basics is also worth bookmarking. Getting those foundations right from the start makes everything that follows easier. Beacon is here to help you build them with confidence.