Executive Compensation Reasonableness for Nonprofit Boards

Nonprofit executive compensation can be reasonable and still be poorly documented.

That is the risk boards often miss. The issue is not whether the executive director works hard. The issue is whether the board can show how it reached the compensation decision, who approved it, what data it reviewed, and how conflicts were handled.

This guide gives board treasurers and executive committees a simple process.

Start with the full compensation package

Do not review salary alone. The support file should show the full package:

• base salary
• bonus or incentive pay, if any
• retirement contributions
• health and other benefits
• housing, vehicle, or taxable allowances
• deferred compensation
• severance or contract terms
• expense reimbursements and accountable plan treatment

If the board approves only the salary while other benefits are decided informally, the record is incomplete.

Use comparable data

The board should review data for similar roles. Good comparability data considers:

• organization size
• budget
• geography
• mission or service complexity
• number of staff
• grant and compliance complexity
• executive responsibilities

One salary survey may be enough for a small organization. A more complex organization may need several data points. The board should not cherry-pick only the highest number.

Keep conflicted people out of the decision

The person whose pay is being reviewed has a conflict. They may answer factual questions about role scope or performance goals, but independent board members should deliberate and approve the decision.

The minutes should show who participated, who left the room, and who voted. Keep the discussion respectful and concise. Do not put private personnel notes in public-facing minutes if a separate executive session record is appropriate.

Write the approval record

The approval record should include:

1. Date of review.
2. Position reviewed.
3. Compensation package approved.
4. Comparable data used.
5. Conflict handling.
6. Board or committee members present.
7. Vote or consensus record.
8. Effective date.

GrantPipe keeps board approval memos, supporting documents, and governance notes tied to the operating record. That helps finance and leadership find the approval when Form 990 prep or audit review asks for it.

Connect the decision to Form 990

Form 990 asks public questions about governance, compensation, and related-party transactions. The tax preparer may need compensation support, board minutes, conflict disclosures, and the process used to approve pay.

Do not wait for tax prep to collect these files. Store them when the decision is made.

Review after major changes

Review compensation again when the role changes materially. Examples:

• the organization doubles in budget
• a major federal grant adds compliance responsibility
• the executive takes over a new program area
• merger or fiscal sponsorship duties are added
• staffing changes shift finance or fundraising responsibility

Pay decisions should follow the role. If the job changes but the record does not, the next review will be harder to defend.

What to avoid

Avoid approving pay by habit. Avoid using only one anecdotal comparison. Avoid letting the executive control the data. Avoid vague minutes that say “compensation was discussed” without the amount or support. Avoid retroactive cleanup after Form 990 questions arrive.

The board’s job is not to underpay the executive. The board’s job is to make a reasonable decision and keep a record that can stand on its own.

Keep the file separate from performance notes

The compensation support file should be easy to share with the tax preparer or auditor. That does not mean every performance note belongs in the same folder.

Keep the reasonableness support focused on the decision: comparable data, role description, approved compensation, conflict handling, and minutes. Keep sensitive performance notes in the personnel process where access is limited. The board can make a careful decision without turning private performance detail into a general finance file.

This separation helps small teams. It gives finance the support needed for reporting while respecting personnel boundaries. It also makes the Form 990 review cleaner because the preparer can see the governance record without sorting through unrelated notes.

DEFINITION

Excess benefit transaction

A transaction where an applicable tax-exempt organization provides an economic benefit to a disqualified person that exceeds the value of what it receives.

DEFINITION

Comparability data

Market data used to compare pay for similar roles, organizations, geography, budget size, and responsibility level.

DEFINITION

Independent approval

Approval by board members who do not have a conflict in the compensation decision.