Best Practices in Nonprofit Executive Compensation

Advice to compensation committee
Best practices in nonprofit executive compensation (revised 10/17)

  • Develop a compensation philosophy for board approval
  • Assure compliance with safe harbor components as described in IRS regulations
    • Form a compensation committee
    • Insure no conflict of interest exists among members of the committee and employees whose salaries are being examined
    • Use comparability study to demonstrate reasonable compensation (see benchmarking)
    • Document process of contract renewal, annual review process and bonus distributions (in Committee minutes)
  • Simplify and eliminate ancillary perquisites (auto, spousal travel, country club members, etc.) that may cause negative publicity by including the value in annual salary
  •  Award small increases in salary by predetermined “index” amounts
  • Use total compensation to achieve strategic goals and to retain top employees.  For example:
    • Include performance (incentive) bonus as part of total compensation
    • Insure the total annual compensation is in line with the compensation philosophy and competitive (for example, 75th percentile) Note:  75% is being used as an example, not a recommendation
    • Use 457(f) or similar vehicle to motivate employee to fulfill length of contract
  • While protecting the image of the organization and the public’s funds, have Committee develop an open dialogue with the employee to understand his/her compensation and long-term career needs
  • Depending on the age and desire of the executive, offer tax deferrals as part of the compensation package
    • Tax Deferred Plans
      • 457(b) Employee may defer an additional $15, 500 (or more depending on age) above the 403 (b) maximum.  457(b) plan vests when the employee departs the organization but the amount may be rolled over and continues tax deferred
      • 457(f) Employee may shelter an additional amount (up to total compensation) tax deferred
        • 457(f) plan, to qualify as tax deferred, must have a “risk of forfeiture.”  This is used by the employer as an incentive for the executive to remain during a specified period, usually the length of the contract
        • 457 (f) plan vests immediately following the defined period and appropriate taxes are due and withheld.
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