VIDEO | Nonprofit Executive Compensation Best Practices
By The C3 Team
Executive pay practices are under increased scrutiny.
How can you safeguard your organization?
In today’s regulatory environment, strong oversight procedures are not just best practices, they are essential for effective risk management.
In our latest video, C3’s Nanci Hibschman walks through a 10-step checklist boards can use to mitigate risk and strengthen executive compensation oversight.
VIDEO TRANSCRIPT
Hi, I’m Nanci Hibschman, President and Managing Director with C3 Nonprofit Consulting Group. C3 exists to partner with the world’s most impactful organizations to navigate people and culture solutions. Our vision: a society in which nonprofit employment is synonymous with meaningful work, thriving culture, and competitive, fair, and sustainable pay.
In today’s heightened regulatory environment, executive compensation has become a focal point for increased government scrutiny. The IRS, state Attorneys General, and watchdog groups are examining nonprofit pay practices with unprecedented rigor. Recent federal administration initiatives have specifically targeted excessive compensation as an area of concern, making robust governance procedures not just best practices, but essential risk management. This checklist represents your roadmap to navigating these complex waters with confidence and integrity.
- Your board needs dedicated, disinterested members with appropriate skills, training, and background to make compensation decisions. These individuals should have no conflicts of interest when determining executive pay.
- Ensure your board receives regular ongoing education about market trends, regulatory issues, and compensation program options. This knowledge is critical for informed decision-making.
- Formalize your approach with documented compensation philosophy and strategy statements that align with your mission and values.
- Clearly identify all positions regarding review – especially disqualified persons under IRS regulations. These are individuals who hold positions that have substantial influence over the affairs of the organization, such as your CEO, CFO, and other officers and executives.
- Establish that all compensation is reasonable by obtaining a written opinion letter from qualified outside experts. In public charities, receiving and relying on this documentation provides important protection from financial penalties should the IRS ever find compensation to be unreasonable. While private foundations don’t enjoy the same financial protections from a reasonableness opinion, this documentation remains best practice.
- Implement oversight processes so the board can verify compensation programs are administered according to the board-approved compensation philosophy and board- approved executive compensation methodology.
- Focus evaluations on total compensation: All cash compensation, whether salary or bonuses, annual accruals and deferred compensation plans, the value to the executive provided through health, wellness, and retirement benefits, all allowances and non-business-related reimbursements such as for housing and transportation.
- Structure board meetings appropriately with sufficient frequency, advanced materials, executive sessions, proper documentation and record keeping.
- Brief the full board annually on compensation activities and provide access to resources and advisors to fulfill governance duties.
- Finally, establish clear media protocols so all board members understand how to respond to inquiries about executive pay.
The stakes have never been higher for nonprofit governance. Excessive compensation can trigger intermediate sanctions, excise taxes, self-dealing penalties, and devastating reputational damage. When implemented thoroughly, this checklist creates a defensive framework that protects your organization’s mission, demonstrates stewardship to stakeholders and constituents, and provides peace of mind in an era of intensified oversight.
