I’ve talked before about the Board Café‘s informative newsletter for non-profit Boards of Directors, particularly in the article entitled Non-Profit Board Self-Assessment Survey. The latest article on Executive Director pay is another keeper, particularly given the scandals surrounding the often incredibly inflated salaries of even the most benign non-profits. Indeed, before you donate to your favorite charity, exec director pay is an interesting figure to learn… And do pay attention: this article also talks about a shocking gender gap in the pay of executive directors too.

HOW MUCH SHOULD EXECUTIVE DIRECTORS BE PAID?

Both the Internet and new regulations in some states are
making nonprofit boards more aware than ever about
executive compensation. On the web at guidestar.org,
all the Forms 990 for US nonprofits (with annual revenues
of $25,000 or more) are posted and each shows the salaries
for “key employees” who are paid $50,000 per year or more.
In other words-by going to this website anyone can find
out the salary of the top staff in nearly any nonprofit.

At the same time, the media is filled with stories of
executives-in both for-profit and nonprofit corporations-
with excessive compensation. Many CEOS at many large
corporations make $10 million per year or more-often 400
times the salary of a blue collar worker at the same
company (Business Week, Stanford Report), raising eyebrows
among employees and shareholders. The salaries of some
nonprofit execs-with a median of $75,000 for organizations
with annual budgets of between $1 million and $2.5
million-are also legal but raise eyebrows in different
circles. In California, nonprofits with non-governmental
income of $2 million or more are now required to have the
board approve the salaries of the CEO/executive director
as well as that of the CFO.

Despite the press about excessive compensation, nonprofit
boards are more frequently worried that they are paying
their executives too little. In a national study of
nonprofit executive directors, most were reasonably
satisfied with their compensation, despite salaries often
between $40,000 and $60,000 in some of the country’s most
expensive urban areas. On a scale of 1 to 5 (5 is “very
satisfied”), respondents’ average rating of satisfaction
with pay was 3.47, although a substantial portion-27%–
rated their compensation packages a 1 or 2. It is also
noteworthy that 6% of executive directors receive no
salary at all-they’re volunteers. (Information from
Daring to Lead: Nonprofit Executive Directors and Their
Work Experience. CompassPoint Nonprofit Services, 2001.
This study is available free on the web at
compasspoint.org. Daring to Lead 2005 will be
published in the fall.)

More disturbing were the gender differences in salary.
Despite the predominance of women in nonprofit executive
positions around the country, male executives make
significantly more than their female colleagues do. This
is true at five of the six sizes of organization studied.
The gender gap is especially wide at agencies with budgets
of more than $5 million. The mean salary nationally for
women executives of nonprofits with budgets between $5 and
$10 million was $82,314. At this same budget size, the
mean salary for men was $98,739.

This question of how much to pay usually arises in one of
two quite different settings: when hiring a new executive
director and when discussing a raise for a current
executive director. When hiring a new ED, boards
typically choose a salary designed to attract strong
candidates. Later, the same board may end up ignoring
salary as a retention tool, and instead focus only on
percentage increases. Some of the objectives and factors
to take into consideration:

1. The executive director’s salary should make the
organization competitive in the market for talent. To
where is your executive director most likely to leave?
From where are you most likely to recruit your next ED?
If the answer is a similar nonprofit, look at the salaries
of comparable nonprofits in the area. (But keep in mind
that salaries at very similar nonprofits can be different
by factors of 10 or more.) If the answer is government,
look at the kinds of positions your ED might take, and
what salary and benefits are being offered.

2. The salary is fair in the context of other salaries in
the organization. How much are other employees making?
How distant or how close do you think is appropriate?

3. The ED’s salary for the coming year reflects the
contribution we expect the ED to make this coming year,
not as a reward for past contributions. Performance in
the last year gives us the best clues about how well the
ED will do next year, but this year’s salary is not a
reward for last year’s work.

4. The ED’s salary should send the appropriate signal to
the ED, to the staff, and to others. Words are important,
but so is money. Praising an executive director while
keeping her compensation flat ends up conveying a message
that the board doesn’t really value her work. In the same
way, giving an inadequate executive a raise while quietly
considering her termination sends a mixed signal you may
later hear about in a wrongful termination lawsuit.

5. Neither the ED’s salary-or other salaries-should cause
financial stress on the organization. The board has a
responsibility to keep the total costs of the organization
(including the executive director’s salary) in an
affordable range. On the other hand, when hiring a new
director, it may be appropriate to invest “venture
capital” in offering a higher salary. In an experiment by
the Neighborhood Investment Corporation, $5,000 and
$10,000 grants were made to local groups to raise the
salary offered to a new executive. The theory was that by
offering more, a better qualified person could be hired
and such a person could raise enough money to meet the new
costs as well as bring up all salaries. In some cases,
boards did succeed in hiring at a new level of competence
and the model was proven correct. But in other cases,
boards still were unable to attract talent with which they
were satisfied.

Whatever you pay your executive director, it’s a good idea
to have the salary reviewed and approved by the board
annually, preferably in the context of performance
evaluation and the budget for the upcoming year. The
simple step of assigning one person to look up the
salaries of comparable organizations can set a helpful
context for the board.

Information on salaries may be found at:

• Guidestar: draws salary data from 65,000 Forms 990,
  which are filed annually by nonprofits with annual
  revenues of $25,000 or more. Salaries reported are those
  of $50,000 or higher. It’s also possible to look up
  organizations in your community with which you are
  familiar to see the salaries of their key employees. Keep
  in mind that the data is typically a few years old and
  does not include hours worked and certain other types of
  benefits.
  [link]
• Nonprofit Times has an annual issue on nonprofit
  compensation, but focuses on large national organizations
  such as the American Cancer Society, the SPCA, and others,
  and may not be relevant for community-based organizations.
• Local compensation studies on nonprofits are conducted
  in some areas. The local United Way or community
  foundation will have the information if there is one.
  Local business newspapers or the local Chamber of Commerce
  often conduct local studies on for-profits.
• “Chief Executive Compensation: A Guide for Nonprofit
  Boards,” covers IRS regulations on excess pay, more ways
  to research comparable nonprofit salaries and a list of
  national and regional compensation surveys. This very
  short, 20-page booklet is available from BoardSource for $16; 800-883-6262.