Accounting professionals at Jitasa provide an overview of what is included in a compensation policy and why it’s essential for nonprofits to have.

Nonprofits are known for having a reputation for underpaying their employees. Paying less is often considered an attempt to keep the overhead expenses to a minimum. However, the outlook on nonprofit overhead is changing. At the heart of fair compensation lies the need for a nonprofit to implement a nonprofit compensation policy. 

By providing fair and competitive compensation, nonprofits are able to better retain their employees, which saves money in the long run by decreasing recruitment and onboarding costs.

IRS Requirements

The new Form 990 has added requirements for reporting the compensation of officers/directors and key employees. All tax-exempt organizations are required to publicly disclose the salaries of their five highes paid employees.

Form 990 Part VII – Reporting Executive Compensation – Officials Included

Line 15A and 15B of Part VI requires your organizaiton to detail the process by which it approved compensation for your CEO or ED, as well as for top management staff and other officers or key employees.

According to Veneable LLP, the compensation policy should include three basic elements to meet these reporting requirements:

  • The organization’s board of directors, or a committee tasked with setting compensation, must approve the compensation arrangement;
  • The board of directors or its committe must have obtained and relied upon appropriate comparability or benchmarking data – such as industry surveys or compensation studies – prior to making its decision; and
  • The board of directors or its committee must adequately document the basis for its decision at the time it is made.

NAO publishes a bi-annual Oregon Nonprofit Compensation and Benefits Report as veifiable benchmark data for nonprofits to utilize. NAO nonprofit members receive a significant discount on the report.