Nonprofit Hiring Spotlight: The Nonprofit Compensation Guide

There is a common misconception that “Nonprofit work doesn’t pay.” And while it is definitely true that an individual’s lifetime earnings are typically higher in the private sector than in the public sector, that does not mean that nonprofit work does not pay at all, or that equity and market demands cannot or should not be considered.
​
Sure, there are plenty of instances where nonprofit staff are making far less than they should, given the high cost of living in the metropolitan areas where their nonprofit organizations are based. However, nonprofit organizations that are doing it right should be paying their employees a comfortable wage to equip them to do the kind of important work that protects their communities and the world at large. And the self-fulfillment that they garner along the way should be an added bonus on top of their compensation, not a substitute for it.  

---

Nonprofit work typically pays about 4-8% less for both salaried and hourly employees. The so-called “nonprofit discount” is the gap between what a private sector job would pay and what a nonprofit organization pays for the same role. This wage discrepancy is very real, and it is rooted in the fact that for-profit companies are doing business for the purpose of generating revenue to benefit their stakeholders. Meanwhile, nonprofits are doing work to serve their missions and using funds from sources like donors to employ the people needed to do that work. Simply put, the goal at a nonprofit is not to get rich, so they tend to invest more in the programs they run rather than investing in the people who administer those programs and work to make sure they reach the people who need them. 

​There is also expectation from Nonprofit “watchdog” organizations that no more than 25% of expenses at a nonprofit should be spent on Administration and Fundraising combined. This best-practice guidance has changed over time, but many board members and finance personnel still fear the stigma that might arise from an increase in payroll budgeting. That being said, some nonprofits are not paying their employees as much as they should to provide a suitable living even though they have the funds to do so. In fact, Nonprofit Quarterly explains, “Gaining equitable federal treatment for the people who work at nonprofit organizations has been at least an 80-year slog, going back to the Social Security Act of 1935” citing a biased view of nonprofit work in those early days of government compensation protection.  

These days the most common reason for nonprofit employees being underpaid is likely a simple lack of understanding around what they should be paid by the nonprofit boards and managers that hire them. This is an especially salient point the further up the chain of command you go, with executive leadership frequently being undervalued when compared to their private sector peers.

In this nonprofit salary guide we will explain the basics of nonprofit compensation, show you how to do a comparable wage analysis, discuss important salary considerations, and give you advice on how to implement pay equity initiatives.

Compensation Models
Obviously, nonprofits need to abide by federal minimum wage regulations as well as state-specific wage guidelines that will vary based on location. Employees must be paid a “reasonable” wage as defined by the IRS. For salaried employees that wage can take one of two forms: fixed compensation or variable compensation.

Fixed compensation is a straight-forward salary amount that is paid to an employee, while variable compensation is a base salary plus a performance bonus based on how much value they bring to the organization. A nonprofit using variable compensation will typically tie compensation to mission-related efforts, paying employees more that help to further the organization’s charitable mission in the form of donor relations, donations, volunteer sign-ups, partnerships, program expansions, positive press, awards, or other markers of success. However, a percentage-based compensation (“commission”) system is widely frowned upon in the non-profit world. The Association of Fundraising Professionals takes a firm stance on this topic when it explains, 

The Association of Fundraising Professionals (AFP) believes that individuals serving a charity for compensation must accept the principle that charitable purpose, not self-gain, is paramount. If this principle is violated and percentage-based compensation is accepted:

     > charitable mission can become secondary to self-gain;
     > donor trust can be unalterably damaged;
     > there is incentive for self-dealing to prevail over donors’ best interests.

​In addition, percentage-based compensation, however administered, can produce reward without merit. AFP holds that percentage based compensation can encourage abuses, imperils the integrity of the voluntary sector, and undermines the very philanthropic values on which the voluntary sector is based.

When a variable wage is paid in the form of a base salary with an opportunity to earn a bonus based on overall job performance instead of “finders fees” for donors or “commissions” on donations, that is a more ethically sound approach. As a result, some organizations choose to use a combination model where individual contributors are paid a fixed salary while executive leadership is given bonuses based on their success in the role. However, there are still pros and cons to paying a variable wage. These must be carefully evaluated before utilizing this form of compensation. Proponents of this compensation model feel the monetary increase incentivizes nonprofit leadership to work harder to make the organization successful, while opponents argue that added funds would be better used going directly towards the nonprofit’s mission.

Comparison Analysis
Determining whether a wage is “reasonable” requires comparing compensation for similar roles across similar organizations in similar job markets. The idea here is that you should look at what other organizations that are competing for the same pool of talent (either in the nonprofit or for-profit space) are willing to pay someone to do that same job. That said, under valuing not-for-profit staff in endemic in many places. So even if the “the market” suggests a rate below what is considered a living wage for your community, you might want to consider setting a new trend to address the inequity as opposed to using it as rationalization for offering a lower wage. This is one area where a local recruiting firm can offer significant assistance because they have the pulse of the job market and can advise on what is reasonable given the current job market in your location. Once you have a general sense of what the position should offer, you can start to home in on the offering based on the specific type of work, required skillset, included responsibilities, and available budget.

Salary Considerations
Many factors will go into what you should pay your nonprofit staff, including:

• Geography – Nonprofits in areas with a higher cost of living will need to pay their local staff more to ensure they have a livable wage. Additionally, in the new era of remote work, hiring staff that is located elsewhere may require further assessment to determine what their compensation should look like to meet their specific cost of living needs. In some cases, an organization will pay a livable wage for the location where they are headquartered regardless of where a candidate is located. In other instances, there may be a base salary for all employees with a similar job title and then an added “commuting allowance” for local candidates who are going into a physical office. But regardless of the approach being used, a nonprofit organization must take the appropriate steps to ensure that customized compensation agreements do not become tantamount to discriminatory practices.  
   
• Focus Area – Nonprofit organizations in more lucrative fields (like medical organizations) will have more money to pay their staff than less funded fields (like community social organizations).
  
  
• Job Function – Executive leadership will always make more than lower level staff. However, in the nonprofit space, there are likely fewer executives at the helm than you would find at a for-profit company, making their role even more critical. As a result, senior-level roles typically make up an even higher proportion of the organization’s total wages than they would in the private sector because more responsibility is placed on their shoulders. Also be sure to check local and federal requirements related to Exempt versus Non-Exempt staff. In recent years there have been both Federal and State proposals to set higher pay and responsibility thresholds for classifying a position as Exempt.
  
  
• Existing Pay Bands – Salaries for new employees should balance current market values for similar roles while fitting within pay bands for existing employees. Otherwise, you run the risk of undervaluing existing employees’ hard work and tenure with the organization.
  
  
• Experience-Level – Employee compensation should not be simply degree or certification-based. Valuing relevant lived or adjacent experience is also important in ensuring that employees are properly compensated for what they are bringing to the table. 

If you need help determining what to offer for an open role, lean on a nonprofit recruiter for salary guidance or reach out to similar organizations in your area to collaborate.
Achieving Pay Equity another important factor to consider is how an individual’s salary fits into the broader organization or the employment landscape as a whole. New hires should exhibit pay equity across the organization, other nonprofits in the same space, and similar roles in the private sector.  

Why? The Youth Development Executives of King County organization summarizes why the subject of pay equity in nonprofit compensation is so important when they explain, 

Low wages result in higher stress, higher turnover that makes it harder to support the young people and communities we are built to serve, and fewer skilled applicants for every new role that is posted. Conversely, paying staff higher wages results in more skilled-applicant pools (and therefore stronger teams), improved wellbeing for staff, less turnover, greater impact from our change-making efforts, and more.

MissionBox expresses the same sentiment but takes the subject of nonprofit pay equity a step further in saying,

In an age where salary information is widely available online, pay equity is more relevant than ever. This is an area where nonprofits — held to high standards for nondiscrimination and rewarded with tax-free status — can lead the way.

​So, how can you achieve equity in your compensation practices? The following steps can help you to realize immediate pay equity gains with minimal investment:

• Pull from existing staff to create a committee dedicated to implementing pay equity initiatives
• Offer salary transparency, as a part of job listings
• Communicate the benefits of pay equity to all staff and encourage respectful dialogue between managers and employees around compensation
• Be amiable to salary negotiations among applicants as well as current staff
• Pay employees according to their market value instead of their salary history
• Accept anonymous feedback related to your employees’ current compensation and benefits packages
• Include your Board in the discussion and work with them to evaluate compensation periodically

Remember, when it comes to issues of executive compensation, the buck stops with your Board. They are the ones that will ultimately decide base salary for the role, how much bonuses will be, and what the performance criteria are for earning them.
​
If you are looking to hire a new Executive Director, CEO, or other leadership position, a nonprofit executive recruiting firm can assist you with finding the right candidate for your organization. Reach out to us for nonprofit hiring help today!