Washington, D.C., and Williamsburg, Va.—People are often surprised—even offended—by what the CEOs of large, well-known charities earn. As the IRS noted in its February 2009 report on tax-exempt hospitals, "For some, there may be a disconnect between what, as members of the public, they might consider reasonable, and what is permitted under the tax law."
So what does the IRS permit in terms of charity compensation? In brief:
Charities can pay their executives market rate.
"Market rate" is determined by researching what someone in a similar position would earn at an organization that is of the same size and has a similar mission or field of activity.
Charities can look at for-profit compensation when determining market rate, as long as the job, organization size, and organization mission/purpose are comparable.
The IRS has no standard formula, such as percentage of total revenues or expenses, for determining compensation.
If the IRS finds that a charity executive has been overpaid, it can fine both the executive and the board members who approved the overpayment, or even revoke the organization’s tax-exempt status if the board has not (1) based its decision on appropriate research and (2) documented its decision-making process at the time it approved the compensation.
"The vast majority of charities are run by volunteers or staff earning very low wages," noted Bob Ottenhoff, president and CEO of GuideStar, the leading provider of information about U.S. nonprofits. "Relatively few, but often prominent, charities, however, must compete with other nonprofits and for-profit companies to hire and retain executives for positions that require certain skill levels and experience. When evaluating a charity's pay scales, members of the public need to look at more than just the numbers; they must also take in account the organization's size, complexity, sources of revenue and nature of its mission. At the same time, charities need to be sensitive to the expectations of their stakeholders and be transparent about their compensation policies." (To interview Bob Ottenhoff, contact Suzanne Coffman, GuideStar director of communications, at 757-941-1427 or firstname.lastname@example.org.)
Suzanne E. Coffman
Director of Communications