Nonprofit organizations operate in an environment where mission, stewardship, and accountability are paramount. One area that often draws attention—from staff, boards, donors, and regulators alike—is how employees are compensated. To balance fairness, compliance, and competitiveness, many nonprofits conduct a compensation study.
What Is a Compensation Study?
A compensation study is a structured review of how an organization’s pay and benefits compare to similar roles at peer organizations. It involves analyzing salaries, benefits, and total rewards to determine whether a nonprofit is offering competitive and reasonable compensation.
Unlike informal benchmarking (e.g., asking peers what they pay), a study relies on objective market data and applies consistent methodologies. The goal is not only to inform fair pay but also to document that pay decisions are grounded in data—a critical factor in avoiding IRS penalties for “excess benefit transactions” under intermediate sanctions rules.
Why Should a Nonprofit Do One?
There are several compelling reasons:
Attract and Retain Talent
The nonprofit sector competes with both for-profit businesses and government agencies for skilled professionals. Competitive pay is essential to recruit and retain top talent.
Fairness and Equity
A study helps identify pay gaps within the organization, ensuring compensation aligns with experience, responsibility, and market standards rather than subjective judgments.
Regulatory Compliance
The IRS requires nonprofits to establish that executive compensation is “reasonable.” A compensation study provides the supporting documentation to show that pay decisions are based on independent, comparable data.
Board Fiduciary Duty
Boards have a legal responsibility to oversee compensation practices. A study equips them with the data to make informed, defensible decisions.
Transparency and Donor Confidence
Clear, data-driven pay practices build trust with stakeholders, demonstrating that the organization is a good steward of charitable resources.
How Is It Done?
While each study can be customized, most follow these steps:
- Define the Scope: Decide which positions to review (often leadership, executive, or hard-to-fill roles).
- Gather Job Data: Collect up-to-date job descriptions, responsibilities, and organizational structure.
- Select Comparison Sources: Identify reliable salary surveys, Form 990 data from peer nonprofits, and industry reports.
- Analyze Market Data: Match roles to external benchmarks and adjust for factors like geography, budget size, and organizational mission.
- Develop Findings: Summarize how current compensation compares to the market, highlighting any significant over- or under-payment.
- Make Recommendations: Provide guidance on salary ranges, benefits adjustments, or policy updates.
- Board Review and Approval: Present results to the board (or compensation committee) for discussion and approval, ensuring compliance and transparency.
Next Steps
Compensation studies ground pay decisions in objective data, protect reputations, and strengthen nonprofit teams. Leaders should:
- Schedule studies as part of regular governance (e.g., every 3–5 years).
- Keep thorough documentation of process and results.
- Engage independent advisors or consultants for objectivity.
- Use findings to shape not just pay but also broader HR and retention strategies.
If your organization is considering a study, engaging outside expertise can help ensure accuracy, independence, and compliance.
Contact Han Group today to learn how we can support your nonprofit in building strong, transparent, and competitive compensation practices.
