Setting compensation in nonprofits is tough these days. You need to attract and retain staff, managers, and executives, working within a tight—maybe even shrinking—budget and also projecting what will happen next year. Next, add more federal reporting requirements on compensation on the Form 990 this year. Finally, prepare to explain (and perhaps defend) your actions as other stakeholders—funders, donors, media, members of the public, even clients and staff members—weigh in.
When revenues are down and prospects for increasing or even continuing support from foundations, government, and individuals are not bright, nonprofits have to make some tough decisions about how to spend their scarce dollars. Typically, salaries represent well over 50 percent of an organization's budget, so compensation mistakes can be costly. In addition to the monetary consequences, nonprofits that make such errors stand to lose valuable staff, waste important resources, and, in the worst scenario, forfeit their credibility within their communities.
There are a few basic concepts to keep in mind about compensation in the nonprofit sector: