In a recent webinar hosted by BDO entitled “Why Nonprofits Should Care about Compensation”, a recording of which you can access here, discussion focused on a topic that nonprofit leaders cannot afford to treat as a routine administrative matter: compensation. Organizations are encouraged to consider how they compensate executives, board members and the broader employee population. Many times, organizations prioritize mission focus, rather than devoting sufficient time to sound compensation planning. However, when organizations rely too heavily on goodwill and underinvest in a structured pay strategy, they can create unnecessary retention risk, pay equity concerns, difficulty recruiting specialized talent and reputational risk.
Compensation decisions sit at the intersection of governance, talent strategy, compliance, and stakeholder trust. Regarding compliance and taxes, the following are key areas that are critical to consider:
- Private Inurement is a prohibition against insiders benefiting from tax-exempt organization (TEO) assets or income. Violations can result in loss of TEO status and intermediate sanctions. Private Benefit applies to both insiders and outsiders and is only allowed if incidental.
- IRC 4960 Excise Tax: Under the old rule (2018–2025), Applicable Tax-Exempt Organizations (ATEOs) had to pay a 21% excise tax on remuneration over $1 million on excess parachute payments made to the top five covered employees. The new rule (effective after December 31, 2026) expands coverage to all employees ever employed by the ATEO since 2016, significantly increasing exposure. IRS Notice 2026-36, released on June 5, 2026, announced that the IRS intends to issue proposed regulations under IRC Section 4960 that will propose exceptions to the expanded definition of “covered employee” that are similar to the limited hours and non-exempt funds exceptions in the existing regulations.
- Intermediate Sanctions (IRC 4958): A 25% excise tax (200% if uncorrected) applies to excess benefits paid to disqualified persons plus 10% on knowing managers. Organizations can protect themselves by establishing a rebuttable presumption of reasonableness through proper documentation, comparable data, and independent board approval.
Stakeholder perceptions are also especially important for mission driven organizations: the Form 990 makes executive pay publicly visible to media, donors, employees, students, watchdog groups, and regulators. For this reason, it is not enough for compensation to be merely reasonable. It must be supported by an appropriate process, credible data, and well-documented decision-making.
For the broad employee group, we encouraged leaders to think beyond cash compensation alone. Compensation is best viewed within the total “rewards of work” framework, including direct pay (salary, incentives, merit), indirect pay (benefits, perquisites), work content (variety, challenge, autonomy), career (advancement, training, work-life balance), and affiliation (organizational commitment and work environment).
One example we shared during the webinar involved a small private college facing a familiar but complex question: how to reward a successful president in a way that reflected performance, aligned with market practice, and stood up to scrutiny. The issue was not simply whether the individual had earned the compensation package. It was whether the organization could support that decision through a disciplined, well-documented approach while also being mindful of the costs. In this case, the work involved peer benchmarking, review of comparable institutions, analysis of compensation structure, and careful documentation of the rationale behind the package design. The outcome was a more supportable compensation strategy that strengthened the institution’s position with key stakeholders and reduced meaningful excise-tax exposure. A key takeaway for nonprofit leaders is that when compensation becomes highly visible or technically complex, thoughtful planning can reduce risk and support better long-term outcomes rather than merely reactive decision-making.
If there is one practical takeaway to leave with nonprofit leaders, it is this: not every compensation issue requires outside support, but some clearly do. Organizations should consider seeking additional guidance when preparing for a leadership transition, reviewing executive compensation, recruiting talent from the for-profit sector, addressing retention or pay equity concerns, evaluating incentive or deferred compensation arrangements, or responding to board, donor, auditor, or public scrutiny.
A review of compensation can also be important when structures have evolved informally over time and may no longer reflect the organization’s complexity, risk profile, or talent needs. In those situations, external perspectives can help leaders pressure test assumptions, document decisions appropriately, and move forward with greater confidence. For nonprofit organizations trying to balance mission, stewardship, and competitiveness, that kind of disciplined support can be particularly helpful.