Nonprofits are Employers Too

posted in: People, Policies 0

One thing board members, especially of nonprofits with 1-3 employees, often have trouble wrapping their minds around is the idea that they are an employer. That seems too much like being a business, not a nonprofit. But the organization is an employer with the same responsibilities as any for-profit employer, and ignoring or abdicating these responsibilities can land a nonprofit in big trouble with the IRS or their state attorney general.

One responsibility that boards are explicitly tasked with is setting the ED’s compensation each year. The legal reason is to ensure that the ED isn’t taking a larger portion of the nonprofit’s funding than is reasonable for the job. If the IRS determines that the ED has taken “excess compensation”, with or without the board’s approval, board members can be personally liable for stiff penalties (in addition to the ED having to return the excess and pay penalties). The human reason is that many EDs who choose their own salaries make too little, because they know they have to raise the money or because they don’t want to deprive the nonprofit’s programs of money. The fundraising reason is that donors can look online and see how much staff is paid; too much and too little can both be red flags to big donors. It isn’t easy, but the board must address the issue, ideally setting a compensation policy and then following it in the future.

The board also needs to manage the ED rather than letting them run the whole show. The board needs to provide overall direction for the organization, set a job description for the ED, evaluate the ED annually, and generally ensure that whoever is running the place on a day-to-day basis is accomplishing the board’s goals. This can be uncomfortable for board members who have never managed people and like the ED, especially if the ED is having trouble, but avoiding it can cause more trouble.

Things can be even more challenging with a founder ED or one who has been in place for decades and has much more knowledge of the organization than any of the board members. In this case, it is even harder for the board to manage the ED, who knows so much more about things than the board does – but an unmanaged ED can cause a lot more trouble for themselves and everyone else. The problem needs to be approached delicately but, for the sake of the organization’s mission, it needs to be addressed.

The good news is that a board that actively manages (not micromanages!) its executive directors and sets a fair salary for them every year is likely to have a well-managed nonprofit organization that is well set to accomplish its mission. It is yet another way in which boards are integral to a nonprofit’s success.