Our bylaws state that the Executive Committee has full authority/responsibility to review the CEO’s performance and to set compensation, and that the Board “shall be informed” of the Committee’s decision. Is this OK?
Technically, the answer is yes—assuming that all members of the Executive Committee are, in fact, directors. Even so, the board as a whole still has responsibility for the process and outcome.
That said, it’s generally recommended to have a transparent and fair process for determining the executive director’s salary. While the executive committee certainly may play a role in salary discussions, it’s often advisable to establish a compensation committee or involve the full board in the decision-making process.
Having a broader group involved can bring diverse perspectives and ensure a more objective approach to determining the executive director’s salary. This approach is in line with principles of good governance, accountability, and transparency, which are important for the credibility and effectiveness of nonprofit organizations.
Two things to keep in mind:
- Although the IRS does not provide specific dollar amounts or an acceptable range of compensation levels, they stipulate that compensation must be reasonable and not excessive.“Reasonable” is defined as the value that would ordinarily be paid for like services by like enterprises under like circumstances.
- Nonprofits filing IRS Form 990 must describe the process they use to approve executive compensation as part of the nonprofit’s responses on the annual return, IRS Form 990, Part VI, Section B, line 15.