By Angela Ogunjimi Updated October 26, 2018
Nonprofit organizations use many formulas to set their chief executive's salary and compensation package and making it a percent of the budget is among the most popular formulas. Additional considerations exist, especially in light of economic downturn, dwindling donations, organization size and other factors. If a nonprofit director salary is too high, your organization might face backlash, and if it's too low, you'll have trouble attracting top talent. According to Charity Navigator's latest survey of mid- to large-size nonprofits, the median salary of the average executive director was $123,462.
Budget Considerations for Salaries
Some nonprofit organizations with budgets under $1 million set their percentage of nonprofit budget for a salary of the executive director at around 10 percent of their budget, whereas large major nonprofits with budgets in the tens of millions sometimes use a percentage from 1 to 2.5 percent. A major reason for tying executive director's salaries to the budget is the notion that the ED's salary should not unduly burden the organization. Normally, an organization's bylaws require the board of directors to set the ED's salary, but they also have fiscal responsibility for keeping the organization afloat. When organizations can't afford to attract the best candidates, they may turn to fundraising to offer a better salary.
Executive Director Compensation Package
Nonprofits make several considerations when offering an executive director salary. They compete against each other, in the sense that several organizations in the same field vie for the same dollars. That means organizations have to offer a competitive salary to attract and retain the most dynamic and aggressive leader they can. The board of directors is likely to look at the salaries offered by similar organizations to match or better. Depending on its future goals, the board may want to recruit from government or private industry. It will have to come up with an even more attractive salary to lure from those ranks.
Total Package for Executive Directors
An ED's salary is generally a reflection of the value the organization expects that person to generate. Moreover, the salary must be somewhat balanced with what the rest of the staff makes. The top position is generally a cap to other salaries, which sets the tone for all recruiting efforts. Finally, money is not the end of the salary discussion, as benefits, insurance and perks also play a big role in luring EDs.
Legal Guidelines Regarding Salaries
In some cases, the law may also play a role in how much a nonprofit can offer. To prevent excessive compensation, federal law makes a rather ambiguous pronouncement that nonprofits should pay "reasonable compensation," and that is an amount that would ordinarily be paid for the same services by similar organizations. In addition, some states have stepped in to place indirect regulations on nonprofit executive salaries. In New Jersey, for example, any nonprofit that receives state funding can only spend so much of that funding on the ED's salary. In California, nonprofits with operating budgets of more than $2 million must have their boards approve the salary of the executive director and the chief financial officer. This is a common practice already, but it signifies that government is increasingly interested in the affairs of nonprofits.
Compensation Based on Merit
Another important reason the executive director's salary is linked with an organization's budget is because organizations use the salary and budget to set a benchmark for the ED's performance. The salary and any raise often come with a mandate for the ED to bring in more funding, at least equal to his salary or increase it by the percent raise he receives. In addition, the executive has the burden of knowing that his increase in salary also means raising additional funds to increase the rest of the staff's salary. That's all in addition to purchasing resources, maintaining the office, and spending money on mission and core programs.
FAQs
Some nonprofit organizations with budgets under $1 million set their percentage of nonprofit budget for a salary of the executive director at around 10 percent of their budget, whereas large major nonprofits with budgets in the tens of millions sometimes use a percentage from 1 to 2.5 percent.
What percentage of grant budget should be salaries? ›
Personnel costs typically account for 50-80% of a typical grant budget.
What is the salary ratio for a non profit? ›
How much should a nonprofit spend on salaries? Typically, nonprofits spend between 15% and 40% of their revenue on salaries, buildings, equipment, utilities, supplies, fundraising, and so on. However, the Better Business Bureau recommends that nonprofits keep administrative costs to 35% or less of their contributions.
What is a good expense ratio for a nonprofit? ›
Charity Navigator updated its rating system in 2023 and now generally gives full credit to those organizations whose ratio of program expenses is 70% or more of their total expenses. Other agencies, such as the Better Business Bureau's Wise Giving Alliance, recommend a ratio of 65% or higher.
What percentage of a nonprofit revenue should be fundraising? ›
According to Charity Navigator, nonprofits should spend less than 10% on fundraising spending. Charity Navigator also promotes healthy spending on activities because nonprofits that spend less than a third of their budgets on program expenses are likely to be failing to meet their missions.
What percentage of a nonprofit budget should be the executive director? ›
Some nonprofit organizations with budgets under $1 million set their percentage of nonprofit budget for a salary of the executive director at around 10 percent of their budget, whereas large major nonprofits with budgets in the tens of millions sometimes use a percentage from 1 to 2.5 percent.
What percentage of a nonprofit budget should be administration? ›
As the costs add up, you might be asking: How much of a nonprofit's annual budget should be spent on administrative tasks and fundraising? Here's the short answer: 15 to 25%.
What is the pay ratio for a nonprofit CEO? ›
The median ratio was 2.7:1, meaning the CEO was paid 2.7 times as much as the median employee at the same grantmaking organization. The reported ratios are as low as 0.2:1 (where the median employee makes more than the CEO) and climb to 9.5:1 (where the CEO makes almost 10 times as much in salary alone).
How does a CEO of a nonprofit get paid? ›
What should a nonprofit pay its chief executive? The board of directors is responsible for hiring and establishing compensation (salary and benefits) for the executive director/CEO that is “reasonable and not excessive,” but is also enough to attract and retain the best possible talent to lead the organization.
How is a non profit CEO salary determined? ›
A nonprofit will often use financial information from other organizations in its industry to set salary benchmarks. This information is used to determine an appropriate level of compensation for its own CEO.
The Administrative and Fund-raising Rate (AFR) represents the percentage of dollars spent on expenses other than services. The CFC calculates the AFR as a percentage of the organization's to- tal support and revenue.
What is the ideal ratio of expenses to income? ›
Our 50/30/20 calculator divides your take-home income into suggested spending in three categories: 50% of net pay for needs, 30% for wants and 20% for savings and debt repayment. Find out how this budgeting approach applies to your money.
What is the administrative cost ratio? ›
You can typically find your administrative expenses on your annual income statement between the cost of goods sold and the operating profit sections. Divide your total sales by your total administrative expenses to calculate your sales to administrative expenses ratio.
What does a good nonprofit budget look like? ›
While every nonprofit's expense budget will look slightly different, the Better Business Bureau recommends that organizations don't spend more than 35% of their funding on their overhead expenses and spend at least 65% on their programs.
What should a nonprofit operating budget look like? ›
In nonprofit budgets, around 35% of your expense budget should be used for administrative expenses (overhead) and the other 65% for program expenses. Among your annual projected expenses, include fixed expenses like rent and loan repayments as well as variable expenses like marketing and fundraising costs.
What is the average budget for a nonprofit? ›
Nonprofits by the Numbers
97 percent of nonprofits have budgets of less than $5 million annually, 92 percent operate with less than $1 million a year, and 88 percent spend less than $500,000 annually for their work. The “typical” nonprofit is community-based, serving local needs.
What is the 70% rule for budgeting? ›
The 70-20-10 budget formula divides your after-tax income into three buckets: 70% for living expenses, 20% for savings and debt, and 10% for additional savings and donations. By allocating your available income into these three distinct categories, you can better manage your money on a daily basis.
What is the budget 30% rule? ›
The 50/30/20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should be split between savings and debt repayment (20%) and everything else that you might want (30%).
What percentage of church budget should be salaries? ›
According to the Evangelical Covenant Church, a healthy congregation with a weekly average attendance of 150 people should spend 40 to 50 percent of their total budget on staff salary.
How do you format a grant budget? ›
It should begin with a budget narrative, which you should write after the entire budget has been prepared. Each section of the budget should be in outline form, listing line items under major headings and subheadings. Each of the major components should be subtotaled with a grand total at the end.
