Understanding the
Compensation of Nonprofit
Executive Directors
Examining the Influence of
Performance and Organizational
Characteristics
Nathan Grasse,1 Trenton Davis,2
Douglas Ihrke3

1

Central Michigan University, 2Georgia Southern University,
3
University of Wisconsin-Milwaukee

In this study we aimed to provide a better understanding of executive compensation in nonprofit organizations. We examined factors including organizational size, market, subsector, organizational type, staffing level, and organizational performance as potential influences driving variation across the nonprofit sector. The models utilize data on the population of nonprofit organizations required to file Form 990 returns with the Internal Revenue Service in order to broadly examine compensation. The results indicate associations between various measures of performance and compensation in nonprofit organizations and also suggest that different types of nonprofits may be sensitive to different measures of performance.
Keywords: compensation, nonprofit, human resources

B

ECAUSE OF THE TREMENDOUS diversity that characterizes the nonprofit sector, it can be difficult for nonprofit organizations to establish compensation for their executive directors.
However, with compensation costs accounting for, on average, 65 percent to 70 percent of the total costs in the U.S. economy

Correspondence to: Nathan Grasse, Political Science Department, Central Michigan
University, Mount Pleasant, MI 48859. E-mail: grass1nj@cmich.edu.
NONPROFIT MANAGEMENT & LEADERSHIP, vol. 24, no. 3, Spring 2014
© 2014 Wiley Periodicals, Inc
Published online in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/nml.21099

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(Blinder 1990; U.S. Bureau of Labor Statistics 2010), this is a topic of substantial importance. At a very basic level, a nonprofit’s compensation philosophy reflects a reasoned strategy on the part of organizational decision makers as to how vigorously that organization is going to compete within an increasingly competitive and continually shifting marketplace. Although nonprofit organizations are legally prohibited from paying wages deemed to be excessive, they must also be wary of the potential negative consequences of offering pay levels that are too low to attract or retain highly qualified and high performing personnel.
When examining executive compensation, we have found that significant differences exist between apparently similar organizations. These differences are partially attributable to the deliberative decisions regarding pay made by appointed board members, who may or may not be acting upon the recommendations of professional administrative staff. Although the nonprofit literature has examined executive compensation, these studies have primarily focused on understanding compensation within particular subsectors or for specific types of nonprofit organizations (Frumkin and
Keating 2001; Hallock 2002; Oster 1998).
This article attempts to build on existing literature on executive director compensation, to explain additional variation in executive compensation, and to examine compensation across the nonprofit sector. We rely on Form 990 data from the National Center for
Charitable Statistics in order to examine executive compensation as broadly and as comprehensively as possible. This data includes information from the population of nonprofit organizations in the
United States (that are required to submit tax returns) from 1998 to
2003. Factors such as organizational size, market region, subsector, organizational type, staffing level, and organizational performance are examined in order to predict executive compensation in nonprofit organizations, thereby shedding light on a critically important issue for nonprofit organizations, professionals, and researchers.
Additional models explain compensation within six subcategories, such as human services organizations or hospitals, in order to assess