To Pay or Not to Pay – Compensating Nonprofit Founders

Setting Nonprofit CompensationWe have the privilege to work with many nonprofit founders. In in the beginning, it is typical for founders not to receive any compensation for their work or to accept compensation that is far less than “reasonable” for the work they perform. However, we find that even when the nonprofit starts to have some fundraising success, founders are often reluctant to be paid for their work.

As a group, founders are typically consumed with passion for their cause and want every dollar raised to be spent toward the charity’s mission. The problem with this thinking is that it doesn’t invest in the long-term sustainability of the nonprofit.

Nonprofits don’t run themselves and very few individuals can afford to work for free. As the demands of the non-profit grow, the founder/volunteer will eventually burnout trying to juggle a day job while meeting the needs of the nonprofit.

Another common scenario is a founder who remains underpaid for years, perhaps even decades, and is then not prepared for retirement. We are often asked if the Board can pay a large bonus to a retiring founder in recognition of their years of service at below market rates. Unfortunately, paying an insider an amount that is not justifiable based on comparables risks intermediate sanctions.

Experienced grant-makers will not be impressed that the organization is run solely by volunteers or underpaid semi-volunteers. An effective nonprofit will eventually require dedicated staff to sustain and grow organization. A nonprofit that isn’t sustainable won’t have the capacity to achieve its mission and sophisticated funders know this.

Many founders feel guilty accepting reasonable compensation from the nonprofit they have nurtured but if they continue to forgo a reasonable salary, they risk erecting a house of cards that will fall apart as soon as they burn out.

An investment in human capital, ultimately, is an investment in the nonprofit.

Ellis Carter is a nonprofit attorney licensed to practice in Washington and Arizona. Ellis advises tax-exempt clients on federal tax matters nationwide.

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