Understanding the Compensation of Nonprofit Executive Directors: Examining the Influence of Performance and Organizational Characteristics

• DOI: http://doi.org/10.1002/nml.21099
• Author: Trenton Davis,Nathan Grasse,Douglas Ihrke
• Published date: 01 March 2014
• Date: 01 March 2014

Understanding the

Compensation of Nonprofit

Executive Directors

Examining the Influence of

Performance and Organizational

Characteristics

Nathan Grasse,

1

Trenton Davis,

2

Douglas Ihrke

3

1Central Michigan University, 2Georgia Southern University,

3University of Wisconsin-Milwaukee

In this study we aimed to provide a better understanding of

executive compensation in nonprofit organizations. We exam-

ined factors including organizational size, market, subsector,

organizational type, staffing level, and organizational perfor-

mance as potential influences driving variation across the non-

profit 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 com-

pensation. The results indicate associations between various

measures of performance and compensation in nonprofit orga-

nizations and also suggest that different types of nonprofits may

be sensitive to different measures of performance.

Keywords: compensation, nonprofit, human resources

BECAUSE OF THE TREMENDOUS diversity that characterizes the

nonprofit sector, it can be difficult for nonprofit organiza-

tions 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 377

Published online in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/nml.21099

378 GRASSE, DAVIS, IHRKE

Nonprofit Management & Leadership DOI: 10.1002/nml

(Blinder 1990; U.S. Bureau of Labor Statistics 2010), this is a topic

of substantial importance. At a very basic level, a nonprofit’s com-

pensation philosophy reflects a reasoned strategy on the part of or-

ganizational decision makers as to how vigorously that

organization is going to compete within an increasingly competi-

tive and continually shifting marketplace. Although nonprofit or-

ganizations are legally prohibited from paying wages deemed to be

excessive, they must also be wary of the potential negative conse-

quences 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 organiza-

tions. 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 profes-

sional administrative staff. Although the nonprofit literature has

examined executive compensation, these studies have primarily

focused on understanding compensation within particular subsec-

tors 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 com-

pensation, and to examine compensation across the nonprofit sec-

tor. 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 non-

profit 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

whether a single model can adequately explain compensation for all

nonprofit organizations.

Literature Review

Although much empirical research has examined executive com-

pensation in the for-profit sector, relatively little work has focused

on top-level executives in the nonprofit arena (Benson and Hornsby

2002; Sanders 2001). With a few exceptions (Frumkin and

Keating 2001; Hallock 2002; Jobome 2006; Oster 1998), a review

of the nonprofit sector literature reveals a significant gap in the

area of nonprofit compensation. This is a particularly notable omis-

sion because, as reported in 1999 by Boris and Steuerle, there were