IRS Form 990 has a number of items requiring information regarding the compensation of the executives of the nonprofit organization. One of the questions asks for details regarding the methods used to establish compensation for the CEO/Executive Director.
It is often recommended that nonprofits organizations establish a compensation committee to establish executive compensation. Organizations without a compensation committee may use the executive committee for this task. Most nonprofit organizations involve the board in some way (through committee or as a whole), in order to fulfill the fiduciary responsibilities as a board member. Often this includes a board vote on the compensation.
Those charged with the determination of compensation can use a number of tools to accomplish this task. Many organizations use their human resources personnel or independent consultants to analyze comparable salaries. It is common to use various salary studies to compare the organization with other nonprofits. It is less common to compare the organization with similar for-profit entities. The analysis is most commonly performed on an annual basis.
Strong nonprofit governance includes a policy that enables the board to make fair and reasonable compensation decisions.