Nonprofit boards have always had a responsibility to be thoughtful about executive compensation. That responsibility is not new. But it is not uncommon at all for CEO compensation to increase by a generous “bump” up over last year’s, and be done with it.
But the challenges around highly compensated nonprofit officers appear to be increasing. The compensation conversation is no longer only about whether the CEO’s salary “feels right,” whether the executive has done a good job, or whether the organization can afford the package. Increasingly, the conversation also has to account for tax rules, comparability data, related organizations, public disclosure, and the possibility that well-intentioned board members may create problems simply by failing to document their reasoning.
Jennifer Becker Harris of Clark Nuber recently published an excellent and very useful article on the expansion of IRC Section 4960 and the IRS’s Notice 2026-36 guidance. I recommend it to anyone working with tax-exempt organizations that may be approaching, or connected to, high executive compensation levels. Her article does a careful job explaining what the IRS has told us so far, what is still coming, and why the “covered employee” expansion matters.
I am not trying to restate her technical analysis here. She has already explained it well. My broader takeaway is this: nonprofit boards should treat executive compensation as a governance process, not just as a number.
IRC Section 4960 is one reason. It imposes an excise tax on certain excess compensation paid by applicable tax-exempt organizations. Historically, the focus was on the five highest-compensated employees, but the rules are expanding. For taxable years beginning after December 31, 2025, the “covered employee” concept is no longer limited in the same way. That means more people may need to be tracked, and the consequences of who counts, when they counted, and whether they remain covered can matter years later.
That is the kind of rule that rewards careful systems and punishes casual record-keeping.
But Section 4960 is not the only tax provision boards should have on their radar. Section 4958, the “intermediate sanctions” provision, is another. It applies to excess benefit transactions between certain tax-exempt organizations and disqualified persons. In plain English, if an insider receives compensation or another economic benefit greater than the value of what the organization receives in return, the IRS may impose excise taxes.
The first tax falls on the person who received the excess benefit. That person may owe 25% of the excess benefit, and if the transaction is not corrected, an additional 200% tax may apply.
Here is the part that should get board attention: organization managers (including volunteer board members) can also be personally exposed. A board member, officer, or trustee who knowingly participates in an excess benefit transaction may face a tax equal to 10% of the excess benefit, capped at $20,000 for a single transaction, if the participation was willful and not due to reasonable cause.
That does not mean board members should panic. It does mean they should use a real process.
The good news is that the law gives boards a sensible roadmap. A board approving executive compensation should be able to show that it used appropriate comparability data, relied on independent decision-makers, managed conflicts, and documented the decision at the time it was made. Those steps do not guarantee that no one will ever question the decision, but they put the board in a much stronger position.
This is why “What do similar organizations pay?” is not a casual question. It is a governance question. The answer should be based on relevant comparables: mission type, geography, budget size, staff size, complexity, and other facts that actually matter.
It is also why boards should avoid two opposite mistakes.
The first mistake is overpaying without a documented basis. A beloved, high-performing executive may still earn and deserve high compensation levels that can be defended objectively, especially when documented during the process. A written report from an objective source is convincing. But a thrown-together rationalization created after an IRS agent or reporter comes knocking gets viewed more skeptically.
The second mistake is underpaying out of fear or habit. Nonprofits need talented leadership. Boards do not serve their missions well by pretending compensation does not matter, or by assuming that mission commitment should substitute for fair pay.
The goal is definitely not low compensation. The goal is reasonable compensation, approved through a thoughtful process.
For many nonprofits, this may feel like one more administrative burden. But I think it is better understood as board protection and mission protection. A disciplined compensation process helps the board recruit and retain strong leadership, maintain public trust, and avoid preventable tax and governance problems.
Highly compensated nonprofit officers are not automatically a problem. Casual approval of highly compensated nonprofit officers can be.
The more complicated the rules become, the more valuable it is for boards to have a process they can explain before anyone asks them to explain it.