Council of Nonprofits Issues Guide on IRS Three-Step Executive Compensation Process

The National Council of Nonprofits lays out a three-step IRS comparability process that nonprofit boards can use to establish, document, and review executive compensation. The framework centers on an independent review, the collection of comparability data from credible sources, and thorough documentation of the board’s decision. These practices are designed to support defensible compensation decisions and shape workplace trust and equity.

Step one calls for an independent review of proposed compensation. Boards should ensure the review is free of conflicts so trustees can credibly assess whether pay recommendations are reasonable. Step two requires collecting comparability data from credible sources and relying on appropriate benchmarks. Boards are advised to use relevant salary surveys, market studies, and data from comparable organizations to anchor pay decisions. Step three emphasizes documenting the board’s decision in minutes and maintaining records that show how benchmarks and data informed the outcome.

The Council’s guidance stresses that compensation is not a one-time exercise. Annual review and routine documentation are central to sustaining a rebuttable record that executive pay was set through deliberative governance. Recording deliberations in board minutes, keeping copies of comparability data, and noting who conducted the independent review are concrete steps boards can take to demonstrate process and intent.

For employees and workplace leaders, the implications are practical and cultural. Clear, documented benchmarks and regular review help reduce uncertainty about pay practices and can mitigate perceptions of favoritism or arbitrary raises. Staff looking at compensation equity or pay compression will find it easier to raise concerns when boards can point to documented market comparisons and a conflict-free review. For human resources and compensation committees, following the three steps creates a defensible paper trail that can ease both internal questions and external scrutiny.

The guidance also affects organizational risk. When boards rely on the three-step process and maintain contemporaneous minutes, they create a record that supports reasoned pay decisions. That documentation can be important in demonstrating to external stakeholders that governance procedures were followed.

Boards, HR leaders, and employees should treat these steps as governance basics: conduct an independent review, gather credible comparability data, document decisions and reviews in minutes, and revisit compensation at least annually. Doing so strengthens defensible pay practices and contributes to clearer, fairer workplace dynamics.