Nonprofit executive compensation: board-level processes and the IRS ‘three-step’ comparability safe harbor that A Simple Gesture boards should follow

Picture a routine board meeting at an A Simple Gesture chapter: the treasurer proposes a salary increase for the executive director, a motion passes by show of hands, and the meeting moves on to green bag pickup logistics. No independent committee. No salary survey. Minutes that say only "ED compensation approved." Six months later, that chapter's Form 990 lands on an IRS desk, and the question on line 15 of Part VI, Section B, "Did the process for determining compensation include a review and approval by independent persons, comparability data, and contemporaneous substantiation of the deliberation and decision?" has been answered "yes" with nothing behind it. That is the moment intermediate sanctions become a real financial and reputational risk.

For A Simple Gesture, an organization that coordinates volunteer-run green bag pickup routes, partners with municipal agencies, and depends on donor trust for every bag on every doorstep, getting executive compensation governance wrong can ripple far beyond a tax penalty. Grant applications, municipal partnership diligence reviews, and even the morale of the administrative and program staff who manage those partnerships often hinge on visible governance credibility. The good news is the IRS has provided a clear, three-step safe harbor that, once built into the board calendar, converts a chronic risk into a routine process.

What intermediate sanctions actually mean for a nonprofit board

Under IRC Section 4958, intermediate sanctions apply to excess benefit transactions between tax-exempt organizations and disqualified persons, which typically means executives, key employees, and board members who receive compensation. The disqualified person who benefits from an excess benefit transaction is liable for the excise tax, and an organization manager may also be liable for an excise tax on the excess benefit transaction. To avoid the imposition of the 200 percent tax, a disqualified person must correct the excess benefit transaction during the taxable period. In plain terms: approving pay that cannot be justified as "reasonable" under the tax code can trigger personal financial penalties on both the recipient and the board members who approved it, not just an organizational fine.

The shield against that exposure is the rebuttable presumption of reasonableness, sometimes called the three-step safe harbor.

The three-step rebuttable presumption

If an organization meets three specific requirements, payments it makes to a disqualified person under a compensation arrangement are presumed to be reasonable, and a transfer of property or the right to use property is presumed to be at fair market value. Each step is non-negotiable; missing any one of them forfeits the presumption entirely.

Step 1: Independent approval

The compensation arrangement must be approved in advance by an authorized body of the applicable tax-exempt organization, which is composed of individuals who do not have a conflict of interest. For A Simple Gesture chapter boards, this means formally designating a compensation committee or confirming that the full board, minus any conflicted member, will conduct the review. The executive director, any family members of the ED, and anyone with a financial relationship to the ED must recuse themselves. If a committee is used to review compensation, the committee should disclose the executive compensation arrangements it approves to the full board, since the board has the ultimate responsibility for the compensation that is paid. Critically, independence must be documented in the meeting minutes at the time of the review, not reconstructed later.

Step 2: Comparability data

The authorized body must obtain and rely on appropriate data for comparability before making its decision. This means collecting at least three credible benchmarks before the compensation discussion begins. Strong sources include regional nonprofit salary surveys, compensation data from similarly sized organizations' Form 990 filings (searchable through Candid and GuideStar or ProPublica's Nonprofit Explorer), and, when budget allows, a compensation consultant's analysis. Each comparable should be annotated: why is this organization comparable? Does it share a similar mission, geographic footprint, operating budget, and staff size with the ASG chapter in question? The committee should keep copies of every data source used. For small organizations, the IRS regulations acknowledge that the depth of data may be more limited, but the obligation to document what was gathered and why it is relevant does not diminish.

Total compensation, not just base salary, must be benchmarked. Retirement contributions, health benefits, paid leave, any housing allowances, vehicle stipends, or severance terms all belong in the comparison. A board that benchmarks only salary against market data while approving a generous retirement match and a car allowance has not completed a real comparability analysis.

Step 3: Contemporaneous documentation

The authorized body must adequately document the basis for its determination concurrently with making that determination. The documentation of the authorized body should include the terms of the transaction and the date of its approval, the members of the authorized body present during the debate. "Contemporaneous" is the operative word: documentation created after the fact, even a week later, does not satisfy this requirement and will not hold up in an examination.

The committee report does not need to be long. A one-to-two page document covering (a) which comparables were reviewed and why they were selected, (b) what the data indicated about a reasonable range of total compensation, (c) the committee's rationale for the final package, and (d) who voted and how, is sufficient to anchor the rebuttable presumption. That report, attached to or referenced in the board minutes from the same meeting, becomes the primary evidence defending the decision.

The Form 990 disclosure requirement

Every A Simple Gesture chapter filing a Form 990 must answer Part VI, Section B, line 15, which asks whether the process for determining compensation included independent review, comparability data, and contemporaneous documentation, and when the review occurred. A "yes" answer with no underlying documentation is worse than a "no" answer with an honest explanation, because it signals to the IRS that the board understood the requirement and claimed to follow it without doing so. Boards should treat the Form 990 narrative line as a quality checkpoint: if the answer cannot be described clearly in one or two sentences backed by a committee report and board minutes, the process was not complete.

The one gotcha that routinely fails audits

The single most common failure in IRS examinations of nonprofit compensation is approving pay in a meeting where no independent review actually took place. This happens when a board chair informally polls members by email, when the full board votes without anyone documenting that conflicted members abstained, or when the minutes from a prior year are copied forward with only the dollar amount changed. Compensated individuals and those related to them should not be approving their compensation, and they should not be on the compensation committee. If the executive director sits in the room during the compensation discussion, even without voting, that is a red flag in an audit. The solution is a standing protocol: before the compensation agenda item is called, the minutes record by name which members constitute the independent committee for this purpose and which members have recused.

Sample timeline for A Simple Gesture boards

Many boards anchor the annual compensation review to the budget cycle. Here is a workable calendar:

Sample language for board minutes

The independent compensation committee, consisting of [Name], [Name], and [Name], confirmed no conflicts of interest as defined in the board's conflict-of-interest policy. The executive director and [any related parties] were not present during the deliberation. The committee reviewed comparability data from [Source 1], [Source 2], and [Source 3], which indicated a reasonable range of total compensation for comparable organizations of [budget size] in [region] of $[X] to $[Y]. Based on the performance evaluation summary and the organization's budget capacity, the committee recommends a total compensation package of $[Z], consisting of [salary, benefits summary]. The committee voted [X to Y] to approve the recommendation. This report is incorporated into the board minutes of [date].

One-page compliance checklist for A Simple Gesture boards

• Confirm in writing which board members form the independent committee and that no conflicts exist
• Obtain at least three comparables (salary surveys, Form 990 disclosures, consultant data); annotate each for relevance
• Benchmark total compensation, not salary alone; include all benefits, allowances, and any deferred compensation
• Ensure the executive director and any related parties are absent from the deliberation
• Complete the committee report and vote before, or on the same day as, the formal board vote
• Attach the committee report to the board minutes dated the same meeting
• Answer Form 990 Part VI, Section B, line 15 accurately and ensure the documented process supports the answer
• Schedule next year's review on the same calendar cadence before the current meeting adjourns

What this means for ASG's broader mission

A consistent compensation process reduces staff turnover risk and strengthens the governance narrative in grant applications and municipal partnership proposals. For the coordinators, program staff, and administrative leads who manage volunteer recruitment, route logistics, and food pantry relationships daily, knowing that the board operates transparently on pay matters signals organizational maturity. Executive compensation should be reviewed on an annual basis even if there is no change in the compensation to be paid; an unchanged number still needs a documented review on record.

BoardSource and state nonprofit associations publish templates that can be adapted immediately. The National Council of Nonprofits and the IRS both maintain publicly available guidance. For any A Simple Gesture chapter that cannot currently point to a committee report and corresponding board minutes supporting its most recent compensation decision, the most important next step is scheduling that meeting before the next pay-cycle change, not after.