Private jets, lavish vacations, mansions with glittering pools. We’ve all read the headlines about “perks” like these afforded to high-ranking executives at large corporations, while the rank and file barely get by. As CEOs’ salaries continue to soar, the average worker’s is in decline, sparking conversations around equity and how we can ensure the average worker is able to do more than make ends meet.

What exactly is a Pay Ratio?

One solution that has garnered attention is the implementation of pay ratios. But what exactly is a pay ratio? Simply put, a pay ratio is a measure that compares the salary of the highest-paid employee (typically the CEO) to that of the lowest-paid employee within the same company. For example, a pay ratio of 20:1 means that the CEO earns 20 times more than the lowest-paid worker. This tactic is meant to rebalance the scales and minimize the widening pay gap that is rampant across corporate America. 

Pay ratios are also gaining popularity in the nonprofit sector as their leaders work to ensure equity and transparency across their organizations. But are pay ratios the right solution for Executive Directors in the nonprofit sector?

For Profit Practices Put Pressure on Nonprofits

The pandemic, the Great Resignation, and inflation have changed how and why we work. Nonprofit leaders and staff are no longer willing to take a pay cut to do good work. They want to do good and live good. So, the nonprofit sector is under pressure to compete with for-profit companies, which typically offer higher salaries and more attractive benefits packages. 

However, just because nonprofits need to compete doesn’t mean they need to adopt every for-profit practice. Solutions must fit the unique nonprofit context. If nonprofits want to stay competitive and attract the best talent, they have to find ways to invest in their staff and pay equitably across the board.

But, are Pay Ratios Right for Nonprofits?

For-profit companies have the freedom (and budgets) to set the direction and guidelines on how (and how much) to pay their executive leaders and employees. 

But nonprofits are in a different position. IRS guidelines on reasonable compensation, funder requirements, and historic and prevalent sector practices often dictate how nonprofits spend their dollars, with the lion’s share going to programmatic activities and a small amount to salaries, benefits, and overhead.

The budget emphasis on programs means that most organizations pay below market rate for just about every position, including the executive director. So if a nonprofit is already paying lower salaries, and then layers on a pay ratio, that could leave executive directors with the opposite problem of corporate CEOs – being insufficiently compensated for their work and responsibilities.

If not Pay Ratios, then what? 

So if not a pay ratio, then what? The sector is at a crossroads where a paradigm shift could change everything. Rather than accepting below market pay as the standard and looking to band-aid solutions like pay ratios, we need a more equitable system where everyone is paid to market. Where we’re truly valuing staff members’ talents, contributions, and responsibilities. 

Executive directors, who handle a myriad of responsibilities, should be compensated higher than the most junior staffer. That junior staffer should be paid at market rate so we can worry less about policing the pay gap. 

We have the resources and opportunity to make this kind of change. The nonprofit sector is bigger than ever, contributing an estimated $1.5 trillion to the US economy in 2022 and composing 5.6 percent of the country’s gross domestic product. 

Solution: Move Away from Funding Restrictions

Funders are facing pressure from leaders and advocates to shift their grantmaking requirements and nonprofits are in a position to push back on funding restrictions. For example, funders can, and should, move away from restricted funding to general operating support, leaving the experts to determine how best to disperse the money they receive within their organizations.

Additionally, nonprofit leaders can approach their budgets differently, prioritizing not only programmatic work but ensuring that the right infrastructure and systems (such as salaries and overhead) are in place to execute the mission effectively.

Solution: Stop Looking to For Profits for Nonprofit Pay Rates

Nonprofits exist to do good work and that mission has to translate to internal operations, too. People get the work done, and to attract, retain, and care for the best talent, nonprofits must pay at least a living wage. We don’t have to choose between doing good work and being able to support ourselves and our family.

Let’s stop looking to the for-profit world for pay gap solutions and focus on changes the nonprofit sector can make to pay everyone in an organization equitably. Whether it’s shifting the funder paradigm or how leaders approach their budget, it is possible to practice our values in every way.

Book a free consultation with Whitney and get clarity on the HR challenge that’s been weighing on you.

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Frequently Asked Questions

Q: What is a pay ratio and how is it calculated?
A: A pay ratio compares the compensation of the highest-paid person in an organization, typically the executive director or CEO, to that of the lowest-paid employee. A ratio of 20:1, for example, means the top earner makes 20 times more than the lowest earner. Ascend People helps nonprofit organizations evaluate whether pay ratio policies make sense for their specific compensation structure and mission.

Q: Are nonprofits required to disclose pay ratios?
A: Most nonprofits are not legally required to publish internal pay ratios, though executive compensation is publicly visible through IRS Form 990 filings. Some funders and boards have begun requesting pay equity data voluntarily. Ascend People works with nonprofits to build transparent compensation frameworks that hold up to scrutiny—whether or not formal disclosure is required.

Q: Why can’t nonprofits simply adopt the same pay practices as for-profit companies?
A: Nonprofits operate under IRS reasonable compensation guidelines, funder restrictions, and budget structures that prioritize programmatic spending—constraints that don’t exist in the for-profit world. Applying for-profit pay frameworks without accounting for these realities can create compliance risk or leave executive directors undercompensated. Ascend People specializes in compensation strategies designed specifically for how nonprofits actually operate.

Q: What does “paying to market” mean for a nonprofit organization?
A: Paying to market means setting salaries based on current data for comparable roles in the nonprofit sector and local labor market, not defaulting to below-market rates because “that’s how nonprofits do it.” Ascend People supports organizations in conducting compensation benchmarking that reflects real market conditions, so every position is valued based on actual skill, responsibility, and sector norms.

Q: How can nonprofit funders help close the pay gap for nonprofit staff?
A: One of the most direct levers funders have is shifting from restricted project funding to general operating support, which gives nonprofits flexibility to direct dollars toward salaries and infrastructure, not just programs. Ascend People works alongside nonprofit leaders who are navigating these funder conversations and building the compensation case needed to advocate for more equitable grant structures.