Is there anything illegal about our 501(c)(3) organization giving a Christmas bonus, or an incentive for a fundraiser that she initiated, to the Executive Director if she is already receiving a salary?
There is nothing illegal about giving bonuses to the staff of charitable organizations so long as they are not based on the “profit” or surplus of the organization. The IRS takes the position that if incentives are based on profits, there is an incentive to cut services, which it does not consider charitable. If you give an incentive for a fundraiser, you probably don’t want it to be commission-based because the professional fundraising community thinks that is unethical.
In either case, you should be sure that the total compensation is not unreasonable so that there is no “excess benefit” for the E.D. You want to be sure to follow the safe harbor rules to assure that you have a rebuttable presumption that the total compensation is reasonable. (See Ready Reference Page: “Charities Must Avoid Excess Benefit Transactions.”)