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ExecutiveCompensationConsiderationsWhatexecutivedirectorsshouldbepaidcandefinitelybeastickytopicthesedays.Ontheonehand,anorganizationwantstomakeitselfcompetitiveinordertoattainthebesttalent.Ontheother,youdon'twanttoenduponthefrontpageofYahooNewswiththeheadline"Nonprofitunderinvestigation".Admittedly,thebalancebetween

competitive

and

excessive

isatough

one,

with

itbeing

easy

for

one

to

inadvertentlycrosstheline.Butdeterminingexecutivecompensationisdefinitelyonefacetofoperationyou'llwanttopayparticularattentionto.Doingsowillnotonlyassistingainingthetrustofyourdonors,staffandboard,butcanleadtoahappier,aspirationalandmorecompetentwork-forceaswell.Notgivingittherequisiteattentioncanresultinintermediatesanctions,fines,penalties,investigationsanddamagetoyourbrand.Thekeytoitallishaveasysteminplaceandtoensurethissystemisnotonlyused,butimplementedfairly.Here,atemplateapproachisnotrecommended.You'llwanttoaudityourorganizationanddeterminewhatmayworkbestforyou.Togetyouonyourway,I'veoutlinedacoupleofconsiderationstokeepinmindbelow.AnAppraisalSystem

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Agoodwaytorebutclaimsofimproprietyistohavesomesortofappraisalsysteminplace.Whetheryouuseapoint,goal orrankingsystem,ithelpstohavesomeobjectivesystemplayinganintegralroleindeterminingwhatanexecutive's(orsomeoneinanexecutiveposition's)compensationwillbe.Perhaps thoseinexecutivepositionscanhavegoalssetforthem,dependingonwheretheirweaknessesanddeficiencieslie,andmeetingthosegoals determineswhetherornotaraiseisappropriate.Wheninitiallyhiringsomeoneforanexecutivepositiondeterminehowimportantcertaincompetencies,experiencesorskillsareandcompensateaccordingly.Theimportantthingistoavoidcompensationorraisesbeingdeterminedonanimpromptubasis.You'llwantsomewayofdocumentinghowmuchaparticularpositionisgettingpaidandwhythatamountisappropriate.CompensationPolicyAs supplementtoanappraisalsystemyoumightalsowanttodraftacompensationpolicyaswell.Doesn'thavetobe1000pagesorreadlikeaShakespeareanmasterpiece.Justsomethingsuccinctthatdetailshowyourorganizationsetscompensationandhowcompensationwillbeadjustedeachyear(remember,accountingforaraiseisjustasimportantasthebasesalary).Detailwhatfactorsordatatheorganizationuseinitsdeterminations,andhow theywilluseit. You'llalsowanttobeclearonwhatconstitutesas"compensation"anddetailhoweachfacetof"compensation"willwork.Sothingslikebenefits,deferredcompensation,raises,expenseaccounts,housing,etc.shouldallbediscussedoratleasttouchedon.Forthatlasttouchof"umph"detailwhatthepolicyisfor,whyitisneeded,howitwillbeusedandthatallcompensationmustbesetwiththebestinterestsoftheorganizationinmind.LanguagecoveringtheIRS'IntermediateSanctionssafeharborrequirements,which arefurtherdiscussedbelow,shouldalsobeincluded.Committees

Iwon'tgettoomuchintothis,butdependingonthesizeoftheorganizationitmaybebeneficialtohaveanadhoccompensationcommittee.Theywouldn'treally beactiveuntilannualreviewscamearound,otherotherimpromptueventssuchashiring,butthetaskofresearchingcomparablesalaries,newlegalorethicaldevelopmentsincompensationaswellasensuringthatannualreviewsrunproperlycouldbetaskedtothiscommittee.Noneedforittobetoolarge,perhapssomeonefromthefinance/auditcommittee(whocankeepeveryoneontrackwiththebigfinancialpictureoftheorganization)aswellas1or2otherboardmembersand

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possiblytheED.Ofcourse,whentheED'scompensationcomesupyouwillwanttogracefullyexcludethemfromthatconversation.Penalties

Thereareafew"penalties"thatyou'llwanttobeawareof.Thefirst,andmostoftenmentioned,aretheIntermediateSanctionstheIRSwagesonexcessbenefittransactions.Thereasoningis,ifsomeone'ssalaryisn'treasonabletherehasarguablybeenanexcessbenefitgained. Thetaxis25%oftheexcessbenefit(theamountexceedingwhatwasreasonable)andcanjumpupto200%ifleftunresolved. Unfortunately,notonlythepersonreceivingthebenefitbuttheperson(s)payingtheexcessbenefitcanbepenalizedaswell.However,thelawdoeshaveasafeharborprotectingorganizationsifathereisa"rebuttablepresumptionofreasonableness"i.e.ifthecompensationisreasonable.Amongstmanythingsthisisdeterminedby: Whetherthefinancialarrangementwasapprovedbyacommittee(board)that

isunrelatedto,andnotsubjectto,thecontrolofthepersonreceivingthebenefit(knownasthedisqualifiedperson). Whetherappropriatedatawasusedtodeterminewhetherthetransactionwascomparablewithwhatothershavedoneinsimilarsituations.Exampleswouldbecompensationstudiesdonebyotherorganizations,offerlettersfromorganizationsinthesamegeographicallocationandsector,etc. Whetherthearrangementanditsbasiswereproperlydocumented. Inotherwords,detailsofwhatwasreliedonindeterminingcompensation,howthearrangementwasvotedon,etc.

MoredetailsaboutintermediatesanctionscanbefoundontheIRS'website.Otherthingsthatshouldbekeptinmindisthatexcessive paycanalsobeinterpretedasprivateinurementinsomeinstances(aconceptIdiscussedinapreviouspost).Consequently,excessivecompensationcannotonlyresultinresponsibilityforextrataxesbutriskingone's tax-exemptstatuswaswell.InadditiontothesetwoconsiderationsyouwillalsowanttokeepinmindotherregulationsthataffectcompensationsuchastheFairLaborStandardsAct(FLSA),EmployeeRetirementandIncomeSecurityActof1974(ERISA),ConsolidatedOmnibusBudgetReconciliationActof1985(COBRA)andanyapplicablestateregulations.

Take-Away

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http://www.notationsonnonprofits.com/musings/94/http://www.notationsonnonprofits.com/musings/94/http://www.notationsonnonprofits.com/musings/94/http://www.notationsonnonprofits.com/musings/94/http://www.notationsonnonprofits.com/musings/94/http://www.notationsonnonprofits.com/musings/94/http://www.notationsonnonprofits.com/musings/94/http://www.irs.gov/pub/irs-tege/eotopich02.pdfhttp://www.irs.gov/pub/irs-tege/eotopich02.pdfhttp://www.irs.gov/pub/irs-tege/eotopich02.pdfhttp://www.irs.gov/pub/irs-tege/eotopich02.pdfhttp://www.irs.gov/pub/irs-tege/eotopich02.pdfhttp://www.irs.gov/pub/irs-tege/eotopich02.pdfhttp://www.irs.gov/pub/irs-tege/eotopich02.pdfhttp://www.notationsonnonprofits.com/musings/94/http://www.notationsonnonprofits.com/musings/94/http://www.irs.gov/pub/irs-tege/eotopich02.pdfhttp://www.irs.gov/pub/irs-tege/eotopich02.pdf

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Attheendofthedayitisallaboutbeingreasonable;doyoupassthecommon-sensetest.Iwouldventuretosaythatinmostofthoseegregiouscaseswereadaboutinthepapers(wherethesmalltownnon-profitwithasmallbudgetdedicatesitselftoadvocatingforAmazonianfrogsandpaysitsEDoveramilliondollars)involvespeoplewhoknewfullywellsomethingwasn'tquiteokay.Buttoavoidthoseclose-callsituationsyou'llwanttoensureyouhaveawayofprovingthatthereisnoconflictorfavoritisminvolvedwithyourcompensationdecisions.Therightsystemswiththerightimplementationwilldojustthis.Forfurtherresearch: CharityNavigator,TheUnitedWay,GuidestarandNon-profitTimesconduct

survey'sonExecutiveDirectorpay.Thesewillhelptremendouslywithresearchingcomparablesalaries. TheBoardSourceandNationalCouncilofNonprofitshavesamplepoliciesthatcanbeusedaareferencepoint. TheIRShasagreatpageaddressingExcessBenefitTransactions.

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http://www.irs.gov/charities/charitable/article/0,,id=123298,00.htmlhttp://www.irs.gov/charities/charitable/article/0,,id=123298,00.htmlhttp://www.councilofnonprofits.org/sites/default/files/Sample%20Policy%20for%20Bd%20Approval%20of%20Compensation.pdfhttp://www.councilofnonprofits.org/sites/default/files/Sample%20Policy%20for%20Bd%20Approval%20of%20Compensation.pdf