Nonprofit Compensation under Scrutiny: How to Protect Your Organization

Historically, executive compensation for nonprofit organizations has been directed and determined by a committee or board charged with the task. Typically, this group has the responsibility of documenting and determining compensation, as is required under Section 4958 of the Internal Revenue Code and Treasury Regulation Section 53.4958-6. Compensation is considered to be reasonable if it is approved by an authorized body of individuals with no conflict of interest, comparability data was provided prior to making a determination and the authorized body documented the decision concurrently with the determination.

Due to recent budget restraints of various government entities, nonprofits have been feeling the pressure to run leaner and thus need to prove their executive compensation is appropriate. Adding complication to the issue, the media has highlighted instances of excessive compensation practices. New York Governor, Andrew Cuomo, recently created a tax force to investigate the executive compensation of the nonprofit agencies receiving taxpayer support. While the task force data has not yet been released, many believe the highly publicized instances of excessive compensation are the exception instead of the rule.

With this increased pressure, a key to combating scrutiny and ensuring all requirements are met is to take detailed minutes of compensation meetings. Minutes should include, at a minimum:

• Any preparation materials along with meeting notice given to attendees in advance.
• Those in attendance including committee members, staff and consultants. Notes should indicate when any attendees are dismissed for private discussion.
• Issues placed before the committee, a recap of information presented, alternative options considered, and, the discussions of committee members.
• The final decision of the committee.

Many nonprofit compensation committees have also elected to perform annual compensation studies as a tool to not only protect the organization, but also to give benchmark figures for budgetary planning for the retention or succession of key staff.

If you have any questions or would like to determine if your board can improve compensation discussions to meet IRS sanctions, feel free to contact any of our nonprofit specialists at 800.741.7087 or www.berganpaulsen.com.