Satisfy the ‘rebuttable presumption of true audacity’
An ECS reader recently asked where to find reliable data that can be used to compare non-monetary compensation among executives within the nonprofit sector (NFP): Compensation committees should evaluate this component of the salary package in order to satisfy the “rebuttable presumption of reasonableness” under Section 4958 of the Internal Revenue Code. In this article, Paul Dorf, member of the ECS Editorial Advisory Board, identifies several potential sources: Ed.
The analysis of executive compensation within the nonprofit organization (NFP) is relatively systematic in its methodology. The IRS allows the use of for-profit and non-profit compensation data to determine a reasonable salary, based on the evaluation of similarly situated organizations. The first question of determining reasonable comparisons is not difficult in itself, but requires some thought on the part of the Compensation Committee and the organization’s top management.
There are a number of criteria to consider, including the characteristics of the organization (foundation, healthcare, public charity); the current financial situation of the organization and its financial stability; the geographic area in which the organization operates; and the scope of the position for which the data is sought.
Once these criteria have been defined, compensation information can be obtained from the following materials:
Posted compensation surveys that provide data on the nonprofit industry, either specifically or with specialized cuts
Compensation surveys covering participants for profit, but with clippings outlining organization-specific compensation data.
Form 990 data from a representative group of comparably situated nonprofit peer organizations that meet the criteria listed above
Represent data from a group of comparably situated for-profit organizations that are also compared on the criteria listed above. However, this method can only be used in very limited situations, and when used it should be evaluated with caution so as not to over-inflate the overall assessment of market compensation.
A thorough evaluation
Identifying a group of peer organizations requires a thorough assessment of the characteristics of each organization for comparison. The first step in this process is to consider direct competitors for services: for example, if a mental health provider located in the New York metropolitan area was seeking to identify peers, the organization would target similar providers within a reasonable radius of your service area. with those suppliers that have finances similar to those of the organization. This provides the most relevant comparison data for determining reasonable market compensation for positions in an organization. In addition, you can also target other non-profit organizations in the general industrial sector that can compete for the same talent. Using this same example, crisis centers, hospitals, primary care providers, etc. It can also be compared to a mental health facility, as the talent required to run one of these organizations is generally transferable to any of the others. Lastly, NFPs who are not otherwise compared from an industry / service point of view, but who have similar finances as the organization seeking the data, may also be selected for some of the more interchangeable positions ( CFO, General Counsel, etc.), but these data should be used with more caution.
Published surveys provide a readily available, often cost-effective means of collecting data. Although the data is not always presented in a format that allows a definite match with the organization looking for comparison numbers, published surveys provide a good starting point for data collection. The 990 forms, on the other hand, provide actual compensation data against which to compare the organization’s salary package and can serve to validate published survey findings. Relevant data can be found within Part VA – Current Officers, Directors, Trustees, and Key Employees, under the following three components:
1. Column (C) reports the salary, rates, bonuses and severance payments paid, as well as the payments for the current year of the amounts declared or reportable as deferred compensation in any previous year.
2. Column (D) includes all forms of deferred compensation and future severance payments (funded and baseless, vested and disenfranchised, qualified and unqualified), as well as payments to social benefit plans (medical , dental, life insurance, severance pay, disability) on behalf of officials, etc. The IRS allows reasonable estimates to be used if accurate cost figures are not available. Deferred compensation, such as salaries and other compensation earned during the period covered by the return but not yet paid on the date the organization files its return, is also reported here, unless the amounts have been reported in the column ( C).
3. Column (E) includes both taxable and non-taxable fringe benefits (other than de minimis fringe benefits), and expense allocations or reimbursements that recipients must report as income on their separate income tax returns. This includes payments made under severance agreements, the value of personal use of homes, automobiles, or other assets that the organization owns or leases (or that is provided for the organization’s use at no charge), as well as any other fringe benefits. taxable and non-taxable.
Form 990 Challenges
In theory, the compensation information disclosed in nonprofit Form 990 filings represents a true and accurate description of the compensation elements that included the total compensation package for each named executive. However, many NFPs have had trouble completing these forms correctly. While columns (C) and (D) are relatively straightforward, experience has shown that some organizations do not accurately disclose the value of fringe benefits and non-monetary compensation, making a true calculation of market compensation is less likely. Some other challenges in obtaining 990 data include:
· Effectively define which other NFPs represent a “peer” in the organization seeking data from an operational and / or financial point of view.
· Making copies of Form 990. Generally, requests for Forms 990 can be made to the Internal Revenue Service and / or the organization itself, but you should wait for a significant waiting period, assuming the forms themselves are available .
· Determine which positions disclosed on Form 990 match the “incumbent position” for which data is sought, as only titles are provided in the submission. Better, more accurate, and certainly more timely information is expected to be available soon as electronic filing becomes more common (based on IRS reporting requirements).
Focusing on non-monetary compensation
Assuming that all items of cash compensation are accurately reported (base salary, bonus, deferred compensation, etc.), how can you get accurate data for non-monetary compensation? Ideally, if public disclosure of compensation data for nonprofits mimicked the requirements set by the Securities and Exchange Commission for publicly traded companies, an accurate assessment can be made. Until then, however, a more ingenious method must be used to collect such data.
Return to posted compensation surveys. Many published surveys provide not only statistics covering cash compensation items, but also data on the prevalence of a variety of other compensation package items such as car allowances, memberships, etc. These studies can help you determine whether, in fact, profit is prevalent among top executives in comparable organizations. In some cases, average dollar values may also be disclosed, and these may provide a basis for comparison. Rather than relying on a single source, the organization’s compensation planners should consider some of these studies to provide a broader and more complete picture of the market.
Industry associations are also a good source of compensation data. The professional organizations that govern the NFP sector often publish compensation and benefits studies that are available to their members, and these reports can provide valuable peer data that you can use to assess the elements of compensation.
Many organizations also rely on their own network of contacts within the industry, as well as the professional services firms that assist them (accountants, lawyers, etc.) for data on wages and benefits. However, the information collected in this way is the least reliable, as individuals may not always be as forthcoming in disclosing their own compensation packages.
More art than science
Ultimately, collecting non-monetary compensation is an art form that requires the evaluator to consider all possible resources and then make a reasonable claim that the data accurately reflects the market. Any questions about the validity of the information received should require a reassessment of the data collected, as well as determining whether this is an element of the compensation package that really should be included in the calculation of a reasonable salary.
Determining the fair value of the compensation package for NFP executives while adhering to IRS regulations on Interim Penalties is a complicated task. The organization’s Compensation Committee and / or Board of Directors must exercise prudence and professionalism in determining reasonable compensation for executives, and that means seeking information from a variety of sources and then using the resulting data to determine the elements of a competitive executive compensation package. .
Finally, it is also the responsibility of the organization’s Board or Committee to question any element of the salary package that may be unclear, unbalanced, or suspicious, and to take decisive action to correct anything that may be perceived as overcompensation.