Personnel Committees Need More Involvement in Compensation Decisions

Posted on October 22, 2009 by  
Filed under Board Governance · Tagged: , , ,

Today, I attended an informative seminar here in Charlottesville put on by two McGuireWoods, LLP  partners: Jeffrey Capwell (Charlotte, NC) and Michele McKinnon (Richmond, VA) .  The seminar was excellent and I highly recommend nonprofit executives and board members attend these seminars if they possibly can.

During one portion of today’s session, they discussed the background for changes to the IRS Form 990 and the form’s new questions about the determination of compensation for nonprofit staff executives.    Because of these new questions on the IRS Form 990, your Personnel Committee may want to adjust its staff compensation decision-making and approval process.  Here’s some background:

1. The IRS thinks that a well-governed organization is more likely to be a tax-compliant organization.  Increasingly, the IRS is asking more governance-oriented questions in not only the IRS Form 990 but the IRS Form 1023 (application for tax exempt status).

2. There seems to be a trickle-down effect from the private sector.  The fall-out from situations like Enron, WorldCom, and Madoff in the private sector will eventually result in increased regulation in the nonprofit sector. 

3. Expect to see more enforcement and expectation of disclosure and transparency for executive compensation for tax exempt organizations.

In brief, the Personnel Committee should review the compensation of all newly-hired executives as well as revisit these executive salaries on an annual basis.  Specifically, the IRS is expecting nonprofits to be able to do the following:

1. Show the compensation you’re paying your executives is comparable to similar jobs in your market.  A salary survey of nonprofits that are of a similar size in your local geography is a good starting point.  Be sure that you have included all compensation:  both salary and benefits, current and deferred salary, pensions, severance, housing allowances, club memeberships, etc.

2. Justify the amount you pay executives is equal to the value you receive.  

3. Provide documentation showing your Personnel Committee has  discussed staff compensation.  The Personnel Committee  minutes should include the compensation survey that you have used, a discussion of the value you will be or are receiving from each executive, and any concerns or dissentions in the determination of the final compensation. 

4. Show that the Personnel Committee’s decisions have been reviewed by the entire board, have been discussed and understood, and have been entered into the minutes of the entire board.   Is is essential that this review with the entire board includes a description of the total compensation paid to your executives – so that all board members understand the total compensation package and contracts for current and future payouts with their executives.

5. Be sure no one in a position to hire or determine salary for an executive is related to that executive.

In summary – be sure that your Personnel Committee is doing a thorough job of reviewing the compensation of new and continuing executives, that they have documented their discussions and decisions along the way, and that they are reporting these details to the rest of your board.

Lastly, McGuireWoods offers a free e-mail news service that follows legislation and regulation on a variety of topics.  I highly recommend the “Nonprofit & Charitable Advisory” which you can sign up for at http://www.mcguirewoods.com/news-resources/email/

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