Compensation Considerations for Senior Not-for-Profit ExecutivesBy Frances McKenna | March 5, 2018
In a near record-low unemployment economy, with professional opportunities abounding for competent business executives, recruitment efforts by organizations in the not-for-profit sector can be challenging to say the least.
Not-for-profit organizations operating with limited budgets and resources can find it challenging to develop compensation programs as attractive as their for-profit counterparts. The good news is that there are non-financial compensation alternatives available as well.
There is a misnomer that not-for-profit organizations need to have the same compensation packages as for-profit organizations to attract and retain top talent. This is especially true for smaller not-for-profits, because many executives that consider these positions have a passion for the mission of the organization – they simply aren’t in it for the money.
However, for larger not-for-profits, monetary compensation may come into play because they need to be competitive when it comes to attracting highly competent managers. These organizations need senior business professionals who can oversee more complex governance challenges and have the necessary business acumen to prevent potential fraud or misuse of funds.
The board of directors is responsible for approving job descriptions, overseeing the search process, establishing the compensation package and ultimately for hiring the executive director/CEO. In terms of compensation, their charge should be to create a package that is “reasonable and not excessive” while being attractive enough to attract and retain the most competent talent available to lead the organization.
Not-for-profit organizations are required to file IRS Form 990 “Return of Organization Exempt from Income Tax” that provides the public with operational and organizational information about a not-for-profit organization. This requirement ensures that nonprofits conduct their business in a way that is consistent with their mission and public responsibility; that is, be good stewards of their budgets, including the compensation of their senior executives.
Elements of Compensation Available to Not-for-Profit Organizations
The following elements, among others, are acceptable forms of compensation for senior management of not-for-profit organizations:
- Base Salary
- Performance-based incentive compensation
- Fringe benefits
- Health and other insurance benefits
- Retirement plans (pensions/403c retirement savings plans)
- Deferred compensation packages
Unacceptable Forms of Not-for-Profit Executive Compensation
The following are not considered acceptable benefits for senior management of not-for-profits:
- Chefs/Domestic Employees
- Car Service
- Housing (in some cases) – housing needs to meet specific requirements, such as close proximity to the organization in order for the executive director/CEO to carry out the exempt purpose or mission, in order to be acceptable.
- Luxury Travel
Beware of Disqualified Persons
If the compensation package offered by a not-for-profit to a senior executive is deemed by the IRS to be “in excess” of reasonable compensation, they may flag that executive as a “disqualified person” and impose “intermediate sanctions” on both the individual receiving the compensation and the organizational managers (Board) who approved it.
This situation arose from the IRS needing to better regulate the interactions between not-for-profits and “insiders” (including executive directors, CEOs, big donors and their family members). It was sparked by some high-profile cases in which not-for-profit executives and other insiders took liberties with their organization’s money, spending it on items like luxury travel and excessive entertainment expenses.
These intermediate sanctions were put into effect by the IRS back in January of 2002 as an enforcement measure that allowed another level of regulatory oversight - short of revoking the tax-exempt status of a not-for-profit organization engaged in shady behaviors.
A nonprofit making decisions around the compensation of a disqualified person must adequately document the basis for its determination. For 501(c)(3) public charities (and social welfare organizations) the procedure, if carefully followed, shifts the burden of proof to the IRS to prove the unreasonableness of the compensation package. For other nonprofits, the procedure serves as a good roadmap for adequately documenting compensation decisions.
It Pays to Get Expert Advice
If this all sounds really complicated for nonprofit board members trying to administer sound governance policies and effectively exercise their fiduciary responsibility, it certainly can be. That’s why it pays to get expert advice when formulating highly attractive compensation packages for not-for-profit executives, and handling compensation-related issues for other “insiders” who may potentially be identified as disqualified persons by the IRS.
For more information on this topic and our specialty Not-for-Profit services, please contact Frances E. McKenna, MBA, Tax Director.
(212) 201-3153 | firstname.lastname@example.org
This material has been prepared for general informational and educational purposes only and is not intended, and should not be relied upon, as accounting, tax or other professional advice.
Please refer to your advisors for specific advice.
About Frances McKenna
Frances E. McKenna, MBA, came to Marks Paneth after twenty six years of service in the Internal Revenue Service (IRS). At the IRS, Exempt Organizations (EO) were her main focus. Ms. McKenna was responsible for a number of high profile national programs, including the Affordable Care Act (ACA), International/Foreign Account Tax Compliance Act (FATCA), Referral, Political Campaign Intervention (PCI), Employment Tax, National Research Programs (NRP), Fed/State, and Gaming. As the manager of the IRS’s EO... READ MORE +
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