Not-For-Profits Take Action
Upper Saddle River, N.J. - September 20, 2004 – In the wake of the increasing examination of compensation arrangements for executives of Not-For-Profits, organizations are reviewing and revising their compensation policies and procedures at an unprecedented pace. The recent focus on Not-For-Profit governance is sure to have a far-reaching impact on how these organizations conduct business, and, in particular, set compensation. The past abuses of a few organizations will potentially affect the future of many organizations. It may not be long before Not-For-Profit organizations are held to the same standards as For-Profit organizations.
On August 21, 2004, The Knight-Ridder/Tribune Business News published an article announcing that the Internal Revenue Service would be contacting 2,000 charities and foundations nationwide to gather information regarding practices and payments of compensation to their officers which would focus on the following:
• Compensation of specific individuals or instances of questionable compensation practices;
• Awareness of tax issues as organizations set compensation in the future;
• Practices that organizations follow as they set compensation and report it to the IRS and the public on annual Form 990 returns.
Not-for-Profits may now view themselves as “sitting ducks” with respect to compensation issues. However, there are proactive initiatives that can be taken to correct inaccuracies relative to compensation and prevent future contentious issues from occurring. A brief self-check by organizations may include the following:
• Are Job Descriptions current and accurate, and do Job Titles appropriately reflect the duties and responsibilities of the positions?
• Are compensation decisions made by an independent Board, which is “arms-length” from the executives?
• Is there adequate written documentation and justification for pay decisions?
• Are written guidelines established for future compensation decisions?
• Does the organization have a formalized compensation philosophy? If so, is it consistent with the organization’s mission and vision?
• Are peers used for pay comparison purposes? If so, are they truly reflective of the competitive marketplace?
• Are “extraordinary” compensation arrangements properly documented and explained?
• Is Form 990 reporting accurate?
In keeping with the move toward stricter governance of Not-For-Profits, organizations can benefit from facing the challenge with awareness, due diligence, and proper documentation.
Knight-Ridder/Tribune Business News, Richmond Times-Dispatch, Va., “IRS to Examine Pay Scales at 2,000 Tax-Exempt Groups”, August 21, 2004.
