Nonprofit Compensation: How Much is Too Much?

With Federal, State and Local budget deficits at all-time highs, governments are looking for justification for budget cuts by rationalizing that nonprofits are not running as lean as they should. In an effort to address scrutiny of Nonprofit executive compensation, the Governor of New York, Andrew Cuomo, recently introduced Executive Order 38 to place limits on the total compensation an executive of a nonprofit doing business in New York State can receive.

This raises significant questions: How did we to get to this point? Why is government intervening on proper board governance?

Recently, the press has reported instances of excessive compensation practiced by some nonprofit organizations. Responding to a New York Times article about executive compensation paid by a nonprofit provider serving the developmentally disabled, Governor Cuomo created a compensation task force to investigate executive compensation packages at not-for-profit entities that receive State taxpayer support. The task force collected and reviewed detailed executive compensation information from thousands of not-for-profit entities that receive funding from the State. Although the task force data has not been released, many believe that highly publicized abuses are just outliers and not indicative of an industry in peril.

So why do we need more government intervention?

In most cases, this intervention is unnecessary. Responsible nonprofits and their boards know how to act accordingly. Many of our clients have responded to the budget freezes and/or cuts by holding the line on compensation increases, eliminating vacant positions and reducing administrative costs.

Historically, executive compensation has been determined by the board of directors of a nonprofit organization. The board has a responsibility to determine that the compensation is reasonable, and to document that conclusion. This is a requirement under section 4958 of the Internal Revenue Code and Treasury Regulation section 53.4958-6 when determining compensation of executives. Under this test, compensation payments are presumed to be reasonable if the compensation arrangement is approved in advance by an authorized body composed entirely of individuals who do not have a conflict of interest with respect to the arrangement, the authorized body obtained and relied upon appropriate comparability data prior to making a determination, and the authorized body adequately documented the basis for its determination concurrently with the determination.

Many more Non Profits are electing to perform annual compensation studies provided by compensation experts. This is a vital tool not only to protect the organization from outside scrutiny of funding sources, but also to give the organization an important benchmark in planning for the retention or succession of key employees and the impact on future budgets.

Do you think government intervention is warranted?

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