3 Things Board Members Should Verify to Minimize Nonprofit Executive Compensation Risk

Nonprofit organizations are held to very high standards when it comes to executive compensation and benefits; indeed, some may even argue that the bar is set higher for the nonprofit sector than it is for for-profit entities. Both government entities and donors alike have a vested interest in ensuring that a nonprofit is spending its money ethically and wisely, and executive compensation in particular is subject to high levels of scrutiny. Nonprofit organizations that appear to be paying excess wages and benefits to their leadership—whether in the eyes of outside investigators or through the lens of public perception—may be subject to not only costly regulatory and compliance actions, but also reputational harm.

Swift action to correct the problem can go a long way toward alleviating the damage to an organization’s reputation. However, in a handful of cases, the damage to the organization is irreparable. In the aftermath of these events, investigations often reveal that had the organization’s Board implemented simple preventative measures, or properly used processes already in place, the crisis could have been averted. Below, we outline some of the three key processes and procedures nonprofit Board members should verify in order to minimize their organization’s exposure to executive compensation risk.

1. Establish and follow a formalized process that ensures that independent Board members have sole oversight over CEO and senior executive compensation. It is imperative that independent directors alone maintain oversight of all matters pertaining to the organization’s most senior executives. Ideally, the organization has a Board-approved policy governing executive pay matters and a regular schedule for the administration of executive pay that includes processes such as annual performance goal-setting, interim progress reviews and year-end performance evaluations complete with competitive compensation reviews.

2. Provide Board members access to credible compensation information for positions with similar responsibilities from comparable organizations. Board members engaged in compensation decision making must be provided reliable information about competitive pay practices. Board members should establish the criteria for the types of organizations and positions included in the competitive information, and all data sources should be easily demonstrated as comparable, reasonable and relevant to the organization. Board members can obtain data from sources such as comparable organizations’ Form 990 and Schedule J information, published compensation surveys from pertinent service sectors and professional publications with regular reports on executive pay matters.

3. Maintain and approve timely and thorough documentation of all Board discussion, deliberations and decisions on executive compensation matters. Thorough documentation of the Board’s activities regarding executive compensation must be maintained.  Records must reflect all individuals (Board members, staff and outside advisors) participating, as well as contain substantive descriptions of discussions, proposals considered and votes taken to adopt decisions. Any information or reports used in the meeting should be included in the minutes. Finally, minutes should be circulated to Board members for review and approval within 60 days.

Transparency and accountability are key for organizations as they look to align executive pay and benefits with their missions. Board members have an important role to play in ensuring that these principles are maintained in all deliberations around executive compensation. For more information on executive compensation risk and procedures for mitigating exposure, check out Laura Kalick’s previous blog post on intermediate sanctions.

Mike Conover is Senior Tax Director, and Tony DaSilva is Compensation and Benefits Partner, both in BDO’s Executive and HR Services practice.