Looking for non-cash compensation data?
Satisfy the ‘rebuttable presumption of unreasonableness’
An ECS reader recently asked where to find reliable data that can be used to compare non-monetary compensation among executives within the nonprofit (NFP) sector: Compensation committees must assess this component of the pay package in order to satisfy the “rebuttable presumption of reasonableness” under Section 4958 of the Internal Revenue Code. In this article, Paul Dorf, a member of the ECS Editorial Advisory Board, identifies several potential sources – Ed.
The analysis of executive compensation within the nonprofit organization (NFP) is relatively systematic in its methodology. The IRS allows the use of for-profit and non-profit compensation data to determine reasonable payment, based on the evaluation of similarly situated organizations. The first issue of determining reasonable comparisons is not difficult per se, but it does require some thought on the part of the Compensation Committee and the organization’s senior management.
There are a number of criteria to consider, including the characteristics of the organization (foundation, health care, public charity); the current financial situation of the organization and its financial stability; the geographic area in which the organization operates; and the scope of the position for which the data is requested.
Once these criteria have been defined, compensation information can be obtained from the following materials:
Published compensation surveys that provide data on the nonprofit industry, either specifically or with specialized courts
Compensation surveys that cover for-profit participants, but with cutouts that delineate organization-specific compensation data
Form 990 data from a representative group of similarly situated nonprofit peer organizations that meet the criteria listed above
· Representation data from a group of similarly located for-profit organizations that also compare based on the criteria listed above. However, this method can only be used in very limited situations and, when used, should be evaluated with caution so as not to overly inflate the overall assessment of market compensation.
A thorough evaluation
Identifying a group of peer organizations requires a thorough evaluation of the characteristics of each organization being compared. The first step in this process is to consider direct competitors for services: For example, if a mental health provider located in the New York metropolitan area seeks to identify its peers, the organization would target similar providers within a reasonable radius. of your service area, with those providers that have similar finances to the organization. This provides the most relevant comparison data for determining reasonable market compensation for an organization’s positions. In addition, other non-profit organizations in the general industry sector that may be competing for the same talent may also be targeted. Using this same example, crisis centers, hospitals, primary care providers, etc. It can also be compared to a mental health facility, as the talent required to eat one of these organizations is generally transferable to any of the others. Lastly, NFPs that are not otherwise comparable from an industry or service standpoint, but have similar financials to the organization seeking the data, can also be targeted for some of the more interchangeable positions. (CFO, General Counsel, etc.), but these data should be used with more caution.
Published surveys provide a readily available, often cost-effective means of collecting data. Although the data is not always presented in a format that allows for a definitive match with the organization looking for comparison numbers, published surveys provide a good starting point for data collection. Form 990s, on the other hand, provide actual compensation data against which to compare the organization’s pay package and can serve to validate published survey results. Relevant data can be found in Part VA: Current Officers, Directors, Trustees, and Key Employees, in the following three components:
1. Column (C) reports salary, fees, bonuses, and severance payments paid, as well as payments for the current year of amounts reported or reportable as deferred compensation in any prior year.
2. Column (D) includes all forms of deferred compensation and future severance payments (funded and unfunded, vested and non-vested, qualified and non-qualified), as well as payments to social benefit plans (medical, dental, insurance of life, compensation for dismissal, disability) in favor of civil servants, etc. The IRS allows the use of reasonable estimates if precise cost figures are not available. Deferred compensation, such as salaries and other compensation earned during the period covered by the return but not yet paid as of the date the organization files its return, is also reported here, unless the amounts have been reported on the return. column (C).
3. Column (E) includes taxable and nontaxable fringe benefits (other than de minimis fringe benefits) and expense allowances or reimbursements that recipients must report as income on their separate income tax returns. This includes payments made under severance agreements, personal use value of homes, cars, or other assets owned or leased by the organization (or provided for the organization’s use free of charge), as well as any other fringe benefits taxable and non-taxable.
Challenges of Form 990
In theory, the compensation information disclosed on nonprofit Form 990 filings represents a true and accurate description of the compensation elements included in each named executive’s total compensation package. However, many NFPs have had trouble completing these forms correctly. While columns (C) and (D) are relatively straightforward, experience has shown that some organizations do not accurately disclose the value of fringe benefits and non-monetary compensation, making a true estimate of compensation less likely. market compensation. Some other challenges in obtaining 990 data include:
· Effectively define which other NFPs represent a “peer” of the organization seeking data from an operational and/or financial point of view.
· Actual obtaining of copies of Form 990. In general, requests for 990 forms can be made to the Internal Revenue Service and/or to the organization itself, but you must expect a significant waiting period, assuming that the forms themselves are available.
Determine which positions disclosed on the Form 990 match the “tenured position” for which data is sought, since only titles are provided on the filing. Better, more accurate, and certainly more timely information is expected to become available soon as electronic filing becomes more common (based on IRS reporting requirements).
Focusing on non-monetary compensation
Assuming that all elements of cash compensation are accurately reported (base salary, bonus, deferred compensation, etc.), how can accurate data be obtained for non-cash compensation? Ideally, if public disclosure of compensation data for nonprofit organizations mimics the requirements set forth by the Securities and Exchange Commission for publicly traded companies, an accurate assessment can be made. However, until then, a more ingenious method of collecting such data must be used.
Return to published compensation surveys. Many published surveys not only provide statistics covering cash compensation items, but also data on the prevalence of a variety of other compensation package items, such as car allowances, memberships, etc. These studies can help you determine if, in fact, the benefit is something that is prevalent among senior executives at comparable organizations. In some cases, average dollar values may also be disclosed, and these may provide a basis for comparison. Instead of relying on a single source, the organization’s compensation planners should look at some of these studies to provide a broader, more complete picture of the market.
Industry associations are also a good source of compensation data. The professional organizations that govern the NFP industry often publish compensation and benefits studies that are available to their members, and these reports can provide valuable peer data that you can use to evaluate compensation elements.
Many organizations also rely on their own network of contacts within the industry, as well as assisting professional service firms (accountants, lawyers, etc.), for salary and benefit data. However, the information collected in this way is the least reliable, as people may not always be as forthcoming in disclosing their own compensation packages.
more art than science
Ultimately, collecting non-cash compensation is an art form that requires the assessor to consider all possible resources and then make a reasonable claim that the data accurately reflects the market. Any question about the validity of the information received should require a re-evaluation of the data collected, as well as determining whether this is an element of the compensation package that really should be included in a reasonable pay calculation.
Determining the fair value of NFP’s executive compensation package while complying with IRS regulations on intermediate penalties is a complicated task. The organization’s Compensation Committee and/or Board of Directors must exercise prudence and professionalism in determining reasonable executive compensation, and that means seeking information from a variety of sources and then using the resulting data to determine the elements of an award. competitive executive compensation package. .
Finally, it is also the responsibility of the organizing Board or Committee to question any element of the pay package that may be unclear, unbalanced or suspect, and to take decisive action to correct anything that may be perceived as overcompensation.
