Most corporate bylaws require at least one meeting to be held each year by the board of directors. This meeting provides a great opportunity for your nonprofit to discuss important items such as the executive compensation policy. This policy helps the compensation process to be more transparent, protects board members from potential legal exposure, and avoids fines that may be associated with excessive compensation of executives.
Any compensation paid to officers, directors, trustees, key employees, and others in a position to exercise substantial influence over the affairs of the charity for services rendered to the nonprofit organization must be considered reasonable by persons who have an understanding of compensation matters and who have no financial interest in its determination. Section 4958 of the Internal Revenue Code and Treasury Regulation Section 53.4958-6 provide charities with a means of determining if its compensation is reasonable by means of the “rebuttable presumption test.” Compensation is considered to be reasonable if it is approved in advance by individuals who do not have a conflict of interest in the matter, if the determination is based on appropriate comparability data, and if the basis for determination is adequately documented. Please give us a call to obtain a sample documentation form for you to use within your organization.
Comparability data can be in the form of surveys or studies from outside compensation consultants regarding the compensation levels paid by similar organizations for functionally comparable positions. It is important to ensure the independence and quality of the consultant and conduct research to ensure substantial evidence regarding your organization’s compensation policy. If the IRS develops sufficient contrary evidence to refute the value of your data, your organization could face penalties.
As you can see, executive compensation policies are very important to the overall transparency and well-being of your organization. If you have any questions or concerns regarding this issue, please do not hesitate to contact our office.