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Reasonable pay? It’s a tough question

By: Date: Monday, May 20, 2013
By Julie Holdaway
Published in the Orange County Register on May 20, 2013

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Nonprofits need to be open, honest and follow previous examples of what top executives are earning.

When asked about salaries in the nonprofit sector, I often respond cheekily. “Nonprofit staff bank on karma.” I think this is ironic and even funny. But the IRS? Not so much.

Questions about pay, and what is or is not reasonable pay, are not new. Boards have been juggling compensation issues for years. And multiple years of economic woes – with attendant decreases in nonprofit revenues and increases in demand for nonprofit services – have only exaggerated the situation. In addition, the nonprofit sector has been under increased scrutiny from state regulators and the IRS, not to mention the media, our donors and stakeholders.

It’s nearing budget time for many nonprofits, which means it is time to address compensation again. How much compensation is reasonable?

There’s that word again, “reasonable.” So pervasive, yet so nebulous.

On several occasions the IRS has suggested that it will continue to prioritize executive compensation as an area of focus. Those of us who have muddled through the redesigned Form 990 for nonprofits clearly recognize that the responsibility for greater transparency about nonprofit compensation has been thrust upon us.

While “reasonable” is not an especially helpful yardstick, there is a methodology behind the word, and that methodology is useful.

In determining “reasonable compensation,” the IRS encourages a nonprofit’s board to collect data on the compensation practices of similar organizations. In fact, the IRS policy requires that every nonprofit develop a review process with at least these three elements:

  • Review by an independent body (such as a compensation committee or the executive committee).
  • Use of “comparability” data.
  • Documentation (usually through minutes of the meeting) of the board’s consideration and approval of the compensation.

So, what is compensation?

Typically, it’s the calculation of salary plus other benefits, such as insurance, phone, car, housing allowance or anything else of value.

When a nonprofit board is determining how much compensation to give its executive director and/or chief executive, it is essential that it have comparable data to help set the bar (or floor.) In fact, use of comparable compensation data is part of following expectations for good governance, and it’s required by IRS Form 990 (see Part VI, Section B, Line 15.)

And how do you get such data? One way is to get your hands on compensation surveys or studies conducted by independent compensation consultants for this specific purpose. Salary surveys also are offered all over the web.

OneOC even offers an Orange County-specific nonprofit salary study, which you can access at www.OneOC.org/resources/oc-nonprofit-salary-survey-purchase/. One hundred twenty-five nonprofits participated. Really, it is hot off the presses just this week.

Since I’ve teased you with our new survey, I’ll share some quick factoids:

Nearly six in 10 (58 percent) of local nonprofits surveyed have budgeted for compensation increases this year, with a median bump of 3 percent. But four in 10 are budgeting for no increases, compared with three in 10 that went the no-raise route last year.

P.S. Having a robust conflict of interest policy is another important element – and IRS requirement – of board governance and reasonable compensation. Make sure each of your individual board members is signing one annually.