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An ECS reader recently asked about where to find reliable data that can be used to compare non-cash compensation among executives within the not-for-profit (NFP) sector: Compensation Committees need to evaluate this component of the pay package for purposes of satisfying the “rebuttable presumption of reasonableness” under Section 4958 of the Internal Revenue Code. In this article, ECS Editorial Advisory Board member Paul Dorf identifies a number of potential sources – Ed. The analysis of executive compensation within the not-for-profit organization(NFPs) is relatively systematic in its methodology. The IRS allows for the use of for-profit and not-for-profit compensation data to determine reasonable pay, based on the evaluation of comparably situated organizations. The first question of determining reasonable comparisons isn’t difficult per se, but it does require some thought on the part of the Compensation Committee and the organization’s top management. There are a number of criteria to consider, including the characteristics of the organization (foundation, health care, public charity); the organization’s current financial condition and over financial stability; the geographic area in which the organization operates; and the scope of the position for which data is sought. Once these criteria have been defined, compensation information can be sourced from the following materials: · Published compensation surveys that provide data on the not-for-profit industry, either specifically or with specialized cuts. · Compensation surveys that cover for-profit participants, but with cuts that delineate compensation data specific to the organization. · Form 990 data from a representative group of comparably situated not-for-profit peer organizations, that fit the criteria listed above; · Proxy data from a group of comparably situated, for-profit organizations that also compare on the criteria listed above. This method, however, can only be used in very limited situations, and when utilized, must be evaluated cautiously so as not to over-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 organizations targeted for comparison. 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 was seeking to identify peers, the organization would target similar providers within a reasonable radius of its service area, with those providers having similar financials to the organization. This provides the most relevant comparator data for determining reasonable market compensation for an organization’s positions. In addition, other not-for-profits in the overall industry sector that may compete for the same talent can also be targeted. Using this same example, crisis centers, hospitals, primary care providers, etc. can also compare to a mental health facility, since the talent needed to mange one of these organizations is generally transferable to any of the others. Lastly, NFPs that don’t otherwise compare from an industry/service standpoint but have similar financials to the organization seeking the data, can also be targeted for some of the more interchangeable positions (Chief Financial Officer, General Counsel, etc.), but this data should be used more cautiously. Published surveys provide for a readily available, often cost-effective means by which to collect data. Although the data is not always presented in a format that allows for a definitive match to the organization seeking comparator numbers, published surveys provide a good starting point for the collection of data. Form 990s, on the other hand, provide actual compensation data against which to compare the organization’s pay package and can serve to validate the findings from the published surveys. Relevant data can be found within Part V-A — Current Officers, Directors, Trustees, and Key Employees, under the following three components: 1. Column (C) reports salary, fees, bonuses, and severance payments paid, as well as current-year payments 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 unfounded, vested and non-vested, qualified and non-qualified), as well as payments to welfare benefit plans (medical, dental, life insurance, severance pay, disability) on behalf of the officers, etc. The IRS allows for reasonable estimates to be used if precise cost figures are not readily available. Deferred compensation, such as salaries and other compensation earned during the period covered by the return but not yet paid date the organization files its return - is also reported here, unless the amounts were reported in column (C). 3. Column (E) includes both taxable and nontaxable fringe benefits (other than de minimis fringe benefits), and expense allowances or reimbursements that the recipients must report as income on their separate income tax returns. This includes payments made under indemnification arrangements, the value of the personal use of housing, automobiles, or other assets owned or leased by the organization (or provided for the organization's use without charge), as well as any other taxable and nontaxable fringe benefits. Form 990 Challenges In theory, the compensation information disclosed in the Form 990 filings of not-for-profit organizations represents a true and accurate depiction of the elements of compensation that comprise 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 don’t accurately disclose the value of fringe benefits and non-cash compensation, which makes a true calculation of market compensation less likely. Some other challenges in obtaining data from 990s include: · Effectively define which other NFPs represent a “peer” of the organization seeking data from the operational and/or financial standpoint. · Actually obtaining Form 990 copies. Generally, requests for Form 990s can be made to the Internal Revenue Service and/or the organization itself, but you should expect a significant waiting period, assuming that the forms themselves are even available. · Determining which positions disclosed in the Form 990 match the “incumbent position” for which data is sought, since only titles are provided in the filing. It’s expected that better, more accurate and certainly more timely information will soon be available as electronic filing becomes more commonplace (as per IRS reporting requirements). Focusing On Non-Cash Comp Assuming that all cash compensation elements are reported accurately (base salary, bonus, deferred compensation, etc.), how then can accurate data be obtained for non-cash compensation? Ideally, if public disclosure of compensation data for not-for-profits mimicked the requirements set forth by the Securities and Exchange Commission for publicly-traded companies, an accurate assessment can be made. Until that time, however, a more resourceful method must be used to gather such data. Back to published compensation surveys. Many published surveys not only provide not only statistics covering cash compensation elements, but also data on the prevalence of a variety of other elements of the compensation package, such as automobile allowances, memberships, etc. These studies can help you determine if, in fact, the benefit is something that’s prevalent among top executives in comparable organizations. In some instances, average dollar values may also be disclosed, and these can provide a basis for comparison. Rather than rely on one source compensation planners for the organization should look at few such studies in order to provide a broader, more comprehensive picture of the marketplace. Industry associations are also a good source of compensation data. The professional organizations that govern the NFP sector often publish compensation and benefits studies that are available to its members, and these reports can provide valuable peer data that you can use in evaluating compensation elements. Many organizations also rely on their own network of contacts within the industry, as well as professional service firms that assist them (accountants, lawyers, etc.), to obtain pay and benefits data. However, information gathered in this manner is the least reliable, since individuals may not always be as forthcoming in their disclosures of their own compensation packages. More Art Than Science Ultimately, the collection of non-cash compensation is an art form that requires the evaluator to consider all possible resources, then to make a reasonable assertion that the data accurately reflects the marketplace. Any questions on the validity of the information received should necessitate a reevaluation of the data collected, as well as determining if this is an element of the compensation package that should truly be included in a calculation of reasonable pay. Determining the reasonable value of the compensation package for NFP executives while adhering to IRS regulations on Intermediate Sanctions is a complicated task. The organization’s Compensation Committee and/or Board of Director must act prudently and professionally when determining reasonable compensation for executives, and that means seeking out information from a variety of sources, and then utilizing the resulting data to determine the elements of a competitive executive compensation package. Finally, it’s also the responsibility of the organization’s Board or Committee to challenge any elements of the pay package that may be unclear, unbalanced or suspect, and to take decisive action to correct anything that could potentially be perceived as overcompensation.
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