Executive compensation can be a tricky area for the board of a nonprofit organization. As we’ve discussed previously, the recommended process for determining the appropriate compensation package for an executive of a nonprofit organization involves conducting a review of what similarly-sized organizations, in the same geographic area, offer their executives (of comparable level). This is an integral part of the Rebuttable Presumption of Reasonableness procedures designed in part to safeguard a charity from paying more than a fair and reasonable amount to an executive. But many boards may be wondering where and how to find the data necessary to conduct a proper and sufficient compensation comparison. Here are some tips that will assist a board in finding appropriate comparability data.
What Data is Sufficient?
The IRS requires comparability data to be from similarly-situated organizations, for equivalent positions, in the same community or geographic area. Therefore, three types of comparisons should be made:
- Position. In general, compensation should be commensurate with the duties and responsibilities of the job. When comparing one compensation package to another, the comparison should be based on substantially similar duties and responsibilities. For example, is the job local or national in scope? How many employees, departments, facilities, and/or entities are managed by the person, if any? It may be inappropriate to compare a person who manages only a single facility or department with a person who manages multiple entities and employees, even if their job titles are the same. Titles do not equate functionally comparable positions. A full-time position should not be compared to a part-time position, and vice versa. Likewise, compensation covering the whole year is generally not comparable to compensation for only part of the year, unless it is pro-rated. Lastly, be careful when using compensation for the final year of service because generally final compensation includes additional payments such as severance.
- Enterprise. The comparisons should be based on enterprises of similar size, which means, similar budget, revenues, number of employees, number of persons served by the organization during a specific period of time, and whether the organization is part of a group of enterprises or a stand alone organization. For example, a nursing home should not be used in comparison with a hospital, even though both may have a “Director of Nursing.”
- Similar Circumstances. In comparing compensation packages, it is important to determine whether the comparison is total compensation, including various perks and benefits, or just salary. The IRS has said that when determining the composition of a compensation package, it is imperative that all forms of compensation are properly accounted for, such as insurance, a car, housing allowance, or other fringe benefits. The comparisons should also be from the same or similar geographic area. If there are no comparables in an organization’s geographic area, it is permissible to find some outside the area as long as an appropriate adjustment is made for cost-of-living.
In the past, the IRS has found certain types of comparability data “not appropriate” or sufficient. This was because:
- It failed to state why certain organizations were chosen as comparable
- It failed to state whether the compensation reported was just salary or total compensation
- It included organizations that were not similarly situated based on the factors including, location, revenues, total net assets, and specifics with respect to industry (e.g. for colleges and universities, the number of students and the level of selectivity in admissions)
Therefore, when gathering comparability data, an organization will want to ensure that the comparables are sufficiently detailed with respect to what is included in “compensation,” (e.g., whether just salary, or total compensation including benefits) and use additional data for benefits packages if the comparables only include salary. The data must also be similar enough in geographic location, size, and particular factors specific to the position and industry, as explained above.
Additionally, the number of comparables used in the review is important in whether the board or authorized body used appropriate data. While there is no magic number for large organizations, for organizations with annual gross receipts (including contributions) of less than $1 million, there is a special rule that considers three comparables of similarly situated organizations and positions to be appropriate. An organization may calculate its annual gross receipts based on an average of its gross receipts during the three prior taxable years to meet this special rule.
Where to Get Comparables
Different types of comparable evidence may be used, alone or in combination, to meet the comparability requirements. Here are a few ways to find such information:
- Search Guidestar for Form 990s. An advanced search on Guidestar will allow the user to limit a nonprofit search by geographical area, category, and income range. After finding such similarly-situated nonprofits, the board can review the compensation information contained in publicly available tax-returns (Form 990). However, note that the “reportable compensation” listed on the Form 990 is just salary, not total compensation, and therefore, does not include benefits. The board will also need to determine whether the positions are similar in terms of duties and responsibilities.
- Call Comparable Charities. Another method for finding comparables is to conduct independent telephone survey of similar organizations. A director can phone such organizations and ask about the duties of their executive, their annual compensation including benefits, and then put such findings in a brief written summary for the rest of the board or authorized committee to review and consider.
- Use Other Offer Letters. A well-qualified candidate may have other competing offer letters from similar institutions that an organization may use as comparability data.
- Commission a Salary Survey. The board or authorized committee can also commission a customized compensation survey from an independent firm that specializes in consulting on issues related to executive placement and compensation.
- Consider a Generic Salary Survey. Any salary survey should show that the entities are similarly-situated and provide like services. A generic survey that does not demonstrate the likeness of the organizations or positions will not be sufficient. If using a generic salary survey, be sure to find supplemental information that demonstrates the comparability of the organizations and positions, and provide such data to the board or authorized committee along with the survey in order to bolster their review.
- Don’t Forget to Consider Taxable Entities. There is no rule prohibiting a nonprofit from also using comparables from the for-profit sector. Thus, comparability data may include compensation levels paid by similarly situated organizations, both tax-exempt and taxable, for functionally comparable positions. It may be helpful to use a for-profit comparable when wanting to boost the range of compensation packages under consideration. However, be careful not to rely solely on for-profit data, as such action may draw increased scrutiny from the IRS.