The New York Attorney General has proposed two laws that would bring more rigor and clarity to the rules on compensation in nonprofits.  These are the Nonprofit Revitalization Act and the Executive Compensation Reform Act.

The laws would affect many aspects of nonprofit operation.  Regarding compensation, the laws would establish a rule that “Total Compensation” for any employee must be “fair, reasonable and commensurate with the services the employee provides to the organization.”  “Total Compensation” is broadly defined to include salary, bonus, deferred compensation and any benefits having monetary value such as housing allowances, fringe benefits and retirement benefits.

For charities that are required to register to conduct charitable solicitations in New York, there are two additional levels of rules regarding compensation.  First, all such charities would be required to have a Compensation Committee of independent directors, or have the independent directors on the Board perform the duties of the Compensation Committee.

The basic duties of the Committee are to review the Total Compensation paid to the organization’s “principal executive officer” and determine that it is “fair, reasonable and commensurate with the services provided.”  The law requires to Committee to be directly responsible for the appointment, compensation and oversight of any compensation consultant retained to assist the Committee, that the consultant report directly to the Committee, and that the Committee approve the compensation “peer group” that the consultant recommends be used to develop comparable data.  The law would impose an “independence” requirement in that the compensation consultant must not have received compensation from the organization with the past 2 years except for compensation consulting.  For organizations with annual revenue in excess of $2M, the requirements would be extended to the top five highest compensated employees who are officers or “key employees” and whose compensation exceeds $150K (or a higher amount set by the Attorney General).  For such organizations, the law also requires that the Committee consider relevant data of total compensation paid to individuals serving in similar positions at similar organizations, the employee’s qualifications and performance, and the organization’s “overall financial condition”

Readers who are familiar with the IRS regulations on compensation for nonprofit employees will recognize a significant similarity with many of the terms and requirements of the New York laws.  This article is a summary of a detailed set of laws and does not set out every requirement; also, changes may occur as the laws move through the legislative process.  Lawrence Associates is well-positioned to assist Compensation Committees to set compensation in accordance with the proposed laws’ requirements.

The IRS has issued its final report on the College and Universities Compliance Project, which is based on questionnaires sent in 2008 to a sample of 400 colleges and universities.  Regarding compensation, the report shows a significant portion of the surveyed institutions failed to obtain the advantage of establishing a “rebuttable presumption of reasonableness” of compensation.  Although almost all institutions followed the requisite procedures, about 20% used incorrect data for comparing their compensation to that of other organizations.  This was due to one or more of (a) using compensation surveys that did not show that the surveyed entities were similar to the institution in question, (b) including dissimilar institutions in the surveys relied on, and (c) insufficient data in the surveys about whether the compensation surveyed was total compensation, not just salary.  (It appears that the wide range of benefits offered makes it difficult for colleges and universities to identify all elements of compensation.)

Although intermediate sanctions (financial penalties) were not imposed by the IRS on any of the institutions examined, the effort nevertheless resulted in finding $36Mm of additional wages and in turn $7Mm in taxes and penalties.  The survey showed only about 21% of the surveyed colleges and universities used outside compensation consultants, which we feel may account for many of the defects found in the processes used.

The IRS announcement is here and the full report is here.