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.