The IRS is sending strong signals that it is going to be looking hard at compensation and benefit levels for nonprofit executives. To avoid problems with executive compensation, the IRS advises nonprofits to:
- Set compensation in advance using appropriate comparability data.
- Make sure persons involved in setting salaries do not have a conflict of interest.
- Document all decisions on compensation.
- Report all economic benefits to officers, directors, and key employees on Form 990.
To establish a rebuttable presumption of reasonableness nonprofits should use an independent survey of comparability data. Information and software can be obtained from GuideStar; ERI Economic Research Institute; Salaries Review; Abbott, Langer Association Surveys; and other salary survey sources that specialize in the nonprofit sector.
In “Good Governance Practices for 501(c)(3) Organizations” the IRS states:
8. Compensation Practices
A successful charity pays no more than reasonable compensation for services rendered. Charities should generally not compensate persons for service on the board of directors except to reimburse direct expenses of such service. Director compensation should be allowed only when determined appropriate by a committee composed of persons who are not compensated by the charity and have no financial interest in the determination.
- Compensation Issues for Exempt Organizations
- On February 7, 2007, the IRS posted a preliminary staff discussion draft of Good Governance Practices for 501(c)(3) Organizations on the IRS web site. The informal draft, which is not an official IRS document, or legal requirements for federal tax exemption, but are suggested discussion topics to be considered in the nonprofit governance dialogue. 11/13/07