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Follow-up to Discussion with Joan Reutter, Nonprofit HR Solutions

 

Below is a follow-up to the questions submitted by participants during the January 25, 2011, GuideStar-hosted webinar, “The Compensation Checklist for Nonprofits: Are You Prepared for Today and the Next Five Years?” To view or hear a live recording of the presentation, please click here.

Q: ­What are the legal implications of conducting a compensation study on your own – without a third party? ­

A: The conduct of a compensation survey is regulated by the Sherman Antitrust Act. The Department of Justice (DOJ) and the Federal Trade Commission (FTS) have determined that organizations conducting their own salary surveys could be seen as practicing illegal price-fixing. Violation of this Act could result in fines up to $10,000,000 for a corporation, or, for any other person, $350,000, and possible imprisonment not exceeding three years

To be able to obtain data for determining competitive pay levels while avoiding antitrust violations, the DOJ and the FTC published Anti-Trust Safety Zone Statements, which have been interpreted to provide a “safe harbor” for organizations involved in this exchange of information.

To fall within this antitrust safety zone, the survey must meet the following conditions:

  1. The survey is managed by a third-party
  2. The information provided by survey participants is based on data more than 3 months old; and
  3. There are at least five participants reporting data upon which each disseminated statistic is based, no individual participant’s data represents more than 25% on a weighted basis of that statistic, and any information disseminated is sufficiently aggregated such that it would not allow recipients to identify the prices charged or compensation paid by any particular provider.

The same safeguards should be considered when considering participating in a survey or in the purchase of a survey.

Q: What is “fair compensation” means? What defines fair?

A: “Fair” is a relative term and is based on the perception of each individual based on their personal needs and a defined basis for which they can measure against – i.e., consistent treatment with internal equity and external competitiveness. When an organization develops its compensation philosophy and communicates this to employees, it provides the basis to assess the “fairness” of the compensation provided.

Examples:

A nonprofit in Atlanta, GA has committed to provide compensation that is at the average of nonprofits in Atlanta for each job. The salaries may not be at the level that are seen in for-profits or in higher cost areas like New York City or Los Angeles, but it will be viewed as fair when comparing salaries for jobs in other non-profits in Atlanta.

An organization has committed to recognize performance through merit increases. An employee will view his/her compensation as fair if his/her high performance is rewarded with a higher salary increase and will understand why a low or no increase occurs if his/her performance is below expectations. The performance assessment must be seen as a fair process as well.

An organization has committed to provide competitive compensation subject to the financial viability of the organization. The data may show that organizations are giving an average salary increase of 3% but employees in the organization are not receiving increases this year because the organization has not met its financial goals. While employees may not be happy to hear this news, they should understand the reason and see this as a fair process. Hopefully, the organization does very well in the following year and provides employees with the average increase in the market plus any additional amounts to bring salaries back in line.

An individual’s personal needs may also influence the perception of fairness. With an understanding of an organization’s values, an individual can determine whether an organization is the right fit for him/her.

The organization’s statement of its compensation philosophy and its actions reinforcing this philosophy helps create an environment in which “employees are paid fairly.”

Q: ­Please expand on excessive executive compensation­.

A: ‘A nonprofit organization with tax-exempt status cannot provide employees with private inurement. That is, employees cannot receive benefits greater than they provide in return’

-Nolo’s Plain-English Law Dictionary

For 501(c)3 and 501(c)4 charities (does not cover private foundations), IRC 4958 disallows “excess benefit transactions.” There are no set formulas or percentages to determine whether a nonprofit has transgressed, but there are general guidelines.

The IRS uses 3 tests:

1) Reasonable Compensation

a) Amount test – What is the competitive salary for qualified individuals for such a job?

b) Purpose test – an examination of the services for which compensation was paid, and how many hours are spent per week working on the job.

2) Has the compensation package been arrived at through “arms length” bargaining?

3) Is the compensation package being used as a device to distribute profits to the principles?

If an individual is found to have received excess benefit, they must repay the amount of excess in addition to a 25% excise tax. Individual board members may also be personally assessed a 10% excise tax on the excess benefit.

Following the compensation checklist can help give an organization the legal protection of a rebuttable presumption of reasonableness. The onus is then shifted to the IRS to prove a compensation package is somehow “unreasonable.”

lindsay-nichols.jpgThe preceding is a guest blog post by Lindsay Nichols, Vice President of Marketing and Communications at America’s Charities, the leader in workplace giving and philanthropy. As a member of the organization’s senior leadership team, Lindsay guides and oversees the strategy and execution of all marketing and communications efforts with a major emphasis on strategy and tactics that support increased growth for the organization. Lindsay has been quoted in the New York Times, Wall Street Journal, Chronicle of Philanthropy, NonProfit Times, St. Louis Post-Dispatch, St. Louis Public Radio, Dallas Morning News, and more.

Topics: Policy Webinars GuideStar