This is an interesting technique for capping executive pay at nonprofits:  New Jersey regulations recently put in place a cap on the amount the state will pay for the salaries of the top executives at social-service non-profits.  The cap is somewhat limited in its effect because funds from non-state sources can be used towards executive pay without being limited by the regulations.

Our friends at Charitygoverance.com have taken their own look at the IRS’ interim report that we wrote about recently and we thought we’d share it with you.  Among other things they note that despite concern expressed by Congress (and the IRS – see our posts on this), few institutions used for-profits for comparison.

Foundations should take note of the April 24, 2010, “Prepared Remarks of Commissioner of Internal Revenue Douglas H. Shulman at the Council on Foundations 2010 Annual Conference, Denver, CO”

Lawrence Associates summarized and excerpted some of the key and potential implications of these remarks:

IRS Focus on High Wealth Individuals

- The IRS is innovating .  “A good example is our global wealth unit which we launched last year, which will look at the entire web of economic entities controlled by a high wealth individual.  In the past, we looked at each legal entity separately.  Now we will look at an individual’s tax return, business holdings, trusts, related charitable entities, foreign holdings and other tax related activities as an integrated whole to look for patterns of non-compliance.”

Oversight and Criteria for Grant-making and Grantees

 - “one of the key criteria for grant-making in most foundations is a strong, stable management team and board of directors for the organization receiving a grant… Before your foundation makes a grant, you want to make sure that the organization receiving the grant is:

     o Properly run and a good steward of its assets
     o Has good internal controls
     o Has sound leadership
     o Is skillfully managed to give you confidence it can and will execute in its mission and serve a public good

Focus on Good Governance and Internal Controls

- ”The Council’s ethical principals…mirror the IRS’ core values of honesty and integrity …respect…continuous improvement…inclusion…openness and collaboration…and accountability.”
-  ”…good governance is essential to public trust and accountability, and critical to the success of all organizations and institutions, including governments, non-profits and for-profits.”
-  ”We want well-run institutions that deliver on their on their missions – exempt purpose – tax parlance.  We want appropriate controls in place to ensure clean books and records and adherence with legal requirements…We both benefit from another set of eyes looking at similar issues.”

Potentially Aligning the Form 990-PF with the Form 990?

- “ We will continue to focus on….trust, accountability, and transparency as our strategy evolves.  The new Form 990 is perhaps the best example of our recent work to promote public trust and accountability in the non-profit area.”

Continued Areas of IRS Focus and Articulation of Good Governance

-  ”Congress…allowed for greater control by the original donor to a private foundation in exchange for the application of a fairly precise set of restrictions on behavior.  To some extent, these restrictions are a specific articulation of some good governance practices; including taxes on:
     o acts of self-dealing involving private foundation assets;
     o private foundation expenditures that are not for charitable purposes; and
     o excessive business holdings or risky investments that jeopardize the financial well-being of the foundation”.

On May 7, 2010, the IRS released the “Interim Report on Nonprofit Colleges and Universities Compliance Project.” Although the reported compensation numbers are very generic to be applied to specific institutions, other aspects of the report are quite interesting. We’ve summarized and excerpted the following:

 In large organizations, the highest paid employee (other than officers, directors, trustees or key employees – ODTKEs) was most often a sports coach (43% of organizations).

Very few colleges and universities reported that their coaches are not employees of the organization. The percentage of employees who received NCAA Athletic Income increased with organization size.

Only 55% of small, 71% of medium and 63% of large private colleges and universities reported using the Rebuttable Presumption Procedure (Intermediate Sanctions safe harbor) for any of the six highest paid. The others are not using the process.

The use of comparability data to establish compensation was present less frequently than the other rebuttable presumption factors (contemporaneous documentation and approval by an independent governing body)

We viewed perquisites and benefits reported for at least one of the highest six as typical for the sector

Detail on retirement showed relatively low levels of supplemental executive retirement, e.g. IRC 457(f) organization contributions were reported by 8% – 15% of organizations.

BNA Daily Tax Report quotes Lawrence Associates in “IRS Audits Harvard, Other Universities in Probe of Exempt Purpose Rules” by Diane Freda, March 26, 2010.  In the article Lindalee Lawrence, President of Lawrence Associates, commented on the implications of audits for executive compensation. The article notes that according to former IRS Exempt Organizations Director Marcus Owens, now an attorney with Caplin & Drysdale, a review of compensation has now become a staple of every audit of an exempt organization.

The American Association of University Professors www.aaup.org latest report on the economic status of university professors reports that “[t]he average salary for a full-time faculty member was only 1.2 percent higher in 2009–10 than in the previous academic year, the lowest year-to-year change recorded in the fifty years of this comprehensive annual survey.” The report notes that this is less than half the rate of inflation and also notes the many institutions that have instituted salary freezes. The report can be found at http://www.aaup.org/AAUP/comm/rep/Z/ecstatreport09-10/default.htm.

Social media such as Facebook open up many new opportunities for hiring; many companies are reportedly finding that the best recruitment tool is having existing employees tap into their on-line networks.  But easily-available information about job candidates may tell prospective employers too much, exposing them to claims of violations of laws on such matters as racial discrimination.  A recent twist on this issue is offered by the EEOC, which has asked for pubic comments on whether employers should be prohibited from using social networking sites to research job candidates,  since the searches could reveal information protected under the Genetic Information Nondisclosure Act.

Personally, we question how a ban on any access to on-line information could possibly work; there is so much data out there that building a legal wall of prohibition on use is like trying to hold back the ocean.   But the public comments on the issue will be interesting and perhaps will contain some ideas for a workable solution.

The Chronicle of Higher Education reports a marked decline in the growth of salaries for the heads of public colleges and universities.  The article is here.

Meanwhile, at the Harvard Business Review, Dan Pallotta observes that adverse public reaction to compensation perceived as high may be tied to the nature of the nonprofit, and that executives for nonprofits perceived as doing charitable work may be more vulnerable to criticisim than more highly-paid executives in the arts or high-end college sports coaching.  The post is here.

Although the deadline for complying with Section 409A of the Internal Revenue Code was December 31, 2008, the IRS has provided some avenues for correcting errors in deferred compensation plan documentation.  The most recent is IRS Notice 2010-6, found at www.irs.gov/pub/irs-drop/n-10-06.pdf.