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Got Compensation Program Risk?

All the Form 990 boxes say compensation is IRS compliant…has anyone checked?

Sharing actual experiences arising in our compensation consulting work provides some of the most valuable information for our readers. The questions we are asked and the types of work being requested by clients generally serve as a good source for timely topics. Without divulging any confidential information, I believe some of our recent experiences in the past few months offer a topic that warrants a closer look by many organizations.

We have encountered a number of instances this year where we have been asked to review several years of documentation supporting an organization’s governance of executive compensation. In some cases, our work involved a search for confirmation of detail to support a past pay action. In others there were specific requests to examine the quality of existing documents supporting the pay program. Both approaches allowed us a firsthand opportunity to see what clients had in their possession, or thought they had, regardless of the fact that the applicable questions on the Form 990 were checked with a “Yes.”

It is worth mentioning that the criteria we use to evaluate the materials follow the Internal Revenue Service (IRS) Intermediate Sanctions’ guidance for the Presumption of Reasonableness. We generally focus on determining:

  • The participation/role of independent directors in compensation decision making
  • The quality of competitive compensation data from “comparable” sources used in decision making
  • The quality of contemporaneous documentation (i.e., minutes) kept to record the discussions and decisions related to executive pay.

These criteria can be met by satisfying some rather broad requirements outlined in the provisions of the Intermediate Sanctions. The precise manner of doing so is generally left up to the organization in question. Our reviews express our opinion as to how well organizations could substantiate their satisfaction of the requirements for the Presumption of Reasonableness.

In our reviews, we examined: board and compensation committee members; the schedule of their meetings; staff positions for which the board has direct compensation decision making authority; records of board meetings and resources used by board members engaged in compensation decision making. Additional materials such as formal compensation strategy/policy statements, and board/compensation committee charters, for example, were also reviewed in those instances where organizations were using them.  Download the PDF to continue reading this article.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Summer 2014). Written by Michael Conover, Senior Director, Specialized Tax Services–Global Employer Services.  Copyright © 2014 BDO USA, LLP.  All rights reserved. www.bdo.com

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