Tax-Exempts Should Focus on Executive Comp

Although major regulatory changes appear unlikely for 2011, ongoing regulator and press scrutiny of executive compensation at tax-exempt organizations (TEOs) is certain, Mercer said in a recent Perspective.  

Defining the process steps for determining reasonable executive compensation and carrying them out should be a collaborative effort involving the compensation committee, HR professionals, and the TEO’s compensation consultants and counsel, Mercer suggests. Examples of issues to consider include: 

• How “disqualified persons” or others who are or could be subject to intermediate sanctions or other reasonable compensation requirements are determined; 
• How comparable organizations are chosen and why they are considered comparable – an issue the IRS seems to be concerned about; 
• How to deal with reasonable compensation issues when it is impossible or impracticable to do a full-scale, advance analysis of total compensation (for example, in the case of certain new hires or new programs); and 
• How to appropriately document compensation decision-making deliberations – not just conclusions or outcomes. 

One area where Mercer says TEOs should sweat the small stuff is with benefits and perquisites. According to the Perspective report, detailed questions on the revised Form 990 about various types of fringe benefits provided to executives (as well as more traditional benefits, such as retirement and health benefits), together with reports on TEO compliance checks and audits the IRS has conducted in recent years, demonstrate that the IRS has become very concerned about tax-law compliance for benefits and perquisites. Mercer notes that the agency‘s interest is not simply that benefits and perquisites be considered when evaluating reasonable compensation, but also that these amounts be properly handled for income tax, FICA tax and related reporting requirements – which they quite frequently are not.  

Mercer suggests the solution to benefits and perquisites issues is for the compensation committee and HR to become involved in the following: 

• Determining benefits/perquisites that have a business purpose and those that do not – eliminating any that don’t have a clear business purpose and articulating the purpose for those that do; 
• Considering “makeup” alternatives – such as a simple salary increase in lieu of a car allowance – where necessary for attraction and retention or fairness purposes 
• Working with staff and outside experts to ensure that those executive benefits and perquisites that are provided are appropriately treated when evaluating reasonable compensation and for income and FICA tax purposes; and 
• Working with staff and outside experts to ensure appropriate disclosure on Form 990 of those executive benefits and perquisites that are provided. 

Mercer’s 2010 survey of executive compensation governance revealed best practices for compensation committees, including: 

• Delineating the committee’s role in a charter; 
• Maintaining a calendar of activities, with multiple meetings demonstrating active governance; 
• Formalizing the executive compensation philosophy; 
• Using tally sheets that itemize different compensation components; 
• Reviewing form 990 prior to filing; 
• Approving not just the CEOs compensation, but also that of other disqualified persons; 
• Annually reviewing market data to determine competitiveness and reasonableness of total remuneration; and 
• Directly engaging and using a compensation consultant at the committee level.