Advisers are urging nonprofits to carefully consider, document and report executive compensation in light of increased interest by the Internal Revenue Service, Congress, the media and the public in clamping down on excessive executive compensation. With the increasing effort it takes to get well-qualified executives to lead nonprofits, executive compensation has risen in recent years. Health benefits — which are most cost-effective when part of a group plan — are one part of the compensation package.
Recent surveys of compensation in nonprofit organizations indicate there is little or no difference in executive health benefits from those of other nonprofit staff members. The University of Memphis Institute for Philanthropy and Nonprofit Leadership, in its 2011 study, “Understanding the Nonprofit Workforce — Human Resource Practice in the Mid-South,” with 34 agencies responding, indicates that executives received the same benefits as other “eligible employees.” The Council on Foundation’s “2008 Grantmakers Salary and Benefits Report” states that more than 63 percent of the 850 foundations in the report cover 100 percent of the health benefits cost for the employee. Foundations that ask employees to contribute to their health benefits cover approximately 87 percent of the cost. Pete Smith, president of Smith Compensation Consulting, which works with nonprofits determining executive compensation, confirms that in terms of heath benefits, nonprofits treat their executives the same as their other employees. The nonprofits he works with treat their employees equitably, in line with market conditions, Smith says. The benefit with the most variance from what is offered to staff members is the retirement package for executives.
Smith says that, although it is very uncommon, nonprofits sometimes add a provision in an executive’s contract for an annual physical, so the organization knows he is in good shape. The 2004 “West Michigan Nonprofit Compensation and Benefit Survey” found that 2 percent of 171 reporting West Michigan nonprofits provided an annual physical as a perk, fewer than the number of nonprofits providing a car (11 percent) or a club membership (10 percent).
Start-up nonprofits looking for specific guidance for their own organization might speak with a lawyer familiar with nonprofit law or a human resources consultant handling benefit programs. To avoid problems with executive compensation, the IRS advises nonprofit boards to set compensation using appropriate comparability data, such as the compensation usually paid for like services by like enterprises (both for- and nonprofit) and under like circumstances. The IRS also suggests having the compensation reviewed by an independent body, such as a compensation committee. Nonprofits also must ensure that no one involved in setting compensation has a conflict of interest, such as someone who has an outside business deal pending with the executive; and nonprofits must document the way compensation is decided, such as through board minutes. Nonprofits avoid penalties by reporting compensation of their top leaders and key employees on IRS Form 990, the IRS’s annual informational tax return for nonprofits.
Health benefits must be reported on Form 990, Section J, under nontaxable benefits, for the nonprofits’ current individual trustees and directors, institutional trustees, officers, key employees and other five highest compensated employees receiving at least $100,000 in reportable compensation. Information on people formerly holding these positions during the five previous years also must be reported.