Nonprofit executive compensation tops the current list of IRS hot button issues. In recent years, the IRS has been ramping up its oversight and enforcement of nonprofit executive compensation. With all the rancor surrounding executive perks and bonuses on Wall Street, expect that populist sentiment to spill over into the nonprofit sector as well. It all adds up to the equivalent of a message written in the sky: get your house in order!
So, how do you do that? Let’s take a look at a few key points that will go a long way toward ensuring that the compensation package for your nonprofit’s leader(s) is appropriate.
Reasonable compensation. It all starts here. The IRS requires compensation packages for nonprofit executives (and other nonprofit employees, for that matter) to be reasonable. Unfortunately, the IRS doesn’t really define reasonable…at least not in a way that you could look up in Websters. Reasonable compensation is best understood in light of factors the IRS examines when determining whether or not a charity is exceeding reasonableness with its compensation arrangements. These factors look something like this:
- Actual job description
- Required level of education or experience
- Compensation averages in your area
- Number of hours worked
- The overall budget of the charity