DATELINE: December 6, 2007, Chicago
Vindication comes to Josiah Spaulding and the Citi Performing Arts Center ("CPAC") board of directors in the form a ten-page letter letter from the Office of the Massachusetts Attorney General. You may recall the brouhaha last summer when the Boston Globe decided to highlight CPAC's Josiah Spaulding Jr.'s compensation, implying that Spaulding was overpaid. It didn't seem to be his $400,000+ annual compensation so much as his...
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$1.265 million retention bonus that triggered the controversy. At the time, we asked the question: Does Josiah Spaulding Jr. Make Too Much Money? In our view, the critics of the compensation arrangement were far less interested in reasons for the $1.265 million bonus than the appearances. As we said at the time and continue to firmly believe, nonprofits executives should be paid market rates of compensation. They should not be required to work for free or subsidize the nonprofit sector. Those who believe otherwise are just assuring that the nonprofit world will be staffed with mediocre executives.
That is why we are so pleased with David G. Spackman, Chief of the Non-Profit Organizations of the Public Charities Division of the Massachusetts Attorney General's office. He did not get hung up on amounts, refusing to question the business judgment of the board. Instead, Spackman examined the process by which the compensation was set. Not surprisingly, he began his letter with an explicit reference to the procedures mandated by Section 4958 of the Internal Revenue Code--the intermediate sanctions. He said that the division is guided by the criteria and procedures outlined in those sanctions. That means the division is looking for an independent board to determine the compensation, the use of comparables, and documentation of the decision.
Spackman than proceeded to describe the division's findings in great detail. Although he concluded that CPAC's process was not perfect, he also concluded that it was sufficient. He noted that as early as 1997, the board understood the importance of the process by which executive compensation is set. He also noted that the board's compensation committee relied on two studies regarding market compensation when it reached its 2001 decision. That was the year that the retention bonus was introduced into Spaulding's contract. The lawyer for the organization, Elliot Surkin, noted that the board realized the proposed compensation level was relatively high, but that it believed that CPAC needed to compete with nonprofits, but also with for-profit entities paying considerably larger amounts if CPAC was to be assured of retaining Spaulding.
The most significant problem that Spackman pointed to was a missing set of minutes for an important meeting (the May 3, 2001 one). Spackman made it very clear that the decision, including the reasoning behind it and the economic analysis, should be reflected in the minutes of the board and the committee. This simply reinforces our continuing belief that meeting minutes should be more detailed than many lawyers currently prefer. In our view, boards and their lawyers make a serious mistake when they claim they are avoiding potential board liability by stripping meeting minutes of any meaningful content. As we continue to observe practices, we find that more detailed minutes often would have avoided embarrassment and provided a solid defense for board decisions.
Spackman also notes that given the size and importance of the CEO's bonus in this case, the full board should have made the decision rather than just the compensation committee. This is consistent with our belief that the compensation committee should do the legwork in developing the CEO's compensation package, but the full board should actually make the decision.
Spackman ultimately was comfortable with the process because of the following factors: (i) the board was consistently involved in setting Spaulding's compensation and reviewing his performance; (ii) independent comparables were used by the compensation committee in developing Spaulding's pay package; (iii) there was no evidence that Spaulding attempted to assert undue influence; (iv) the amounts of the deferred bonus were consistently disclosed in regulatory filings; and (v) with one exception, the minutes reflected the major decisions.
Boards often ask how they should set executive director compensation. Spackman's letter offers a concise and useful recipe.
Internal Revenue Service - Circular 230 Disclosure: As provided for in Treasury regulations, any advice (but none is intended) relating to federal taxes that is contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.
THE FOREGOING IS NOT AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. IF LEGAL ADVICE IS REQUIRED, THE NONPROFIT OR OTHER PARTY IN QUESTION SHOULD SEEK THE ADVICE OF QUALIFIED LEGAL COUNSEL. If you liked this post, please visit http://www.charitygovernance.com for a description of our training and consulting services. You will also want to acquire a copy of Jack Siegel's book, A Desktop Guide for Nonprofit Directors, Officers, and Advisors: Avoiding Trouble While Doing Good."
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