DATELINE: May 14, 2010, Chicago
Earlier this
week we began our examination of the recently released IRS Interim Report on its
College and Universities Compliance Project. We examined the responses to
questions on UBIT and endowments.
We now turn to the responses on executive compensation.
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Eve Borenstein, the
report adopts a variation on her TDOKE (trustees, directors, officers, and key employees) nomenclature.
Unfortunately, the report's use of similar terminology results in confusion. The report
defines ODTKEs as the six highest paid officers, directors, trustees, and key
employees. Does
“six highest paid” modify just officers, or each category in the list. As we read the survey, it modifies all
categories in the list, but the report should clarify this.
A second problem and far more significant problem involves the
distinction between highest compensated non-ODTKEs and highest paid
ODTKEs. Borenstein developed her
terminology to ease the discussion of the new Form 990. In our view, the terminology and the underlying concept embodied in it are
irrelevant for purposes of this survey, which focuses on compensation
levels. The IRS should have asked about the six highest compensated people associated with the school. Period. As you will see in the ensuing discussion, the report intermingles the results for at least three different universes, diluting the meaning that can be drawn from the results.
When you exclude
ODTKEs, the highest paid employee at small (55%) and medium (49%) schools was a
member of the faculty. Faculty
appears to have been limited to individuals engaged in instruction and
research. Even with that limitation, we the term susceptible to manipulation. In the case of large
schools, it was the athletic coaches who were the top dogs, with 43% of large
schools so reporting. Not
surprisingly, the average salary for the top non-ODTKE is positively correlated with category size. At a small
school, the highest paid non-ODTKE averages $142,000 a year. The amount jumps to $236,000 for medium
schools and $727,000 for large schools.
The IRS has been obsessed with how related organizations fit into
compensation for some time--see the new Form 990.
Interestingly, only 21 schools had related organizations that paid anything to the
top non-ODTKE.
The report then
turns to ODTKEs. Not surprisingly, those holding the title of
Chancellor/President were the highest paid ODTKEs—62% small, 69% medium, and
77% large. We aren’t sure how CEOs
and executive directors differ from Chancellor/President, but the IRS drew that
distinction in formulating the possible responses to the question.
Not
surprisingly, compensation paid to the highest paid ODTKE was once again
positively correlated with category size-- $200,000 for small, $312,000 for
medium, and $420,000 for large.
And once again, there was relatively little use of related organizations to
boost the levels of compensation paid to these folks.
The report then
turns to types of compensation.
Here the IRS missed an opportunity.
A school is treated as paying a particular type of compensation if only
one of the six highest paid ODTKEs received that form of compensation. Why the focus on just one person? Had we designed the survey, we would
have collected (and reported) the data for all six persons, which we believe would
have provided a more representative sample of actual practice.
In terms of
seemingly popular benefits (at least one ODTKE received it), base salary,
contributions to employee plans, and contributions for life, disability, and
long-term care insurance led the pack.
That is not surprising. Our perception is that the IRS spends a lot of time worrying about
bonuses. Between
30% and 36% of all schools paid at least one ODTKE a bonus, which is much lower than we would have expected.
We were not surprised to see that other popular benefits included personal use of organization vehicles and housing. Fifty-eight percent (58%) of large schools provided at least one of the highest paid ODTKEs with a car, with 52% providing housing. Medium schools reported similar numbers for these two items. Non-accountable plans and personal use of credit cards were minuscule. Most schools have evidently gotten the message.
On the other hand, many schools do
cover health and social club dues for at least one of the highest paid ODTKEs
(20% small schools, 18% medium schools, and 42% large schools). Very few schools cover first class
air-travel. There is some
evidence of loans to ODTKEs, but it appears to be below 10%. In a few instances, ODTKEs probably received a notice of examination as a consequence of responses by their employer--cancellation of the loan was not reported as income.
We would have
liked to see the IRS ask whether the
intermediate sanctions or recent changes in the Form 990 had caused organizations to simplify how they structure
compensation and benefits.
The report then
turns to compensation policies and practices, including the rebuttable
presumption under the intermediate sanctions. Here the focus shifts to officers, directors, trustees, and
key employees, but it does return to the six highest-paid ODTKEs for some
questions, thereby adding a layer of confusion.
This section
begins by asking who determines compensation. Because the question applied to a group rather than the
highest paid person or CEO, the responses are pretty much worthless. Officers, boards, compensation
committees, and decision makers all set the compensation of officers. The more pertinent questions:
Who is setting the top official's compensation? At what point does the function shift
from the board to another agency?
Most
organizations have a written agreement with at least one of their six highest
paid ODTKEs, but this does not reveal how common the practice is for all people
in the category.
What was
surprising was the level of reliance on the rebuttable presumption. We would have thought it would have
been much higher. Only 55% of
small, 71% of medium, and 63% of large institutions rely on it. Once again, the question was framed in
terms of any ODTKE rather than how many ODTKEs. There has been discussion of getting rid of the initial
contract exception. The numbers reveal that most schools do not rely on it.
Most
organizations reported documenting and using an independent approval process
for setting the compensation of at least one of the six highest paid
ODTKEs. It appears that when an
organization failed to meet the rebuttable presumption, it most likely was because the
organization did not use appropriate comparability data. Nevertheless, a
majority of organizations in each category do rely on comparability data.
So there you
have it. Hopefully, the IRS can do
a better job of parsing the raw data in the final report. The interim report doesn’t reveal
much. What it does reveal is not surprising. In fact, our overall conclusion is that compensation is not nearly the problem that many may have believed.
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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