CEOs and search committees: Here's what you can do to prepare for IRS questions about key employees' compensation.
I'm not sure that I have ever met a hard-working association executive who was overpaid. But I don't make the decisions. The IRS is demanding greater reporting on compensation, and associations need to be prepared to provide the information it requires.
Aside from the compensation-reporting changes in the revised Form 990, the government will want information on salaries and how you determine compensation levels, including information from outside parties, compensation comparables, and the overall process used to determine any C-level executive's compensation. It is important to not be above market, particularly with new hires at the CEO or CFO level.
These suggestions may help protect your association when salary levels are under scrutiny:
48% of associations base CEO compensation on comparable salary and benefits data.
Keep records for future reference. In addition to a report of market comparables for a particular position's compensation, keep a record of comparables on the candidates interviewed during the process. This should be compiled and archived regardless of who may be handling the search or how the search is being conducted. If board or search-committee members are asked sometime in the future about compensation, it is important to have information to draw upon to support their decision, especially if considerable time has elapsed.
Remember that raises and bonuses can be questioned, too. While most boards do not get involved in the salary increases of all staff members, it is still important that salary adjustments, salary levels, and any bonuses are at levels that can be supported with data. The most valuable support is from organizations with like sizes of staff and budget in a similar location.
Make sure you're at market with your compensation of existing staff. Paying below market won't be questioned by the IRS, but it creates other problems. Transitions by people who leave to seek market-level compensation are costly. You now will not only have to pay a higher salary, but you'll also bear the cost of transition and training for a new employee.
Alternatively, if you have employees who are truly above market, tell them and allow their compensation level to work to market level through reduced salary increases or none at all. Trust me, if they are above market, they know it, and this gradual change will not be as difficult as you might think.
Association leaders and boards need to be sure that employee compensation levels are correct. If you base salary and benefits decisions on good information to begin with, you'll be prepared when the time comes to show your work.
Thomas G. Owens is president of The Owens Group, LLC. He conducts executive searches nationally for nonprofits, associations, foundations, colleges, and universities. Email: [email protected]