In a recent post, Non-Profit Urban Myths Debunked, we discredited the myth that non-profit board members cannot be paid for their service. We related that IRS regulations do allow non-profit board members to be compensated for their services. We explained: “First, non-profits can—and many do—enact board reimbursement policies for reasonable expenses incurred in the performance of board duties, such as travel to organization events, purchasing supplies for board business out of pocket, etc. Second, although most non-profit board members serve as volunteers, board members can be paid as board members for their services.”
There are several misconceptions about the legal requirements of non-profits that not only pervade the general public, but also creep their way into the media and in non-profit governance and management. Below are a few such myths followed by a debunking overview.
Many founders feel guilty accepting reasonable compensation from the nonprofit they have nurtured but if they continue to forgo a reasonable salary, they risk erecting a house of cards that will fall apart as soon as they burn out.
At the end of each year we like to look back at our most popular posts to evaluate what our readers are finding most interesting and useful on the blog.
Many small nonprofits without sufficient funds to hire a fundraiser on a fee for service basis view percentage based compensation as a godsend. First, percentage based compensation permits the nonprofit to gain the assistance of a professional fundraiser without any risk to the nonprofit’s bottom line. In addition, the fundraiser is likely to be more motivated if they are paid based upon the funds raised.
Could one man really do that much damage to an Arizona institution as high profile and important as the Fiesta Bowl? More likely, the nonprofit scandal of the year was a group effort fueled by a dysfunctional board. The Fiesta Bowl board bears all the hallmarks of a board more interested in administering than governing the organization. Still, there are lessons to be learned from the Fiesta Bowl’s governance and oversight failures.
In light of the heightened interest of the I.R.S., Congress, state regulators, and the media in executive compensation, as well as heightened penalties, exempt organizations should strongly consider increasing the amount of time and attention they devote to investigating, deliberating, documenting, and reporting executive compensation. To facilitate the careful review that is demanded, tax-exempt organizations that employ an executive staff should consider implementing the following practices and procedures:
Trustee compensation is a sensitive topic in the philanthropic world. Many people believe that board members should serve out of a sense of giving back to their community. However, the philanthropic world is diverse and there are many positions that require extraordinary talent and an extraordinary time commitment to lead them. Nonprofit organizations are also increasingly complex and subject to complex rules and that make significant demands on that talent. Increasingly, board members face the potential for liability if they fail to fully adhere to these complex and fast changing rules.
Before 1996, the only option the IRS had when faced with a tax-exempt organization that had violated the private inurement rules was to do nothing or to revoke the organization’s tax-exempt status, a penalty that often punished the organization’s beneficiaries more than the insiders who benefited from the inurement. To cure this problem, Code Section 4958 was added to the Internal Revenue Code in 1996 to provide the IRS with an “intermediate” tool between the extremes of either ignoring the problem or revoking the nonprofit’s tax-exempt status.
To ensure its decisions will stand up to the scrutiny of the media, regulators, and donors, and protect the employee as well as the board from personal liability, nonprofits that employ executive staff should consider implementing practices and procedures that ensure its executive compensation procedures are thorough, well-documented, and free of conflicts of interest.
As evidenced by the recent media coverage of the salaries paid to CEOs of four nonprofits that contract with the government to deliver U.S. foreign aid, nonprofit executive compensation continues to be an area of keen interest for the media and for key members of Congress.