There are Two Paths
IRC § 4958 sets a framework for corporate governance. It establishes a "rebuttable presumption" where the burden of proof is shifted. This consists of a simple 1, 2, 3 set of board level steps: advanced planning, fact finding, and documentation. The 2nd step includes using survey data "compiled by independent firms. In such cases, IRC § 4958 excise taxes can be imposed only if the IRS develops sufficient contrary evidence to rebut ... "
The second path provides additional protections for organization managers who may not have benefited from any excess benefit but where a certified and "reasoned written opinion" by a lawyer, CPA, or valuation expert (compensation consultant) provides personal joint and several liability protection; see Notes for Attorneys and CPAs.
And Two Rest Areas
"For organizations with annual gross receipts of less than $1 million reviewing compensation arrangements, the authorized body will be considered to have appropriate data as to comparability if it has data on compensation paid by three comparable organizations in the same or similar communities for similar services." See Salary Expert's Preliminary Executive Compensation Reports where twelve comparable entities are identified (allowing an organization to easily select the three best comparables).
For larger organizations "good data may not be sufficient" if an authorized body (compensation committee) is shown as unable to understand the recommendations or plans. See the ERI Distance Learning Center's Compensation Committee Certificate.
The Board Path – Independent Data
The IRS Tax-Exempt and Government Entities Division recently purchased 30 annual subscriptions of ERI's Executive Compensation Assessor® software/database, joining the New York State Attorney General's Charities Bureau and thousands of other subscribers. ERI is optically reading 2,000,000 publicly available Form 990s/PFs/EZs and creating an evergreen salary survey. The Assessor Seriesï¿½ have been used since 1989 in Federal Tax Courts to research publicly traded and privately-held executive compensation (electronically reading US SEC proxies, 10-Ks and UK/EU annual reports). This is important because Intermediate Sanctions allow for the creation of a "rebuttable presumption" using data from both taxable and tax-exempt organizations, easily and quickly accomplished via ERI's Nonprofit Salary Survey Assessor™ software. These patented applications also allow for the retrieval of the original source material. Click on a graphic dot and retrieve any one of millions of filed reports, 1994 - present.
An Organization Manager's Path
Silence now costs. Personal liability for organization managers who observe unreasonable executive pay in silence is something new. IRS fines for executives and their managers, rather than an organization, are new. IRC § 4958's definition of "reasonable compensation" is new. Professional firms admitting to "inaccuracies" and "omissions"* forever captures the conflict of interest between the provision of consulting and legal, accounting or insurance services. IRS protection for managers who seek written reasonableness opinions (from an independent, non-service provider) is new, as is the shifting of the burden of proof in a "rebuttable presumption" with survey data "compiled by independent firms." ERI and Salary Expert provide compensation training, reports, and software to support the services of independent compensation consulting firms.
Ask these Questions – While There is Time to Take Both Paths
"Good data is not enough; will our Board be shown as competent?" "A rebuttable presumption calls for a 1, 2, 3 sequence of planning, fact, and documentation in Board minutes; does evidence of "fact" exist in ours?" "Are our managers protected by a written reasonableness opinion, or are they personally jointly and severally liable in any future excess benefit conflict?" If the readers' tax advisor or counsel is unaware of this new Tax Code, an end result of the negative publicity surrounding executive compensation, please auto email them this page's link. Ask them to review the Notes for Attorneys and CPAs. It may be only a matter of time before the logic of IRC § 4958 and Sarbanes-Oxley applies to all US organizations: privately-held, publicly-traded, not-for-profit and nonprofit. California and New York are already making it a states' issue of "just and reasonable" executive compensation. Even the lowest paying organization needs documentation, as it shifts the burden of proof. Silence costs. Inaction costs.
But good corporate governance is inexpensive; find solutions here.