About two years ago, Senator Charles Grassley asked representatives of the nonprofit sector for input on key policy issues related to financial accountability. At first, the focus was on religious groups, but it was later expanded to encompass the broader nonprofit sector. Over the past year, about 80 leaders were involved in the discussion. The final report, Enhancing Accountability for the Religious and Broader Nonprofit Sector, was issued in December 2012.
The questions submitted to the commission included whether the current regulations on determining executive compensation should be changed. An organization can now establish a rebuttable presumption of reasonableness (that is, the burden of proof that the compensation is excessive shifts to the IRS, if this process is followed) if the nonprofit board goes through these steps (after first ensuring that no one making the decision has a conflict of interest):
- Approves the compensation arrangement in advance;
- Collects and uses appropriate comparable data; and
- Adequately documents the basis for the determination at the time of making it.
Some observers now perceive that nonprofit executive compensation is frequently excessive and that current law is ineffective in addressing the problem. It has also been suggested that some organizations abuse the rebuttable presumption protection by using comparability data that is not truly comparable.
To bring some factual data to this discussion, ERI used 2009 Form 990 data from more than 96,000 nonprofits to submit to the Commission members. ERI research reported the following:
- 40% of the organizations filing Forms 990 in 2009 have less than $100,000 in annual revenues, and only about 2% of them have any paid staff at all.
- Organizations with greater than $1 million in annual revenue show greater than 60% with paid staff, but these only account for roughly 14% of all nonprofit organizations.
- The highest paid CEOs — those that are paid more than two standard deviations above the average — represent about half of 1% of all nonprofit organizations.
(Download the complete ERI White Paper, Improved Transparency for Charity Executive Pay.)
The executive compensation section of the Commission’s report extensively references the ERI analysis. With better data on the incidence of high compensation, the final recommendations called for no new laws and regulations (with the exception of some possible guidance on when to use for-profit comparable data), for more nonprofits to use relevant compensation data, for donors and funders to review compensation levels and the process of determining them, and for the IRS to continue its compliance efforts.
ERI’s Nonprofit Comparables Assessor remains the most flexible and comprehensive software available to create the comparable data needed to establish a rebuttable presumption — and it is the tool also used by the IRS to evaluate compensation levels. A free demonstration version is available for download.