Even if the IRS doesn’t think nonprofit executives are paid too much, New York State has a strong opinion on what they should be paid if they are receiving state funds. In May 2012, Governor Cuomo issued an Executive Order capping the amount that New York State will pay nonprofit executives at $199,000. In January, after some revisions and clarifications, the Executive Order was signed and is now scheduled to take effect on April 1, 2013 (read more here).
In addition to the salary cap, there is also a requirement that at least 75 percent of every public dollar go to services and not to administration, a figure that will go up to 85 percent by 2015 (see The New York Times for more details and the entire text here).
A summary of the regulatory requirements follow:
- State funds cannot be used to pay a nonprofit executive any amount of compensation in excess of $199,000 (this cap will be reviewed annually).
- Alternative funding sources can be used to pay an executive more than $199,000, but the additional amount must be justified by following these steps:
- Providing evidence that the pay level is at the 75th percentile or less of compensation according to a compensation survey “identified, provided, or recognized by the applicable State funding source(s),” and
- Setting compensation based on appropriate comparable data and approved by the Board (or equivalent body) that includes two independent members.
Which Nonprofits Should Be Concerned?
An organization is covered by the Executive Order if it meets the following criteria:
- Received more than $500,000 in state funds, averaged over the prior two years, and
- Received at least 30% of its prior year funding from in-state revenues (defined as state funds, state-authorized payments, payments authorized by county and local governments, and revenues derived from or in connection with activities inside New York State, including contributions by out-of-state individuals or entities for in-state activities.
A “Covered Executive” is any director, trustee, managing partner, or officer of a nonprofit and any employee with compensation of $199,000 or more. Also covered are executives of related organizations that conduct administrative or program services for the nonprofit.
The cap applies to “total compensation,” defined as any reportable payments (salary, bonus, etc.) or benefits (direct or indirect). There are two exclusions: (1) the value of any benefits that are provided to all employees and (2) any compensation paid for an executive providing program services outside of managerial/policy-making duties.
Waivers allowing higher payments may be available but they are limited to the one reporting period and require approval from the NYS funding source. That approval is based on the nonprofit’s use of comparable data and an acceptable process for setting the compensation level.
Nonprofits that do not provide the appropriate justifications for any additional amount risk losing their state funding if they pay executives more than $199.000.
Pay More — IF
A covered organization can still pay above the $199,000 cap, without applying for a waiver and with non-State sources, only if the following requirements are met:
- The compensation is below the 75th percentile for executives of comparable providers of the same size and in the same sector and geographic area, as established by a recognized compensation survey;
- Compensation is approved by the provider’s board of directors or governing body, including at least two independent directors, relying on comparability data; and
- The above requirements are substantiated with sufficiently detailed contemporaneous documentation.
The documentation required by New York State appears similar to what the IRS requires for salary determination, obviously what nonprofits should be doing already. ERI’s Nonprofit Compensation Assessor, already used by the IRS and NYS’s Charity Bureau, can provide the data and analysis for the required justification.