When a former top executive for New York University (NYU) nominated for Treasury Secretary was questioned at his confirmation hearing about his compensation (in particular, his parting bonus) and subsidized mortgages, Senator Chuck Grassley raised concerns that these payments by a nonprofit were inappropriate, considering its exemption from income and property taxes. According to a recent New York Times article, Grassley asked for more details and, several months later, has not received the detailed information he is seeking from NYU.
Questioning compensation at nonprofit universities is not new. As a member of the Senate Finance Committee, Grassley was instrumental in setting up a Commission with representatives from the nonprofit sector to examine executive compensation, among other issues. After two years of deliberations, findings were published in December 2012 (see Enhancing Accountability for the Religious and Broader Nonprofit Sector). No recommendations for new laws and regulations (with the exception of some possible guidance on when to use for-profit comparable data) were included. However, nonprofits were told that they should make use of relevant data in their compensation deliberations. Donors and funders were also told to review compensation levels and the process for setting them before committing their funds. In addition, the IRS was encouraged to step up its compliance efforts.
The IRS has also been interested in compensation at universities and recently finished some research that began with questionnaires in 2008 (see the final report from May 2013). Among the 34 private colleges that were audited, nearly 20 percent failed to follow tax rules requiring them to compare the compensation of their top employees to that of similar officials at appropriate peer institutions. Most colleges attempted to conduct such comparisons, the report says, but they relied on figures from the wrong kind of institution or did not consider whether the salary comparison included other kinds of compensation.
And therein lies the problem – the information of most interest to Grassley and, perhaps, for those seeking data for comparisons, is not public information required to be included on Form 990. While Grassley is calling for more detailed information, NYU is providing high-level aggregated data (for example, the total number and size of loans that NYU has made to faculty members and executives, but no breakout of individual loans). NYU says such arrangements are necessary to attract and retain executives and professors, and that providing information about individual loans beyond what is legally required could have an adverse impact on those involved. Currently, there seems to be an impasse, with Grassley saying that he is being stonewalled, and NYU saying that they are cooperating and providing as much detail as possible.
Whatever the outcome, those responsible for setting executive salaries for universities – and for all nonprofits – should be aware that those salaries will be reviewed for reasonableness. ERI’s Nonprofit Comparables Assessor remains the most flexible and comprehensive software to create the comparable data needed to establish what is reasonable – and it is the tool also used by the IRS to evaluate nonprofit compensation levels. A free demonstration version is available for download.