Author: ERI

Will the IRS Be Looking at Your Nonprofit in 2012?

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The latest report on the activities and plans for the Exempt Organizations (EO) division of the Tax Exempt and Government Entities of the IRS provides some insight into what’s ahead for nonprofits – good to know if your nonprofit is in a group targeted for some scrutiny. EO Director Lois Lerner outlines accomplishments in Fiscal Year (FY) 2011 and previews plans for FY 2012 in the 12-page report. It is worth reading to get an understanding of EO’s priorities, but below are some highlights.
  • Better Information of Revocation of Tax-Exempt Status for Nonfilers: The Pension Protection Act of 2006 required that almost all tax-exempt organizations file annually with the IRS and that organizations not filing for three consecutive years would have their tax-exempt status revoked. By the end of 2011, almost 400,000 had lost their tax-exempt status. In January 2012, the IRS created Select Check to permit users to more easily determine if an organization is eligible to receive a donation, if a tax status had been revoked, and if a Form 990-N post card had been filed.
  • Tax-Exempt Hospitals and Health Care Insurance Issuers: The IRS is required to review Community Benefit Activities reports now filed by tax-exempt hospitals with their Forms 990. The IRS will not contact the hospitals when their reports are reviewed, but the data will be used for research and compliance purposes and to target areas where further education is needed. Also, a new category for Qualified Nonprofit Health Insurance Issuers (Section 501 c 29) was created in 2011 and filing requirements and procedures will be developed during 2012.
  • Self-Declared Tax-Exempt Organizations: Social welfare organizations (501 c 4s), labor, agricultural, and horticultural groups (501 c 5s), and business leagues (501 c 6s) can declare themselves tax exempt without a determination from the IRS. To ensure that these groups are in compliance with the rules, the IRS will send out a questionnaire this year to a sample selected based on their Form 990 filing information.
  • Form 990-T Issues: If unrelated business activities are reported and no Form 990-T is filed, the IRS will be looking for an explanation. Also, the IRS will refine its risk modeling to better identify the organizations that report significant gross receipts from such activities but declare no tax due.
  • Employment Tax Check: The employment tax returns of 500 organizations will be examined to ensure compliance with reporting and payment of employment taxes. This is the third year of this IRS-wide study aimed at improving auditing and resolution procedures.
What Should a Nonprofit Do?
All nonprofits can take some simple steps to lessen the likelihood of receiving an inquiry from the IRS in the coming year.
  • Make sure that what’s reported in compensation on Form 990 is consistent with what is reported to other federal agencies (Social Security, unemployment compensation, etc.)
  • Set executive compensation levels using comparable data – see ERI’s Nonprofit Comparables Assessor™ & Tax-Exempt Survey to access what you need.
  • File Form 990 completely, accurately, and on time. Make sure the correct form is filed since threshold levels have changed over the past few years.
  • E-file. It is easy and typically inexpensive. But, even more important, it eliminates the possibility of the most common mistakes – the software won’t let you make math errors, forget to attach or complete required schedules, or fail to sign the return. Check out Form 990 Online for easy access to software developed by the National Center for Charitable Statistics at the Urban Institute.

Participation in ERI’s 2012 Compensation Surveys Continues Through March 31st

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ERI Salary Surveys will be collecting data for our 2012 compensation surveys through March 31, 2012.  We conduct more than 100 industry-specific and job function compensation surveys as well as two benefits surveys.  United States industries include manufacturing, retail, construction, and over 20 nonprofit activity areas.  Thirty industry surveys are conducted in Canada as well.  Surveys include approximately 100 benchmark jobs ranging from support staff to executive positions.  These traditional compensation surveys provide up to three survey data sources in one.  In addition to actual survey participant data from the collection period, you also receive two extra sources of data to use for comparison purposes.  Compensation surveys range in price from $489 to $689 and may be purchased on a national or statewide basis.  Visit ERI Salary Surveys for more information or to participate in a survey.  Survey participants receive a complimentary copy of the survey’s executive summary and a 50% discount on the purchase of the full survey results.  Participation in all applicable surveys is welcome.  By participating in our compensation surveys, you not only strengthen the data in the surveys, but also contribute to the quality of our Assessor Series datasets.

ERI Salary Surveys also conducts two benefits surveys, the Health Care Benefits Benchmarking and Benefits in Nonprofit Organizations.  The Health Care Benefits Benchmarking survey focuses on benchmarking employer-provided employee health care benefits.  The report serves as a valuable reference for considering plans, changes, and strategies for effective benefits management.  Data is reported by organization sector, industry group, geographic region, and organization size.  Participation in this survey closed on January 31st, and the report will be available April 2, 2012.  Visit the Health Care Benefits Benchmarking Survey page for more information or to order the survey.

The Benefits in Nonprofit Organizations survey includes information on medical, prescription, and dental costs, but also provides data on life/disability benefits, retirement plan practices, paid leave, and other benefits including executive perquisites in nonprofit organizations.  The data provided in this survey gives nonprofit organizations the tools needed to compare current benefit offerings to those of other nonprofit organizations throughout the United States.  Data is reported by organization scope, activity area, geographic region, and organization size.  Nonprofit organizations still have the opportunity to participate in this survey through March 31st.  Participants receive a complimentary copy of the executive summary and 50% discount on the purchase of the full report.  Visit the Benefits in Nonprofit Organizations Survey page for more information or to participate in the survey.

Are You Paying Attention to Executive Salaries at Your Nonprofit? Should You?

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Yes, you should be interested, regardless of your level of involvement. As a donor, you work hard for your money and you should give it to diligent, effective organizations that use donations wisely. If you are even more involved and serve as a nonprofit board member, you are responsible for the compensation decisions of your organization. What’s more, if you work for a nonprofit, there’s easily accessible salary data to assess your compensation level. The annual report to the IRS – Form 990 – requires detailed reporting of compensation and even documentation of the process used to determine salaries. Check out an organization’s Form 990 at ERI’s Library of Forms 990.

The IRS says nonprofits must pay employees “reasonable compensation.” Penalties for paying more include taxes on the employees who receive “excess” compensation and even the organization managers who approve salaries. In extreme cases, the organization could also lose its tax-exempt status.

So, compensation must be reasonable, but the IRS gives few specific guidelines. The total compensation must be compared with salaries for like services by like enterprises under like circumstances. This analysis must be done for each nonprofit executive.

If certain steps are followed to determine executive salaries, then a “rebuttable presumption” of reasonableness can be created, meaning that the burden of proof for unreasonable compensation falls on the IRS.

These are the steps a nonprofit board should take:

  1. Approval of the compensation package in advance by board members comprised of “disinterested” parties.
  2. Use of comparability data from other organizations (nonprofit and for-profit, if relevant) to set salaries. If the organization has gross receipts of less than $1 million, there should be data from at least three other organizations.
  3. Documentation of the basis for setting the compensation levels.

ERI’s Nonprofit Comparables Assessor (CA) provides detailed information for nonprofits to research if compensation levels are at market level. The CA demonstration version calculates the expected average annual salary for a given job title (Executive Director, CFO, etc.) from a series of user-selected inputs including the types of comparable organizations (adoption services, day care, museum, etc.), the specific size of the organization based on revenue ($1 million, $50 million, $2 billion, etc.), and the data for a specific geographic region (all US or a state). The majority of nonprofits can use this free version of CA to provide the data needed for a rebuttable presumption. The upgraded versions are designed for larger organizations, watchdog groups, and regulators.

Whatever your involvement with charities, salary data and source documentation to make informed decisions regarding nonprofit compensation is available through ERI Economic Research Institute.

New ERI White Paper – Principles of Merit Pay

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Realizing that people respond to rewards isn’t a difficult notion to grasp. Determining how much to reward, to whom, and when, however, are complex decisions organizations contend with to motivate employees and retain high performing individuals in a competitive market. In ERI’s white paper, “Principles of Merit Pay,” Research Manager Lyle Leritz, Ph.D., draws on history, theory, and common practice to outline the basics of a successful merit-based system.

In addition to covering three models of merit pay, Leritz discusses the importance of measuring performance, communicating increases, meeting salary increase budgets, and timing the distribution of performance-related pay.

A full listing of ERI’s free research white papers is available on the left-hand side of our home page.

New ERI White Paper – Evaluating Salary Survey Methodologies

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In “Evaluating Salary Survey Methodologies,” Senior Researcher Jonas Johnson, Ph.D., examines the methodologies behind three sources of salary survey data: surveys from national statistics offices, traditional salary surveys, and salary survey analytics.

“While compensation researchers genuinely work to provide accurate information,” writes Johnson in the report, “there remain inherent strengths and weaknesses to different methods of collecting, interpreting, and reporting data.”

Johnson discusses the pros and cons of each salary data source to help compensation professionals decide which source is right for their needs. Statistical topics covered include level of analysis limitations, range restriction, and regression to the mean.

Be sure to check out ERI Economic Research Institute’s free research white papers via www.erieri.com. Online compensation and benefits courses are available for continuing education credits through ERI Distance Learning Center. Webinars covering salary administration, executive compensation, and relocation planning are also offered on a regular basis.

ERI in the News — Executive Compensation

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Check out Trade Show Executive’s recent article “What’s in Your Wallet?,” by Danica Tormohlen, Contributing Editor. Tormohlen contacted ERI for compensation research and insight while compiling a special report on compensation trends for trade show executives.

Visit ERI’s News Room for more press mentions, recent press releases, and quarterly newsletters, as well as contact information for media inquiries.

Executive Compensation and Deconstructing TSR Metric

Executive Compensation and Deconstructing TSR Metric

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The prevalent use of Total Shareholder Return (TSR) as a payout or vesting trigger for long-term executive compensation elements begs the question, “How is TSR derived?” To do this, let’s start by deconstructing TSR for executive compensation and review how it is calculated:

TSR = ((Stock Price end – Stock Price begin) + Dividends) / Stock Price begin

TSR is essentially “shareholder’s cash flows,” that is, net change in stock price plus the dividends paid during a fixed period and expressed as a percentage change of the beginning stock price for that period. For shareholders, TSR is a measure they are interested in tracking and meaningful metric. Since it is expressed as a percentage change and can easily be indexed with comparable companies, TSR enables shareholders to make industry benchmark comparisons. As the business mantra is to align executives to shareholders interests, companies use TSR metric provide a line of sight for shareholders to evaluate performance.

Now let’s deconstruct TSR further and look at each component: stock price and dividends. The stock price is typically the key driver of TSR value fluctuations, whereas dividends will typically have little effect since they are relatively “stable.” The main reasons why dividends tend be a more stable part of the calculation are 1) dividend payout patterns are information signaling to the market regarding the long-term prospects of a company and affect the company’s stock price, and 2) companies are not likely to reduce or eliminate dividend payments in an attempt to avoid negative market response. A company could have a negative stock price performance over a certain period yet still generate a positive total shareholder return if dividends paid outweigh the stock price fall (logically possible yet highly unlikely).

Up to this point, it is apparent why many companies use TSR. As investors, shareholders need a “relative” measure to gauge past success of investment choices and TSR does it for them. (Note: TSR is not predictive of future performance.) At this juncture, there is an outstanding nagging issue to the prevalent use of TSR, especially since many companies use it as the single metric for long-term incentive plans. Companies need to consider alignment with the long-term interests not only of shareholders, but also customers and employees. For a more holistic alignment that can potentially result in expanded access to financial markets, customer loyalty, and employee engagement should be combined with TSR as well as other relevant measures that align the long-term interests of customers and employees.

Some obstacles to adding these additional measures may be related to how efficiently and reliably they can be reported. TSR can “easily” be reported and validated by multiple third party sources. Can customer and employee related measures be reported and validated in the same way without disclosing business or trade secrets or perhaps being internally manipulated to a company’s advantage?  Executive compensation pay for performance will continue to garner the attention of diverse constituents, and we can expect new best practices to evolve.  Business practitioners will have to evaluate these developments in terms of relevancy and application to their own organization’s needs.

For more information, analytics, and tools related to executive compensation visit www.erieri.com.

The Debate Over Teacher Pay_Graphic

The Debate Over Teacher Pay – Too High or Too Low?

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As public budgets tighten, the teacher salary debate has recently gotten more heated. While most researchers seem to agree that higher teacher quality translates into improved student performance, does higher pay necessarily bring the best and the brightest to the profession?

A recent London School of Economics blog reported on research by Professors Peter Dolton and Oscar Marcenaro-Gutierrez that compared teacher pay and where it fits in the national income distribution with student achievement in the various OECD countries.  They found that higher teacher pay tends to lead to the desired better student performance and also tends to attract more able graduates into the profession.  When teaching attains a higher standing in a country’s income distribution, the national status of teaching as a profession is enhanced. The end result of this higher pay linked with higher status as a profession tends to be a positive impact on student performance. (Read more)

Meanwhile, in the US, Andrew Biggs and Jason Richwine from the Heritage Foundation found that teachers were overpaid in Assessing the Compensation of Public-School Teachers.  They conclude that public school teacher pay is comparable to the pay of similarly skilled private sector workers, but that more generous fringe benefits for public school teachers, including greater job security, make total compensation 52 percent greater than “fair market” levels.  They claim this is equivalent to more than $120 billion overcharged to taxpayers each year.  They suggest that teacher compensation could therefore be reduced with only minor effects on recruitment and retention. Alternatively, teachers who are more effective at raising student achievement might be hired at comparable cost.

Researchers at the Economic Policy Institute (EPI) were quick to respond.  EPI’s analysis found that average weekly pay of teachers in 2003 was nearly 14% below that of workers with similar education and work experience, a gap only minimally offset by the better nonwage benefits in teaching. In fact, teacher earnings have fallen below that of the average college graduate in recent decades, losing considerable ground during the late 1990s, as earnings of college graduates grew 11% relative to the much lower 0.8% growth in teacher earnings.  See How Does Teacher Pay Compare?  EPI also analyzed the data sources and statistical methods used in the latest Heritage Foundation study and found serious problems with the report and its conclusions (click here for details).

Again, if effective teachers are the most important resource schools have for improving the academic success of their students, reducing teacher pay is not going to have the desired result on student performance!

To add some perspective to this issue, check out Jon Stewart’s opinion on teachers’ pay.

New ERI White Paper – Evaluating Salary Survey Data

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Today’s HR and compensation professionals have a number of options for gathering salary survey data. While traditional salary surveys still exist and maintain their status among useful market-pricing tools, software analytics and Internet sources are changing the process of collecting and distributing pay information.

ERI’s recent white paper, “Evaluating Salary Survey Data,” breaks down various types of salary surveys and provides criteria for evaluating salary data to help you answer the question: “Which sources of salary survey data are right for my organization?”

“Evaluating Salary Survey Data” and other compensation and cost of living white papers can be downloaded via www.erieri.com.

Why Should My Company or Organization Participate in Salary Surveys?

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To start, ERI Salary Surveys participants receive results for half the price. Our numerous industry-specificand job function surveys provide HR and compensation professionals with a wide range of trusted resources for managing pay without breaking the bank. As an added value, those who contribute data also receive a complimentary electronic copy of the Executive Summary once the survey is released.

For Assessor Series subscribers, 2012 ERI Salary Surveys (PDF versions) are free with participation (printing and shipping costs apply to hardcopy requests). There is no limit to the number of surveys in which a subscriber may participate. Our salary surveys give subscribers a permanent copy of ERI pay information with a data date of March 31, 2012, in addition to actual participant data. By participating, subscribers add to the quality of ERI’s employer-provided salary databases, which are reflected in the Assessors you use. Please note: The offer is available to subscribers with valid license codes, and surveys must be accessed through the website via the Platform Library. If you are not already an Assessor Series subscriber, please sign up for a Guided Tour.

Participation in ERI Salary Surveys is easy; for-profit and nonprofit compensation and benefits survey submissions are accepted online, via email through an Excel copy of the questionnaire, or in the old-fashioned paper and pencil format by mail or fax. Data collection continues until March 30, 2012. The 2012 ERI Salary Surveys will be released in August. Results may be purchased on a nationwide or state basis.

New for 2012, ERI Salary Surveys is offering a Physicians Salary Survey for the United States and Canada. This job function survey includes a variety of positions, from toxicologist and pediatrician to psychologist and veterinarian. In total, more than 50 different jobs are included in the Physicians Salary Survey. This is also the first year for open participation in the Aerospace Salary Survey, which documents market-based pay for more than 100 industry-specific benchmark jobs, including executive positions.

Each survey reports employer-provided data derived from survey participants, digitized public records, and ERI Economic Research Institute’s patented online, interactive salary surveys and Assessor Series databases. Salary information for each job title represents actual data points—no attempt is made to alter the data as collected, reported, and graphically displayed other than to normalize collected compensation amounts to a common date.

Not only do you save money by participating in ERI Salary Surveys, your organization’s pay information enhances the validity of the results. For more information or to request participation materials, please email [email protected] or call 1-800-627-3697.