Part 1 - Big Opportunity for Non-Profits: The Issue of Executive Pay

This blog post follows the previous "INTRODUCTION", whereby it is suggested that Non-Profit Organizations can distinguish themselves and gain a competitive fundraising advantage from their peers by proactively complying with the key issues of the Sarbanes-Oxley Act (SOX) to demonstrate organizational excellence.

While SOX does not (yet) apply to the Non-Profit Sector, the IRS has taken an aggressive position (in keeping with recommendations from the U.S. Senate Finance Committee - please see the "Introduction" post below) by enacting changes to its Form 990 (the annual filing by all Non-Profits) regulations.

Readers should remember that the IRS is tasked with (a) 'collecting taxes' from individuals, corporations, and other for-profit entities; but, (b) it is also tasked with 'regulating' the non-profit sector (in keeping with the determination issued by the IRS that the organization serves a charitable purpose and is, therefore, exempt from taxation).

Important point: as a Non-Profit, your regulatory agency is the IRS. (Remember that your grant applications require a copy of your 'IRS Determination Letter'?) And, most states now have non-profit regulatory requirements and annual filings as well.

Enough background.

On to the topic of this blog post: Executive Compensation.

In addition to being the #1 issue identified by Senate Finance, the determination of Executive Compensation for Non-Profits has previously required analysis, comparison, and justification for the pay rates and benefits of top executives (and independent contractors). As with most IRS compliance issues, documentation is advised.

So, can your non-profit organization justify its executive pay with studies, comparisons, and peer-benchmarking? Is that justification on file and ready for inspection?

If your organization does not have proper compensation documentation, it is already at risk, and will be at further risk with the implementation of the revised Form 990 requirements for Fiscal Year 2008 being filed in calendar year 2009.

Is the IRS 'boogey man' out to get your organization? Not at all. Provided you are in compliance. Or, as suggested by our organization (CGEA) you become proactive, document your compliance, or (better still) exceed both current and future compliance regulations. This approach will ensure you have (1) nothing to fear; and, importantly, (2) an opportunity for 'competitive advantage' in fundraising by demonstrating to donors that the Governance, Ethics, and Accountability regulations are of fundamental importance to the operation of your organization.

Remember, the point is to be proactive -- to go the extra mile -- to take seriously and truly demonstrate your understanding of the responsibility that comes with your charitable status as a non-profit.

Is the issue of Executive Compensation a problem? It does not have to be! Actually, it's quite an opportunity; especially for small non-profits, where compliance can be easily achieved if you take the time to do your homework.

Regulatory compliance offers a competitive advantage that is well worth your investment of time and energy. And, this is an opportunity for the Non-Profit Sector to demonstrate leadership in the aftermath of numerous scandals that have led to increased regulation in the for-profit, government, and non-profit sectors.

Please don't miss this opportunity.


NEXT: the challenges of 'non-compliant activities' will be explored...