IRS Scrutinizing Not-for-Profit Pay Practices; Board Members, Trustees, Officers and Directors May Face Penalties

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Hay Group identifies 12 questions for not-for-profit management and boards to consider when setting executive compensation and benefit programs.

As the Taxpayer Bill of Rights 2 enters its 10th year, the IRS is expanding its scrutiny of thousands of charities and private foundations to collect information on their compensation practices and procedures. While some not-for-profits have heeded the warning of the IRS and been proactive in ensuring their practices are sound and compliant, many have not, and are exposed to the risk of penalty and bad publicity.

Through its research and extensive work with not-for-profit firms, Hay Group, a global organizational and human resources consulting firm, has found that some charities and tax exempt organizations are unprepared for the level of IRS scrutiny and the extent of work that needs to be done to make sure the compensation practices are appropriate.

“Board members of not-for-profits – just like their for-profit peers – must realize their roles and responsibilities when it comes to executive compensation,” said Adam E. Meyers, Vice President and Director of Hay Group’s Not-for-Profit Practice. “There are a number of key questions that boards and executives must consider when developing these plans or pay potential penalties.”

Key sectors affected by this are hospitals and healthcare systems, educational institutions, community service organizations, and foundations.

Stakeholder Expectations

Fairness is a key consideration when reviewing pay practices and issues regarding executive reward structures. Other issues include insurance, retirement, and deferred compensation.

Boards should be prepared to answer the following questions:

1. Are compensation plans, approval processes, and reporting sufficiently transparent?

2. Is the board governance process on compensation appropriate?

3. Do executive benefit programs conflict with all-employee benefit policies?

4. Are the severance payments appropriate for voluntary and involuntary termination?

5. Are compensation programs tax compliant?

Strategy, Environment, and Operational Performance

“While many not-for-profit organizations want to attract the best talent to their executive ranks and compensate them appropriately, the compensation plan must still be competitive with executives in the relevant peer group,” said Meyers.

Hay Group recommends that these organizations ensure that all elements of the reward structure for their executives are appropriately aligned with their internal and external competitive environments (questions 6-8) as well as with the organization’s operational strategy and performance (questions 9-12).

6. Is the compensation internally equitable?

7. Is it appropriately balanced for both short- and long-term reward and motivation?

8. Is it reflective of the scope of operations?

9. Does the plan encourage and reward ethical and appropriate behaviors?

10. Are goals and rewards tied to significant improvements in key metrics?

11. Are plans comprehensive and comprehensible?

12. Does pay correlate with performance?

Organizations are no different than people when it comes to being contacted by the IRS. As such, boards and executives want to ensure that they are prepared to respond to any such inquiry with confidence. Hay Group has helped a number of not-for-profit organizations, particularly in the healthcare sector, establish reward structures that meet IRS standards, reflect the organization’s philosophy, and are fair to executives and stakeholders alike.

About Hay Group

Hay Group (http://www.haygroup.com) is a global organizational and human resources consulting firm that helps its clients -- Boards, CEOs, Executives, and HR Managers -- on virtually all aspects of their people-related business issues. Founded in 1943, Hay Group has over 2,200 employees working from 78 offices in 77 cities and 43 countries.

Our areas of expertise include:

-- Design and analysis of organizations and jobs;

-- Talent management through assessment, selection, and

development of executives, managers, and teams;

-- Compensation, benefits, and performance management;

-- Executive remuneration and corporate governance; and

-- Employee and customer attitude research.

Hay Group works with nearly three-quarters of FORTUNE’s top-50 Most Admired Companies, as well as many mid-sized and non-profit corporations, public institutions, and governments.

For more information, please contact:

Jeff Meyers, 215-861-2623

Hay Group | The Wanamaker Building | 100 Penn Square East | Philadelphia, PA 19107 USA

This press release was distributed through eMediawire by Human Resources Marketer (HR Marketer: http://www.HRmarketer.com) on behalf of the company listed above.

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Jeffrey Meyers