setting compensation of church and nonprofit … setting...2014/04/03 · email questions to...

Setting Compensation of

Church and Nonprofit Leaders

with Integrity

April 3, 2014 – ECFA.org

© ECFA 2014. All rights reserved.

Email questions to [email protected]

Today’s Presenters

Michael E. Batts,

President

Batts Morrison Wales & Lee

Dan Busby,

President

ECFA


“The higher a person is in a church or a

ministry, the greater the compensation-

setting challenge.”

…..Dan Busby

Axiom

Best Practices for Church & Ministry

Leaders Compensation

Setting

Michael BattsBatts Morrison Wales & Lee


Key points in executive compensation-setting

• Compensation philosophy

• Ensuring that your executives are paid

commensurately with your compensation

philosophy

• Ensuring that compensation is reasonable

• Documenting the basis for concluding the

above

5


Key points in executive compensation-setting

• Ensuring that the process is appropriate

and sound

• Complying with federal tax law

• Availing your organization’s leaders of

certain protections in federal tax law

• Complying with ECFA Standard #6

6


• An excess benefit transaction is a

transaction between a 501(c)(3) public

charity and a “disqualified person” (DP) in

which the charity transfers something of

value to the DP and does not receive

something of at least equal value in

exchange.

Federal tax law key concept – “excess benefit transactions”

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• A “disqualified person” (DP) is generally a

person who is in a position to exercise

substantial influence over the affairs of a

tax-exempt organization. The term also

encompasses certain parties and entities

related to a DP.

• Application to compensation –

compensation above that which is

“reasonable” paid to a DP is an excess

benefit transaction.


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• For purposes of federal tax law,

“reasonable compensation” is the amount

that would ordinarily be paid for like

services by like organizations under like

circumstances.

• Also, for purposes of assessing the

reasonableness of compensation, all forms

of compensation and benefits (both taxable

and nontaxable) are considered.


9


• Penalties for excess benefit transactions

1st Tier – 25% plus correction on the receiving

party

2nd Tier – 200% on the receiving party

Penalty on “managers” who knowingly approve

an EBT – 10%, up to $20,000 per transaction

• Application to related party transactions –

same rules apply


10


• Congress created an opportunity for

organizations to create a “rebuttable

presumption” that a compensation

arrangement or related party transaction is

reasonable.

• Stated that if certain criteria are met,

penalties could only be applied if the IRS

develops sufficient data to overcome the

presumption.

The “rebuttable presumption of reasonableness” under federal tax law

11


• Congress instructed the Treasury Department

to create Regulations with specific guidance

• The Regulations state that the presumption is

established if the following criteria are met:

The compensation arrangement or

transaction must be approved in advance

by an authorized body of the organization

composed entirely of individuals who do not

have a conflict of interest with respect to

the arrangement.


12


The authorized body must obtain and

rely upon appropriate data as to

comparability prior to making its

determination.

The authorized body must adequately

document the basis for its determination

concurrently with making it.


13


Key concepts:

– Approved in advance

– Authorized body

– Composed entirely of individuals with no

conflict of interest

– Appropriate data as to comparability

– Prior to making determination

– Adequately document basis for

determination

– Concurrently with making it


14


See the Regulations for important and

official guidance in applying these

concepts.


15

ECFA’s New Compensation-

Setting Standard & Conflicts of

Interest

Dan BusbyECFA


• Outgrowth of Commission’s recommendations

• Addresses two key elements

Compensation-setting practices for an

organization’s top leader

Related-party transactions

• Effective January 1, 2014

New ECFA Standard 6

17


Every organization shall set compensation of its

top leader and address related-party transactions

in a manner that demonstrates integrity and

propriety in conformity with ECFA's Policy for

Excellence in Compensation-Setting and

Related-Party Transactions.

Standard 6 – Compensation and Related-Party Transactions

18


1. Full board annually approve

Top leaders total compensation

Board notified annually of compensation

package of any member of the top leader’s

family employed by the organization

Compensation Setting

19


Required for establishing the compensation of the

top leader for any year in which the organization

provides total compensation to the top leader of

$150,000 or more

(includes salary, wages, other payments for

services, and benefits of all types, whether

taxable or non-taxable, whether paid directly or

indirectly by the organization or one or more of its

subsidiaries or affiliates)


20


Groups included in the compensation-setting decision may

not have any conflict of interest in the decision, whether

direct or indirect. No person may:

• be related to the person whose compensation is

being addressed,

• be subordinate to the person whose compensation

is being set,

• be a person whose compensation is determined in

a manner that involves input or decision-making by

the person whose compensation is being set, or

• otherwise have a conflict of interest.


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2. The board or committee shall obtain reliable comparability

data with respect to the position for which compensation is

being set. Such comparability data shall be for functionally

comparable positions, and shall be for organizations as

similar as possible to the organization and shall be updated

at least every five years.

3. The board or committee shall determine appropriate total

compensation, taking into consideration the comparability

data referred to above, as well as the skills, talents,

education, experience, performance, and knowledge of the

person whose compensation is being set.


22


4. The board or committee shall contemporaneously

document its action regarding total compensation

and, if applicable, its rationale for establishing

compensation at a level that exceeds that which is

supported by the comparability data.

5. If the process described in steps 1–5 above is not

conducted by the full board, the full board shall

affirm, ratify, or otherwise approve the total

compensation package.


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The board of every organization shall properly

address related-party transactions pursuant to a

sound conflicts-of-interest policy. An organization may

not enter into a business transaction with a person or

entity that meets the definition of a “disqualified

person” under federal tax law applicable to public

charities unless the organization takes affirmative

steps in advance:

Conflict of Interest Sample Policies:

http://www.ecfa.org/Content/Conflict-of-Interest-Samples

Related-Party Transactions

24

http://www.ecfa.org/Content/Conflict-of-Interest-Samples


1. All parties with a conflict of interest (direct or

indirect) are excluded from the discussion and

vote;

2. The organization obtains reliable comparability

information from appropriate independent sources

such as competitive bids, independent appraisals,

or independent expert opinions;


25


3. The organization’s board determines that the

transaction is in the best interest of the

organization; and

4. The organization contemporaneously documents

the elements described above, as well as the

board’s approval of the transaction.


26


• What is the significance of the $150,000

compensation threshold?

• Related-party transactions referenced in the

standard applies to all members regardless of

size

Review

27


• Review your compensation-setting and

related-party transaction policies and

procedures

• Refine them as appropriate

• Model integrity in these areas especially in

relation to the independence of those involved

in the decision-making process

Next Steps

28


• 2014-2015 Compensation Handbook for Church Staff by

Richard Hammar (http://store.churchlawtodaystore.com/)

• Leadership Network Salary

Report (http://leadnet.org/salary/)

• MinistryPay.com—The Church Salary Survey of NACBA

(http://www.ministrypay.com/web/survey)

• Compensation Survey Report from CLA

(http://www.christianleadershipalliance.org/resources/comp

ensation-survey-report)

• ECFA Nonprofit Compensation Data:

http://www.ecfa.org/Content/SalaryIntro

Church and Nonprofit Compensation Survey Resources

29

http://store.churchlawtodaystore.com/

http://leadnet.org/salary/

http://www.ministrypay.com/web/survey

http://www.christianleadershipalliance.org/resources/compensation-survey-report

http://www.ecfa.org/Content/SalaryIntro

Q & A Time!

Dan BusbyECFA


Michael BattsBatts Morrison Wales & Lee

Enhancing Trust Email questions to [email protected]


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