Upper Saddle River, N.J. - May 2004 - The role of the Compensation Committee or Personnel Committee, as it is sometimes referred to, has always been an important part of every Board of Directors. Much of the furor about executive compensation has focused on the decision-making of Boards of public companies. The fall-out has also impacted Not-for-Profits (NFP) as well.
NFP Boards and their key operating committees are typically comprised of qualified, highly motivated individuals, who are dedicated to providing their time and energies to what they deem to be a worthwhile cause. The Compensation and Personnel Committees of those Boards are generally empowered with the responsibility of ensuring that the organization’s pay and benefits are consistent with its business goals, culture, mission and financial capabilities, while maximizing the use of monetary resources to provide competitive and motivating programs.
Due to the highly publicized attention caused by a small group of NFPs in which unethical, and sometimes illegal practices and lapses of proper governance have taken place, NFP Boards and their Compensation Committees are being subjected to much greater scrutiny, criticism, and, in some cases, legal action. The result has been that, during the last few years, stringent rules and regulations have been levied on the Board’s activities pertaining to compensation matters. Internal Revenue Code §4958, also known as the Intermediate Sanctions Act, addresses the level of independence of Board members and establishes guidelines relative to the amount of compensation that can be paid to an executive, as well as requiring transparency in the decision-making process. Similarly, there appears to be a pronounced increase by States to audit the activities of NFPs, and to question compensation arrangements, using the courts and various regulatory funding and grant approval methods to “correct” pay-related issues they warrant as not meeting their standards.
It has also been strongly suggested that the Sarbanes Oxley Act, which was enacted by Congress to place major regulatory requirements on publicly-traded companies, be expanded to cover NFPs. This would have a serious impact on the way Boards currently operate. In the wake of a decision on inclusion of NFPs under the Sarbanes Oxley Act, many NFPs are doing the legwork to move toward compliance, in order to avoid being targeted by regulatory agencies in the future.
In taking the necessary steps to develop and/or review a compensation program, organizations are advised to lay the groundwork for establishing a competitive compensation package for their executives by collecting data from comparable organizations and reviewing the “best practices” within their industry. Knowing what the compensation trends are, contributes to allowing an organization to make well-informed decisions about pay issues. Using the research data as a basis, consideration should also be given to any unique attributes, education and/or experience the individual brings to the position. Board approval of compensation packages and any other compensation-related decisions should be memorialized by proper documentation. Many times, this is the key to a successful outcome of an investigation.
In taking the above steps to ensure competitive compensation levels are paid to executives within the confines of regulatory guidelines, organizations are also exhibiting a commitment to using their resources efficiently, with a view to securing executive talent which will contribute to the growth and development of the organization. The time and financial investment made by organizations to ensure competitive, reasonable, defensible compensation for their executives, may serve as a pillar upon which the future of their organizations rest.
