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IRS Issues Training Tools for Completing New 990

In a very forward-thinking move, the IRS has issued a set of training materials for completing the new Form 990, including a case study and a series of videos. We applaud this initiative as there is no such thing as too much information when it comes to dealing with the new form. Recently, we did some research for a client on where to report particular items such as split dollar insurance and 457(f) plan contributions; in doing so, we discovered that even the very extensive matrix in the 990 instructions (see page 25) doesn't cover everything but we received excellent service from the group at the IRS responsible for the Form 990 instructions. The IRS indicated to us that the instructions are necessarily a work in progress and will be improved and enhanced over time based on user feedback.

Biggest hospitals in Mass. face labor suits - The Boston Globe

Biggest hospitals in Mass. face labor suits: The Boston Globe reported today that a Rochester, NY law firm says it has signed up about 500 hourly employees for a suit against 5 of Massachusetts' largest hospital chains, alleging that the workers, who are not paid for 30 minute lunch breaks, are being expected to work for at least part of those breaks. The article notes that despite the small amount of time involved on a per-employee per-day basis, the total unpaid compensations claims could be in the tens of millions.
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Are NonProfit Salaries Too High - or Too Low?

While the Massachusetts Attorney General is questioning the entire process by which nonprofit executive compensation is set under the IRS Intermediate Sanctions rules, Dan Pallotta, in his blog at Harvard Business Publishing, argues that there is a "culture of martyrdom" around nonprofit salaries that may work against getting the best talent, and calls for "open[ing] the gates of financial incentive" at nonprofits so that data can be obtained on how this would affect the "quality of talent" of nonprofit leadership and workers. Thought-provoking whether or not one agrees.

Massachusetts Attorney General Office Announces Major New Initiatives on NonProfit Healthcare Executive Compensation

The Massachusetts Attorney General's office has announced a very significant increase in its oversight of the compensation of executives and directors of healthcare organizations. Read the press release here and the full memo here. Among the important points are:

* The AG will move from annual "after the fact" data collection to "broader, more timely and proactive examination of executive compensation on an organization and industry-wide basis."

* Echoing concerns recently expressed by certain officials of the IRS (see our earlier posts on this subject), the AG suggests that the focus of the IRS Intermediate Sanctions rules on using "comparables" for setting executive compensation may lead to boards regularly setting their own organization's executives pay to be above average - i.e. what is "comparable" may not be "reasonable."

* The AG intends to institute new reporting requirements to create standardization in format, methodology and timing, to facilitate comparison among organizations and between hospitals and health insurance companies, with the goal of being able to analyze the healthcare industry in Massachusetts as a whole.

* The AG noted that 2 major organizations compensate their directors; and referring to Principles for Good Governance of charities issued by the Panel on the Nonprofit Sector, indicated that the AG would be looking into the rationale for this compensation.

The AG is starting its review with Blue Cross, Harvard Pilgrim, Fallon and Tufts, but clearly intends to expand its scope, and the new reporting requirements will apply accross the board. We'll keep you posted as the AG's office releases new information.

University Presidents' Housing in the Spotlight

We continue to remark on how press reports of nonprofit CEO compensation can focus on the sensational. Any prominent nonprofit should be prepared for at least local press coverage of its CEO's compensation when its 990 is filed. A recent variation is a story in the Boston Globe about the housing for Boston-area university presidents; the web version of the story comes complete with a slide show of the various houses and estimates of their market value. Lost in the fine print, or not covered at all, are some key issues: The university, not the President, owns the house, and while some money might be raised by selling the house, this is hardly the best market for that. Second, as the story acknowledges, the Presidents have significant social obligations best met in a home setting, not a conference room. And third, until the recent downturn in the housing market (which in some regions, including Boston, seems to have only a limited effect on the value of high-end houses), living in employer-provided housing could have some negative effects, because it meant the President was not participating in the run-up in real-esate prices, making it much harder to buy a new house when done with the presidency post.

Associations and Anti-Trust Perils

The FTC's action against a major trade association serves as a reminder of the perils of exchanges of information among members of associations. The FTC announced a consent order regarding the National Association of Music Merchants (NAMM) due to discussions of pricing policies that took place at NAMM meetings. In its announcement, the FTC noticed that associations "may find it appropriate to update and bolster their antitrust compliance practices and, in particular, ensure that any meetings at which sensitive discussions are discussed are properly planned and monitored." Since the FTC and the Justice Department have issued detailed guidelines about the conducting of salary surveys because of the potential for exchange of competitive information, the FTC's concerns about the exchange of pricing information at association meetings should apply equally strongly to compensation information.

The Press and Hospital CEO Compensation

In our June 30, 2009 post, we noted that key people at the IRS were suggesting that nonprofit hospital CEO compensation was too high, even though the hospitals were following the IRS's own rules for setting compensation. And we noted in our July 1 post that every year, press reports appear reviewing hospital Form 990s and suggesting that the reported hospital CEO compensation is somehow out of line for running a charity. A concise review of the press coverage issue was recently posted at Nonprofit Law Blog, and astutely sums up the recurring issues with press coverage. Once again, this points up that part of the job of the compensation committee must be preparing for and dealing with press coverage.

409A and a Chance to Fix Noncompliance

There's an interesting article in LocalTechWire about Section 409A of Internal Revenue Code, which imposes detailed requirements - and serious penalities for noncompliance - on deferred compensation plans. Section 409A applies to many forms of compensation that aren't always thought of as "deferred" and so holds many traps. The effective date of the section was delayed for several years due to the complexity of the issues involved (the final IRS regulations run more than 300 pages). The article notes that proposed IRS regulations may offer some relief from errors in documents implementing the plans.

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Tough News for Wage Earners

Writing in today's Wall Street Journal, Mort Zuckerman, Chairman of U.S. News and World Report, notes that "[t]he average work week for rank-and-file employees in the private sector, roughly 80% of the work force, slipped to 33 hours. That's 48 minutes a week less than before the recession began, the lowest level since the government began tracking such data 45 years ago. Full-time workers are being downgraded to part time as businesses slash labor costs to remain above water, and factories are operating at only 65% of capacity." He goes on to say that “[t]he average worker saw no wage gains in June, with average compensation running flat at $18.53 an hour.”

Looking Out for the "Rank and File"

With all the focus on executive compensation (which we've addressed in our recent posts), the Blue Avocado blog has some interesting thoughts on the problems of the low wage workers at nonprofits, and what can be done when there isn't money available for meaningful salary increases.

No Surprises Here: Surveys Show Gender Gap in Non-Profit CEO Compensation

The NonProfit Law Prof blog (see Our Blog List on the right side of the screen) calls attention to a recent survey of nonprofit groups in Central Florida that shows a pay gap of around 30% between male and female nonprofit CEOs. This appears in line with a recent nationwide study by Guidestar. An article on the subject in the Chronicle of Philanthropy suggests that at least part of the reason for the difference is that men tend to lead larger organizations - but that a discrepancy exists even among organizations of similar sizes.

IRS Critiques Hospital CEO Compensation - Colleges and Universities Next?

In our post on June 30, 2009, we discussed how the IRS seemed to be taking the position that the executive compensation levels found in its recent study of nonprofit hospitals were set in accordance with law and regulation but were still too high, a view that seemed to reflect the Service's take on public opinion about executive compensation generally. Will colleges and universities be next? Keep in mind that in February, the IRS completed collecting questionnaires from schools for its Colleges and Universities Compliance Project, and that these questionnaires asked for extensive details of executive compensation. We'll be waiting to see the report on this project, but also watching for speeches and articles by IRS officials on the subject which, if the nonprofit hospital project is any indication, may be issued before the formal report.

Competing Views on Compensation - Do you/should you sacrifice to work for a non-profit?

No question that the furor over bonuses and high salaries on Wall Street is creating attention for the subject in the nonprofit world - without any clear reason for it. Over at the blog Createquity, Ian David Moss, a recent Yale B-school grad, has some interesting posts about compensation in non-profits. As we see it, he may have gone overboard with what seems to be a suggestion that the fix for excessive salaries (a problem which will be news to the executives of many non-profits) is that all organizations should unite to offer lower salaries. Indeed, to pick one example, having been deeply involved with hospital CEO compensation for many years, we’d argue that these are some of the world’s hardest jobs, juggling limited resources, community and local political demands, and criticism from the press and politicians each year when the Form 990 reveals the CEO’s compensation which someone will claim is too much for a “charity.” But Ian is generating some interesting discussions, and so we’ve listed his blog in our Blog List on the right hand column of this page.

And for a contrary view, also check out Dan Pallotta’s post at Harvard Publishing where he argues that “charity” shouldn't mean “deprivation” for those who work for charities, and that people should be compensated for the value they produce - and must be, by any organization that wants the best person for the job.

IRS to Hospital Executives and Boards: You're doing what we told you to do, but we're not sure we're happy

As we noted on our website, in February 2009, the IRS released the Final Report on its Non-Profit Hospital Study. The study, and the bulk of the report, focused on the "community benefit" provided by the hospitals, but also addressed executive compensation, through questions on a questionnaire sent to over 500 hospitals and a more detailed examination of the executive compensation practices of 20 hospitals.

And this is where it gets interesting: The "Intermediate Sanctions" process, which imposes penalties for excess executive compensation (on both the executive and the board) is something for which the IRS sought legal authority from Congress back in the 1990s, to give it an enforcement tool less drastic than revoking an organization's tax exemption. As many if not most of our readers know, the IRS regulations for Intermediate Sanctions enable the hospital or other non-profit to establish a "safe harbor" (called the "rebuttable presumption" in the regs) by following certain procedures: an independent governing body, use of appropriate comparability data, and proper documentation of the compensation decision.

And what did the IRS study find? According the Executive Summary, "nearly all" the compensation amounts examined were established in accordance with the rebuttable presumption regs and were "within the range of reasonable compensation."

But is the IRS satisfied? Apparently not, and perhaps this means that the extensive adverse publicity regarding executive compensation in areas of the economy far removed from non-profit hospitals (and, we should add, involving pay levels far beyond those of hospital CEOs) is making itself felt in the IRS Exempt Organizations section. The Executive Summary's acknowledgement of general compliance by the examined hospitals is grudgingly prefaced "[A]lthough many of the compensation amounts reported may appear high to some . . ." (and who are those "some"?). But more revealing is a talk given in January, before the Report was issued, by Steven Miller, the IRS Commissioner for Tax Exempt and Governing Entities. Commissioner Miller, too, acknowledges that the study found general compliance with the IRS regulations for setting executive compensation, but he, too, says that the unidentified "some" will think the compensation of top management is high - and not just "may" but "will." One paragraph later, he focuses on the 20 hospitals selected for detailed examination in the study and while again acknowledging their executive compensation was reasonable "under the current standard," and "permissible under current law,"he then says "but (it) was pretty high" and "I wonder how it will be perceived in the court of public opinion." We've added the italics because this says to us that a very key person at the IRS is looking at public opinion on executive compensation on nonprofit hospitals - as he reads that public opinion - and not only looking at it, but saying he agrees with it, and that the "current" rules may not be with us forever.

Incidentally, the report contains many interesting statistics about hospitals' executive compensation practices, including such issues as who sets the compensation (the board, a compensation committee, etc.) , and the tools used (such as compensation consultants, published surveys, and internet research). In particular, the Executive Summary of the Report notes the "widespread use" of compensation consultants and comparability data in setting executive compensation. Perhaps not surprisingly, the sophistication and detail of the process tended to increase with revenue size.

Launch

Hello - we're launching this blog to follow up on the total revamping of the Lawrence Associates website. We'll keep you posted on important new developments in the compensation field, with particular emphasis on government regulation (IRS, Congress, state legislatures and state Attorneys General) and non-profits. From time to time, we'll also let you know about interesting projects we've worked on.