setting compensation of church and nonprofit … setting...2014/04/03 · email questions to...
TRANSCRIPT
Setting Compensation of
Church and Nonprofit Leaders
with Integrity
April 3, 2014 – ECFA.org
© ECFA 2014. All rights reserved.
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Today’s Presenters
Michael E. Batts,
President
Batts Morrison Wales & Lee
Dan Busby,
President
ECFA
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“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
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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
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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
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• 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”
7
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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.
Federal tax law key concept – “excess benefit transactions”
8
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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.
Federal tax law key concept – “excess benefit transactions”
9
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• 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
Federal tax law key concept – “excess benefit transactions”
10
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• 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
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• 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.
The “rebuttable presumption of reasonableness” under federal tax law
12
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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.
The “rebuttable presumption of reasonableness” under federal tax law
13
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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
The “rebuttable presumption of reasonableness” under federal tax law
14
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See the Regulations for important and
official guidance in applying these
concepts.
The “rebuttable presumption of reasonableness” under federal tax law
15
ECFA’s New Compensation-
Setting Standard & Conflicts of
Interest
Dan BusbyECFA
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• 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
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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
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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
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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)
Compensation Setting
20
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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.
Compensation Setting
21
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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.
Compensation Setting
22
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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.
Compensation Setting
23
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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
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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;
Related-Party Transactions
25
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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.
Related-Party Transactions
26
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• 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
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• 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
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• 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
Q & A Time!
Dan BusbyECFA
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Michael BattsBatts Morrison Wales & Lee
Enhancing Trust Email questions to [email protected]
Enhancing Trust Email questions to [email protected]
Order at ECFA.org/ECFAPress.aspx
Enhancing Trust Email questions to [email protected]
Watch for the release of this new resource in 2014!
Enhancing Trust Email questions to [email protected]
Order at ECFA.org/surveys
Enhancing Trust Email questions to [email protected]
Order at ECFA.org/surveys
Enhancing Trust Email questions to [email protected]
Order at ECFA.org/ECFAPress.aspx
Enhancing Trust Email questions to [email protected]
Order at ECFA.org/ECFAPress.aspx
Enhancing Trust Email questions to [email protected]
Order at ECFA.org/ECFAPress.aspx
Enhancing Trust Email questions to [email protected]
Order at ECFA.org/toolbox Or call 800-323-9473
Enhancing Trust Email questions to [email protected]
Enhancing Trust Email questions to [email protected]
Upcoming Webinars
Register today at ECFA.org/Events
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