What is a Compensation Study?
A compensation study uses internal and external data to determine whether an employee is fairly compensated for the work they are performing.
To comply with IRS regulations that a nonprofit corporation pays only reasonable compensation, an arm’s length relationship between the governing body of the organization and the organizational leader(s) should be in place and supported by having compensation packages reviewed by an independent third-party professional with expertise specific to nonprofit entities.
Importance of a Compensation Study?
It is important the compensation paid to an employee of an organization exempt under Internal Revenue Code Section 501(c)(3) be considered fair and reasonable for services performed by such individual. Any compensation paid to an individual which is not fair and reasonable may be construed to be inurement of benefit or distribution for private benefit, which is specifically prohibited by IRC Section 501(c)(3) and may place the organizations exempt status in jeopardy. Also, under the 1996 intermediate sanctions law, there can be severe penalties for both the organization leaders (and other disqualified persons) and the board members for excess benefits paid.
As with most tax issues, the burden of proof is on the organization to establish that the compensation paid to an employee is reasonable.
We would be honored to assist your organization in determining appropriate compensation packages for its executives and in developing a defensible position should the IRS ever question the “Reasonableness” of compensation paid by the organization.