Do you know what a “rebuttable presumption” is? Can you name the “disqualified persons” in your organization? Do you know why these things are important? If you answered, “No,” to any of these questions, this free webinar is for you. Join GuideStar’s Chuck McLean to find out how to stay compliant with IRS regulations using GuideStar’s annual Nonprofit Compensation Report. The IRS, Congress, and donors are all taking hard looks at what nonprofits pay their leaders. Make sure you can justify your organization’s compensation practices to these important audiences.

1. Decoding the Nonprofit Compensation Mystery: Using
the GuideStar Nonprofit Compensation Report

2. Chuck McLean
VP of Research
Suzanne Coffman
Editorial Director

3. DISCLAIMER
The information provided during this
presentation is not to be considered legal
advice applicable to any particular situation
and organizations needing specific advice and
counsel on these matters should always
consult with knowledgeable counsel.

4. Why do we care about how
compensation is determined?
• Transparency
• Scrutiny
• Fairness

5. From the Form 990
15 Did the process for determiningcompensationofthe following
persons includeareviewand approval byindependentpersons,
comparabilitydata,and contemporaneoussubstantiationofthe
deliberationand decision?
a The organization’s CEO,ExecutiveDirector,or top management
official
b Other officers or key employees ofthe organization 15b
If “Yes”to line 15a or 15b,describetheprocess inScheduleO (see
instructions).

6. Determining appropriate compensation
• Pay must be reasonable, but the IRS never exactly defines
what that is.
• There is no magic formula based on size, location or type of
organization.
• If the IRS ever questions the compensation of individuals at
your organization, the first thing they are going to ask for is
the paperwork documenting the process used to set
compensation.
• If the IRS finds that compensation is not reasonable, the
penalties can range from fines to loss of tax-exempt status.

7. Determining appropriate compensation
Bruce Hopkins, a noted nonprofit law expert, suggests a
number of different considerations go into determining
reasonableness of compensation:
• the compensation at similar nonprofit or for-profit
organizations for similar positions in similar areas
• the individual’s background, education, training,
experience, and responsibilities
• the compensation is approved by an independent board of
directors

8. Determining appropriate compensation
• the size and complexity of the organization’s operations in
terms of revenue, assets, and people
• the individual’s job performance

9. What happens if the IRS decides an
individual’s compensation is unreasonable?
• In particularly egregious situations, the IRS may remove the
organization’s tax-exempt status.
• More typically, monetary penalties will be imposed.
• Section 4958(a)(1) of the Internal Revenue Code provides for
a tax of 25% for amounts that are considered to be an
“excess benefit”. For example, suppose a CEO is being paid
$500,000, and the IRS determines appropriate
compensation is $400,000. The excess benefit is $100,000.
The CEO would be required to pay a tax of $25,000, as well a
repaying the $100,000 (with interest).

10. What happens if the IRS decides an
individual’s compensation is unreasonable?
Section 4958(a)(2) provides for a tax of 10 percent of the excess
benefit for any board member who knowingly approves the
excess benefit transaction, so in the example above any board
member who approved the $500,000 salary would pay a tax of
10% of 100,000, or $10,000. (It should be noted that the
maximum fine for a board member is $10,000, regardless of the
size of the excess benefit.)

11. 2015 GuideStar Nonprofit Compensation
Report
• Uses IRS Form 990 compensation data
exclusively.
• Reports on both total compensation and
annual percentage increases for incumbents.
• 2015 report includes 154,765 positions drawn
from 105,406 Form 990 filings of 501(c)
organizations for fiscal year 2013 (other than
private foundations).

12. Job Categories
• CEO/ExecutiveDirector (96,225)
• Top AdministrativePosition(7,367)
• Top Business Position(3,389)
• Top DevelopmentPosition(3,815)
• Top Education/TrainingPosition(832)
• Top Facilities Position(892)
• Top Financial Position(24,410)
• Top Human Resources Position(1,963)
• Top Legal Position(1,608)
• Top Marketing Position(1,357)
• Top Operations Position(7,839)
• Top Program Position(2,098)
• Top Public Relations/Communications Position(957)
• Top TechnologyPosition (2,013)

13. Statistics Reported
• Number of organizations in the category
• The average compensation for the position across the
category
• The 10th, 25th, 50th (median), 75th, and 90th percentiles of
compensation for the position across the category

14. Understanding the Statistics
• 10th percentile – 10 percent of the people reported upon in
the category made less than this amount, and 90 percent
made more.
• 25th percentile - 25 percent of the people reported upon in
the category made less than this amount, and 75 percent
made more.
• 50th percentile (median) - half of the people reported upon
in the category made less than this amount, and half made
more.
• 75th percentile - 75 percent of the people reported upon in
the category made less than this amount, and 25 percent
made more.
• 90th percentile - 90 percent of the people reported upon in
the category made less than this amount, and 10 percent
made more.

15. Understanding the Statistics
• The larger the number of organizations in the category, the
more reliable the data. The average compensation is
especially susceptibleto being skewed when there are few
organizations in the category.
• The closer together the average compensation and the
median compensation, the more reliable the data.

16. In cases where an executive compensation
package is complicated and anticipated total
compensation is well above the norm, the
GuideStar Nonprofit Compensation Report
probably does not provide sufficient
information to satisfy the requirements of a
rebuttable presumption. However, in most
routine cases, the report provides an adequate
“reality check” for setting executive
compensation.

17. For example, suppose that your organization:
• Provides various human services
• Has an annual budget of $5.3 million
• Is located in Boston, MA
• Is seeking an experiencedexecutive director
Looking in the GuideStar report, you find 99 similar
organizations in Boston, where executive director pay
was $129,338 at the 25th percentile,$169,629 at the
median, and $234,169 at the 75th percentile. It seems
reasonable, then, that target compensation would be
somewhere between the median and the 75th
percentile. If compensation is to be set significantly
higher than that, however, a more rigorous process is
likely required.

18. Words to live by
• The best source of compensation data that the IRS has is
Form 990 data.
• The more the compensation of executives strays above
Form 990 norms, the more likely the IRS is to question it,
thus
• The more rigorous the organization needs to be in following
proper procedures and documenting the reasons for what
might appear to excessively high compensation.

19. T H A N K Y O U !
Questions?

20. Suzanne Coffman,
scoffman@guidestar.org
www.guidestar.org