• Do we have a written compensation policy and process for making compensation decisions?
• Do we have data on compensation policies in other organizations?
• Are we documenting our reviews of executive performance and compensation?
• Do we understand the meaning of “compensation?"

• Bonuses
• Christmas and other special occasion “gifts”
• Retirement gifts and most severance packages
• The portion of a minister’s self-employment taxes paid by his or her employer
• Personal use of an organization-owned vehicle
• Business expense reimbursements and advances under a “nonaccountable” arrangement
• Purchases of organization-owned property for less than fair market value
• Taxable fringe benefits
• Below-market rate loans of $10,000 or more by the organization to the executive
• “In kind” transfers of property
• Assignments of income
• Some discretionary funds
• Some organization reimbursements of a spouse’s travel expenses
• Forgiveness of debt
• Most severance pay packages
• Sabbatical pay
• Organization payment of personal expenses

Examples not included as compensation:

• Contributions to qualified retirement and health plans
• Reimbursement of accountable business related expenses, such as moving expenses, loans, or lodging provided for the convenience of the organization.

Key Questions for Ministry Compensation Planning

• Are we comfortable with the variance between highest and lowest paid employees?
  Some charities, as well as for-profit organizations, tie the compensation of officers to a specified multiple of the compensation received by the lowest paid employees. For example, the president cannot be paid more than 10 times or 20 times the pay received by the lowest paid employee. Boards should determine whether or not they want to establish such a formula.
• Do we want to base compensation upon performance?
  Some charities, as well as for-profit organizations, base officer compensation upon performance. For example, an officer is paid a base salary, plus a specified bonus if certain goals are met. These goals often are defined in terms of the organization’s revenue or net earnings.
• How do we treat our officers’ honoraria?
  Many officers of charitable organizations speak at various conferences and events, and they often receive honoraria for such appearances. Should the officer keep these honoraria? If so, what—if any—impact should this have on the officer’s compensation? If the officer is not permitted to retain the honoraria, what happens to them? If they are assigned back to the employer, have you taken steps to be sure that they are not reported as taxable income to the officer as a result of the “assignment of income” doctrine? Such a result can be avoided if the charity or officer informs the payer prior to the date of the appearance that any honorarium should be paid directly to the employer.
• How often should we permit our officers to be away on travel?
  Boards should determine any limits that will apply to an officer’s acceptance of outside speaking appearances. For example, a maximum number of days out of the office each year for such appearances may be specified.
• What about music or publications produced “on company time”?
  Officers and employees who are authors or composers often are shocked to learn that their employer may be the copyright owner of works that they create. Section 201 of the Copyright Act specifies that “the employer…is considered the author” of a “work made for hire,” and “owns all of the rights comprised in the copyright” unless the employer and employee “have expressly agreed otherwise in a written instrument signed by them.” The Act defines a “work made for hire” as “a work prepared by an employee within the scope of his or her employment.” Governing boards of charitable organizations should establish a “work made for hire policy” that addresses ownership of works produced by employees within the scope of their employment.
• Are we avoiding unreasonable compensation and intermediate sanctions?
  Federal law prohibits charities from paying unreasonable compensation to any officer or employee. A violation of this law can jeopardize the charity’s tax-exempt status. In addition, the IRS can impose “intermediate sanctions” against officers who receive excessive compensation, as well as against the board members who authorize it. Unfortunately, it is often difficult to know whether or not the IRS will view compensation as excessive. Here are a few points that will help:
   
  • Officers and governing boards may rely on a “presumption of reasonableness” with respect to a compensation arrangement if it was approved by a board of directors (or committee of the board) that: (1) was composed entirely of individuals unrelated to and not subject to the control of the disqualified person involved in the arrangement; (2) obtained and relied upon objective “comparability” information, such as (a) compensation paid by similar organizations, both taxable and tax exempt, for comparable positions, (b) independent compensation surveys by nationally recognized independent firms, or (c) actual written offers from similar institutions competing for the services of the disqualified person; and (3) adequately documented the basis for its decision.
  • A transaction in which the amount of compensation is based on the revenues of the organization may result in unreasonable compensation. Congress has instructed the IRS to draft regulations clarifying when such arrangements will be deemed to result in unreasonable compensation. As of March 1998, the regulations have not yet been issued. Charities that base compensation in whole or in part on the basis of a percentage of their income should review the regulations carefully as soon as they are issued.

• What are intermediate sanctions?
  In 1996 Congress enacted legislation targeting unreasonable compensation paid by charities, including churches and other religious organizations. The legislation permits the IRS to impose “intermediate sanctions” on persons who are paid “excess benefits” (defined as unreasonable compensation). The intermediate sanctions apply to unreasonable compensation paid on or after September 14, 1990. The IRS had asked Congress to authorize such sanctions as an alternative to revoking a charity’s tax-exempt status. The intermediate sanctions the IRS can impose include the following:
   
  • Tax on disqualified persons. A “disqualified person” (someone with significant administrative responsibilities) who benefits from an excess benefit transaction is subject to an excise tax equal to 25 percent of the amount of the "excess benefit" (the amount by which actual compensation exceeds the fair market value of services rendered). This tax is paid by the disqualified person directly, not the employer.
  • Additional tax on disqualified persons. If a disqualified person fails to “correct” the excess benefit by the time the IRS assesses the 25 percent tax, then the IRS can assess an additional tax of 200 percent of the excess benefit. The new law specifies that a disqualified person can “correct” the excess benefit transaction by “undoing the excess benefit to the extent possible, and taking any additional measures necessary to place the organization in a financial position not worse than that in which it would be if the disqualified person were dealing under the highest fiduciary standards."
  • Tax on organization managers. If the IRS assesses the 25 percent tax against a disqualified person, it is permitted by the new law to impose an additional 10 percent tax on any “organization manager” (any officer, director, or trustee) who participates in an excess benefit transaction knowing it is such a transaction, unless the manager's participation "is not willful and is due to reasonable cause."

    Note: The intermediate sanctions impose a substantial excise tax on members of a governing board who vote for a compensation package that the IRS determines to be unreasonable. This makes it essential for board members to carefully review the reasonableness of compensation packages.

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