There has been some public concern expressed about executive compensation at charities. It is important that charities have appropriate mechanisms to ensure that the charity is neither paying executives too little or too much for the services provided. If you pay too little you might find out too late that the executive is moving on - the cost to a charity of such change at the top can in some cases be substantial. As well, paying too little has a cascading effect on all salaries in the organization and the charity may have trouble keeping people at different levels. If you pay too much you are not effectively using the assets of a charity, you will have others in your organization feeling that they are not sufficiently compensated and you will quite legitimately upset various stakeholders such as the public, media and CRA.
Here are a few quick thoughts on charity executive compensation in Canada.
In CRA Summary Policy CSP - C29 CRA defines “Compensation” as:
“Compensation includes all forms of salaries, wages, commissions, bonuses, fees, honoraria, etc., plus the value of taxable and non-taxable benefits. In general terms, it includes all amounts that form part of a recipient’s income from employment plus a registered charity’s portion of payments, such as employee’s pension, medical or insurance plan, employer CPP and EI contributions, Federal and Provincial income tax, and worker’s compensation benefits.”
The CRA is concerned anytime there is the possibility of undue private benefit: In Summary Policy CSP - U02 CRA notes “Under the Income Tax Act, a registered charity cannot confer on a person an undue benefit (e.g., a transfer of property or other resources of the charity to a person who does not deal with the charity at arm’s length or who is the beneficiary of a transfer because of a special relationship with a donor or charity.) A registered charity that confers on a person an undue benefit is liable to a penalty equal to 105% of the amount of the benefit. This penalty increases to 110% and the suspension of tax-receipting privileges for a repeat infraction within 5 years. A registered charity that contravenes or continues to contravene the Act could also have its registration revoked.”
In CIL - 1993 - 009 CRA notes that compensation should be “fair and reasonable. Compensation that is disproportionate to the services rendered would contravene subparagraph 149.1(1)(b)(ii) of the Income Tax Act, which defines a charitable organization as an organization “no part of the income of which is payable to, or is otherwise available for, the personal benefit of any proprietor, member, shareholder, trustee or settler thereof”.”
If a registered charity were to pay more than fair market value then it would be contravening the Income Tax Act.
Keep in mind that with the issue of directors compensation is slightly different in that “Provincial law determines the circumstances under which a registered charity’s directors / trustees can receive compensation. In general, a registered charity cannot pay its directors / trustees simply for occupying their positions. However, some provinces permit a charity to have governing documents allowing for reasonable compensation for services that directors / trustees provide to the charity (e.g., the director is an employee). Under the Income Tax Act, a registered charity that confers on a director / trustee an undue benefit is liable to a penalty equal to 105% of the amount of the benefit. This penalty increases to 110% and the suspension of tax-receipting privileges for a repeat infraction within 5 years. [See CRA Summary Policy CSP - D10]
Schedule 3 of the T3010B Registered Charity Information Return deals with compensation. You can access these filings at http://www.cra-arc.gc.ca/ebci/haip/srch/advancedsearch-eng.action Canadian registered charities are already required to disclose “For the ten (10) highest compensated, permanent, full-time positions enter the number falling within each of the following annual compensation categories. $1 - $39, 999, $40,000 - $79,999 $80,000 - $119,999 $120,000 - $159,999 $160,000 - $199,999, $200,000 - $249,999, $250,000 - $299,999 $300,000 - $349,999, $350,000 and over”. The T3010 provides the public with information on compensation amounts. The T3010 is filed annually by registered charities along with a copy of the charity’s financial statements.
CRA’s Guidance on fundraising has a number of references to compensation including the importance of compensation for fundraisers not exceeding fair market value and also discouraging compensation which in any way is commission based.
In the Fundraising Guidance CRA notes:
“c) Good staffing processes
Where fundraising activity is carried on as a staff function, the charity should make adequate effort to ensure that compensation paid does not result in employees receiving excessive benefits. The salary and/or benefits for any fundraising position should never exceed the fair market value for the services provided.
Determining fair market value may involve:
? contacting organizations with a profile similar to the charity’s to determine reasonable compensation for the type and amount of fundraising to be undertaken;
? basing the compensation on a salary survey; and
? setting compensation that is appropriate based on the remuneration received by other employees of the charity in light of the respective responsibilities and requirements of the positions.
A charity should establish accountability processes for the supervision and evaluation of in-house fundraising personnel. A charity should avoid performance evaluation based solely or excessively on
fundraising performance or results achieved (for example, bonuses or incentives exclusively tied to the number or amount of donations).”
I would point out that in addition to CRA’s oversight over “registered charities” under the Income Tax Act (Canada), the operation of “charities” is also dealt with by the provinces. It is not good enough for a registered charity to comply with the Income Tax Act, but trustees and directors must realize that they are fiduciaries and they must act in accordance with those high level obligations. For example, from the website of the Public Guardian and Trustee:
“Duties, Responsibilities and Powers of Directors and Trustees of Charities
2. Duty to be Reasonable, Prudent and Judicious
Directors and trustees must handle the charity’s property with the care, skill and diligence that a prudent person would use. They must treat the charity’s property the way a careful person would treat their own property. They must always protect the charity’s property from undue risk of loss and must ensure that no excessive administrative expenses are incurred.”
If a charity excessively compensates a person, the members of the board of director could be required to repay the funds individually.
Here are some thoughts on executive compensation (some of which are taken from a useful book entitled “Nonprofit Executive Compensation: Planning, Performance and Pay 2nd Ed. by Brian Vogel and Charles W. Quatt):
1) There are many different procedures that can be used including have the board decide, having the executive committee make the decision or having a separate compensation committee. Because of the importance and sensitivity of the compensation issue, it is definitely advisable that the whole board be aware of the compensation provided to the most senior executive and approve it. If you pay too much to the senior executive the media will portray that executive as greedy and the board as incompetent. Both are not desirable.
2) Make sure the board understands what current compensation the chief executive is receiving. Compensation is more than salary.
3) The chief executive compensation plan should support the organizations mission and goals.
4) Make sure you have an up to date job description and title for the position
5) Have an organization compensation philosophy.
6) Look at comparable organizations and what they are paying for comparable positions. Review salary surveys
7) Make sure that compensation is not higher than fair market value and does not provide undue private benefit.
8) Think about stakeholder reaction to compensation
9) Establish a compensation level and plan
10) Identify basic contractual points for agreement and have lawyer draft employment contract.
11) Have a formal review of the chief executive every year or two.
The US IRS provides some thoughts on non-profit executive compensation in the US as follows in its document “Governance and Related Topics - 501(c)(3) Organizations” http://www.irs.gov/pub/irs-tege/governance_practices.pdf:
“A. Executive compensation. A charity may not pay more than reasonable compensation for services rendered. Although the Internal Revenue Code does not require charities to follow a particular process in determining the amount of compensation to pay, the compensation of officers, directors, trustees, key employees, and others in a position to exercise substantial influence over the affairs of the charity should be determined by persons who are knowledgeable in compensation matters and who have no financial interest in the determination. Organizations that file Form 990 will find that Part VI, Section B, Line 15 asks whether the process used to determine the compensation of an organization’s top management official and other officers and key employees included a review and approval by independent persons, comparability data, and contemporaneous substantiation of the deliberation and decision. In addition, Form 990, Part VII and Form 990, Schedule J, solicit compensation information for certain officers, directors, trustees, key employees and highest compensated employees. The Internal Revenue Service encourages a charity to rely on the rebuttable presumption test of section 4958 of the Internal Revenue Code and Treasury Regulation section 53.4958-6 when determining compensation of its executives. Under this test, compensation payments are presumed to be reasonable if the compensation arrangement is approved in advance by an authorized body composed entirely of individuals who do not have a conflict of interest with respect to the arrangement, the authorized body obtained and relied upon appropriate data as to comparability prior to making its determination, and the authorized body adequately documented the basis for its determination concurrently with making the determination.
Comparability data generally involves looking to compensation levels paid by similarly situated organizations for functionally comparable positions. One method is to obtain compensation surveys or studies from outside compensation consultants for this purpose. The Internal Revenue Service will look to the independence of any compensation consultant used, and the quality of any study, survey, or other data, used to establish executive compensation. Once that test is met, the Internal Revenue Service may rebut the presumption that an amount of compensation is reasonable only if it develops sufficient contrary evidence to rebut the probative value of the comparability data relied upon by the authorized governing body.
The Internal Revenue Service has observed significant errors or omissions in the reporting of executive compensation on the IRS Form 990 and other information returns (e.g., Form W-2 and employment tax returns). Organizations should take steps to ensure accurate and complete compensation reporting on these forms, and to also ensure that appropriate income and employment taxes are withheld and deposited with the Internal Revenue Service. Executive compensation continues to be a focus point in our examination program.”
The US charity watchdog Charity Navigator has this to say about executive compensation:
“The CEO’s salary of my favorite charity seems high, should I make a contribution?
While there are certainly some charities that overpay their leaders, Charity Navigator’s data shows that those organizations are the minority. Among the charities we’ve evaluated, the average CEO salary is roughly $150,000. Before you make any judgments about salaries higher or lower than this average, we encourage you to look at CEO compensation as a percentage of total expenses. A charity CEO compensation of $200,000 for an organization spending $20 million per year (1%) probably seems much more reasonable than the same salary for a $1 million organization (20% of expenses for one person).
These charities are complex organizations, with multi-million dollar budgets, hundreds of employees, and thousands of constituents. These leaders could inevitably make much more running similarly sized for-profit firms. Furthermore, when making your decision it is important to consider that it takes a certain level of professionalism to effectively run a charity and charities must offer a competitive salary if they want to attract and retain that level of leadership.”
Here is the Introduction from the 2010 Charity Navigator Compensation Study which provides a good discussion of US charity pay difference and ranges:
Charity Navigator has completed its sixth annual CEO Compensation Study. This year’s study examined the compensation practices at 3,0051 mid to large sized U.S. based charities that depend on support from the public. Our analysis revealed that the top leaders of these charities earned a median salary of $147,2732 in 2008 representing a pay raise of 4.7% over the previous year.
We know from the conversations taking place in the comment section of our charity ratings pages that many donors continued to be concerned by what they believe to be excessive charity CEO pay. Many donors assume that charity leaders work for free or minimal pay and are shocked to see that they earn six figure salaries. But these well-meaning donors fail to consider that these CEOs are running multi-million dollar operations that endeavor to change the world.
Leading one of these charities requires an individual that possesses an understanding of the issues that are unique to the charity’s mission as well as a high level of fundraising and management expertise. Attracting and retaining that type of talent requires a competitive level of compensation as dictated by the marketplace. While there are nonprofit salaries that we would all agree are out-of-line, it is important for donors to understand that since the average charity CEO earns roughly $150,000, a six-figure salary is not necessarily a sign of excessive pay for a mid to large sized charity.
This report offers insight into how a charity’s mission, size, and location impact its CEO’s salary.
It also highlights some questionable salaries, such as those that approach and exceed a million dollars, and suspect compensation policies, such as charities that have multiple highly-paid family members on staff. We round out the report by offering advice for judging the appropriateness of a nonprofit executive’s pay.”
Here is the conclusion of the Charity Navigator Compensation Study:
While it is true that the paychecks of some nonprofit executives are outrageously high, this study confirms that those receiving excessive pay are in the minority. The data also shows that top pay at charities can vary greatly by location - with CEOs in the Northeast typically earning $77,000 more than their peers in the Mountain West - by mission - with the heads of Education charities earning $182,645 more than those running Religion charities - and by size - with CEOs managing large charities earning $184,510 more than those at small charities. Finally, the study shows that with a 4.7% median increase in pay from 2007 to 2008, the beginning of the recession appears to be having a minor effect on raises.
We recognize that many donors will be hesitant to agree that the CEO of their favorite charity deserves a six figure salary. To the skeptics, we ask that you keep in mind that most of the charities included in this study are multi-million dollar operations. Leading one of them requires an individual that possesses both an understanding of the issues that are unique to the charity’s mission as well as extensive management and fundraising expertise. Even so, charities tend to pay less than private sector firms for similar competencies. For example, the charities in our study pay a median total compensation of roughly $150,000, compared to median salaries at S&P 500 companies of $1 million, excluding bonus packages and stock options that drive the median compensation up to $6.6 million.”
Do you require legal advice with respect to Canadian or Ontario non-profits or charities?
Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.