How The Slam Dunk Is Achieved

A Primer In Executive Compensation In Not For Profits « enterprise ...

A tremendous amount has been written about Executive Compensation, and lately, most of this information has been extremely unflattering. Much of the criticism has resulted from the gross excesses, misinterpretations of regulations, and the rash of criminal cases brought against the top management of a number of large firms, such as WorldCom, Tyco, Enron, and a host of others. Virtually every day another egregious example of corporate greed has come to light. The effect has been a huge increase in media attention, which in turn has acted as the stimulus for new government regulations aimed at curbing these abuses. While most of the regulations are aimed at publicly traded companies, there has been some spill-over into the Not-For-Profit (NFP) sector. NFPs have their own set of federal and state regulations limiting executive compensation; the most draconian of these regulations being IRC §4958, or what many refer to as “Intermediate Sanctions”.

It is interesting to note that, for the most part, the regulations covering for-profit, publicly traded companies provide few, if any penalties, and certainly none are spelled out for board members involved in the approval of compensation deemed to be excessive. Since in many situations, the only penalty is that companies cannot deduct the amount of an excessive compensation payment, the brunt of the penalty falls onto the shareholders. Conversely, the NFP regulation calls for a 25% excess tax plus a disgorgement of the excess amount. If this does not occur, the fine jumps to 200%. In addition, the board members of the NFP, most of who are not paid for their board service, but are merely acting in an altruistic manner, are subject to individual fines of the lesser of 10% of the excess, or $10,000.

What are the components of the NFP compensation package? There are traditionally six (6) elements that to one degree or another comprise the Total Compensation Package of executives, whether or not they are part of a For Profit or NFP. These are base salary, annual bonuses or incentives, long-term incentives which could include stock options, restricted stock, phantom stock, and a large group of equity and cash based programs, typical fringe benefits, supplemental benefits and perquisites, and lastly various written documents or agreements that spell out the employment and severance provisions. In the case of NFPs, most of these elements are included but often with scaled-down arrangements. One area that is definitely changing is the increased acceptance and use of annual bonuses and incentives. Rather than paying cash compensation in the form of salary only, many NFPs are beginning to introduce variable pay. This not only better aligns the cash compensation with achievement of predefined results; it also allows the Board to in effect “reduce” pay when the NFP’s situation changes, performance objectives are not met, or when there are cash flow issues. It also allows the NFP to provide a more competitive compensation package that better reflects the realities of the market place. The one compensation element, which heretofore has been virtually missing from the Total Compensation Package, is the use of long-term incentives, which typically exists in For Profits in the form of equity. This is one of the major disparities between For Profits and NFPs, and it is one of the areas which needs to be addressed in order to begin to “level the playing field” between the two business groups.

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