Nonprofit Compensation Systems Part II: Executive Pay and Credit Card Use
In our first installment of this two-part series, we shared the basics for building an ethical nonprofit compensation system. Here, in part two, we’ll dive into another critical component — executive pay and credit card use. These are tricky in the nonprofit world, especially if compensation is considered excessive. So here’s how to navigate both with compliance in mind:
Determine appropriate salary ranges
Much like in part one of this article, research is required to determine appropriate salary ranges for your executive team. To ensure pay is not excessive:
- Look at the IRS filings from organizations of the same size and region of the country.
- Keep in mind your cash flow and the sustainability of salary ranges over time.
- Weigh in the executive’s skills, years of experience, fundraising abilities, track record, technical expertise, and other factors that may justify higher pay.
Ensure pay is compliant
Compliancy goes beyond determining an evidence-based pay range for your executive team. That’s why the IRS recommends a three-step process to determine if compensation is reasonable:
- The nonprofit’s board must arrange for an independent person or team (which does not include the person receiving the compensation) to conduct a comparability review.
- That team must review comparable salaries and benefits of similar nonprofit organizations.
- That team must document the review process, identify the people involved, and any other considerations made when the board approved the compensation.
Note that compensation covers more than just a salary. It also includes other benefits like contributions to profit-sharing plans, payment of personal expenses, car, housing, royalties, and more. (Find a list on pages 33-35 of the IRS Instructions for Form 990 Return of Organization Exempt From Income Tax.)
Adopt a conflict of interest policy
All nonprofits should create, implement, and regularly review a conflict of interest policy. Conflicts of interest exist when executives have personal or financial interests that may influence their judgment in making decisions for the nonprofit. The policy guides how the board should identify and handle a conflict. An effective policy should include:
- A definition of what constitutes a conflict of interest
- When and how executives and board members must disclose conflicts
- How to record the board’s findings once a conflict of interest is disclosed or discovered
- An action plan for policy violations
- A process for reviewing and updating the conflict of interest policy regularly
By adopting and following a policy like this, your nonprofit will prevent improper benefits, including excessive compensation, before they occur.
Acknowledge and monitor credit card use
Some nonprofits use the same kind of credit cards that for-profit businesses use. Unfortunately, it’s a poor choice, as the executives who carry them must personally guarantee their cards. Worse, if the credit card is utilized for personal gain, the nonprofit could risk losing its 501(c)(3) tax-exempt status.
The threat even applies to credit card reward points. For example, suppose an executive took the benefit of the points for themselves without notice to the organization. It seems insignificant, but it could be deemed a violation of the executive’s fiduciary duty of loyalty — essentially using their position for personal gain. What’s more, the executive could be subject to automatic excess benefit taxes for receiving those perks while performing official duties.
Given these problematic scenarios, your nonprofit should establish and communicate a clear policy for credit card use, including:
- Who can obtain a credit card
- The purposeful use of the credit card
- Any spending limits
- Definitions for qualified expenses
- Any expenses that would require pre-authorization
- A process for approving charges
- Procedures and documentation for submitting expenses
- Any penalties for improper credit card use
Granted, a nonprofit should not avoid credit cards altogether. Much like a for-profit business, when it comes to making purchases or paying vendors, credit cards are a valuable tool that makes managing expenses more convenient. It’s also a smart way for a nonprofit to build credit.
These are just a few reasons why we’re moving our nonprofit clients to Divvy.
Divvy credit cards do not require a guarantee, and the card and service are free — all significant factors for a nonprofit. Plus, Divvy automates receipt tracking and expense management. It also offers “virtual cards” (like for a volunteer’s one-time use), allows for set budget limits on individual cards, as well as the ability to zero out a card. And there are no concerns regarding purchase rewards, as those go back to the nonprofit organization. Best of all, Divvy seamlessly integrates with most popular accounting programs.
To learn more about Divvy or how to handle executive compensation, we can help. Our nonprofit accounting team works with many organizations just like yours, so let’s work on overcoming your accounting challenges together. Schedule a quick call today to get the advice you need from a friendly, helpful expert.
Note: Don’t forget — your Form 990 requires reporting compensation paid to your board members, trustees, officers, key employees, and the five highest compensated individuals. If you need a hand with preparing your Form 990, we can help with that too.
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