Charity Leaders Should Pay Close Attention to Obama's Pay Guidelines

Given concerns that lawmakers and regulators have raised about whether nonprofit groups are providing enough social benefits to justify their tax-exempt status, it seems logical to think that those authorities will raise new questions about compensation arrangements.

State and federal charity officials are already increasingly willing to scrutinize alleged abuse of charity status in cases involving specific organizations.

Such concerns are likely to be exacerbated by a report soon to be released by Internal Revenue Service summing up its extensive investigation of nonprofit hospitals. The report is expected to point to high levels of executive compensation and a wide disparity in how much hospitals do to serve their communities and provide charity care.

Concerns about abuse in the nonprofit world have also led some government officials to suggest that charity groups must adhere to stricter governance standards and perhaps compensation guidelines, as a precondition for federal tax subsidies.

It is thus conceivable that the federal financial-bailout guidelines may signal a new, populist-themed regulatory era for organizations—whether publicly traded or tax-exempt—that rely on government money in one form or another. In response, nonprofit groups’ boards and their compensation committees will want to increase their emphasis on the exercise of sound, common-sense business judgment consistent with the general economic environment.

Specifically, compensation committees will want to take steps to assure:

* The independence of both the compensation consultant and committee members.

* The “apples-to-apples” nature of data used to compare pay levels at other organizations and recommend salary ranges and benefits for executives.

* Ways to reduce reliance on compensation data from for-profit companies in producing recommended salary ranges based on comparative data.

* The appropriateness of the organization’s benchmarking for each element of compensation, not just salary.

* The nature and rigor of the performance goals established for incentive compensation.