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Similarly, use of long-term goals must relate to objectives that are more strategic in nature, and related to financial growth projections over next three to five years. It is at this point that more creativity is needed in plan design, since NFPs obviously do not have ability to share wealth or grant equity with members of its senior management team. The award that best fits requirements should take some form of capital accumulation. The specific design features may vary, but basics are same: long-term performance goals are established and monitored. If performance goals are achieved within specified period, funds will be set aside into a Rabbi Trust or similar vehicle, which conforms to IRC §457f and 409A. These plans allow monies to be accumulated for executive until retirement. Although amounts accumulated under this type of long-term incentive plan will probably not equal potential value of stock-based plans, it may actually be more consistent with long-term compensation programs in privately owned For Profits, and will certainly go a long way to making NFP’s executive compensation package more competitive.
What challenges exist in evaluating NFP executive compensation package for determining reasonableness? An interesting aspect of difference between evaluation of NFP compensation package is that elements such as health care benefits, contributions to retirement plans and even prorated cost of Directors & Officers (D&O) insurance coverage is considered part of reportable NFP total compensation package, even if it is not taxable to individual. Among For Profit public companies, amount and makeup of executive compensation package is generally available in various government filings including proxy reports. Even though SEC regulations require specific items to be reported, preparing these proxies continues to be an art form unto itself; which often masks true value of compensation and appears to go out of its way to make reading and interpreting data difficult, at best. Similarly, disclosure of comparable required compensation data for NFPs is shown on IRS Form 990, but is far less definitive and should be carefully scrutinized. The bottom line is that it is much more difficult to accurately make comparisons with other NFPs, which is main area for judging reasonableness of overall compensation package. The regulations currently allow For Profit compensation data to be used when determining competitive market; this is certainly appropriate since many of NFP positions are interchangeable between NFP and For Profit groups. A cautionary note: there are groups in Congress who believe that this “liberal” approach should be curtailed, and only want to allow use of NFP data in evaluation of pay.
Why is a Compensation Philosophy important for NFPs? In world of large For Profits, most have a well-documented Compensation Philosophy that states company’s intentions vis-à-vis how executives will be paid. This typically includes a discussion of what peers they will use for comparison purposes, level of competitiveness, basis for making awards, and elements to be contained in executive compensation package. Many mid-sized and smaller For Profits have not yet taken necessary steps to formalize their pay strategy; this unfortunately is also case with many NFPs. It is not only important from a business standpoint, but is required in regulations. One point that needs to be carefully examined is level of competitiveness that organization establishes. The most common level for majority of compensation philosophies and one that most NFPs strive for is 50th percentile, or “middle of pack”. It is assumed that this is a safe place to be, and therefore, easiest to justify. This may be true, but there is nothing that precludes NFP Board from selecting a higher or lower baseline, particularly if it is consistent with their philosophy, and justified by overall performance of organization. In other words, good performance should earn executives fair and competitive pay, while outstanding performance should earn them above market levels of compensation. It all goes back to setting appropriate expectations and standards, and holding executives accountable for results; and rewarding them accordingly.
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