Not-For-Profit Group Newsletter – Fall 2014
Sarah G. Widlock
Building a Dream Team—How to Manage the Board Selection Process
SARAH WIDLOCK, CPA
Having a leadership team that can drive your not-for-profit organization through hard economic times is more important than ever. Combine that large order with another important factor – transparency – and you have your work cut out for you. So how can you put together a board of directors that can nimbly pick up the ball while satisfying the community your not-for-profit serves?
Look for a Strong Offense and Defense
New federal rules regarding board member selection, notably recent IRS Form 990 disclosure requirements, call for greater due diligence in selecting members to serve. A good place to start is by putting yourself in the shoes of your contributors, funders and constituency when evaluating your current board. Ask yourself these three questions:
- Does the board’s makeup represent a range of diversity and inclusiveness? — Diversity can cover gender, race, geography, age, expertise and other factors. Inclusiveness is how well the board’s makeup mirrors your organization’s mission.
- Is it easy to see how each board member aligns with your not-for-profit’s mission? — Consider including a personal statement from board members on your website and other promotional materials that define their passion for your cause.
- What commitment do board members make? — Some not-for-profits ask board members to sign contracts outlining their commitment, including the time they will commit, the funds they promise to donate or raise and the duties they will perform. If you choose to have your board members sign such a contract, be sure the public knows about it so that everyone knows your expectations.
The first step in formalizing the recruitment process is to identify the talents your organization needs. Although some not-for-profits believe anyone willing to lend their time qualifies for board membership, specific personal and professional strengths will help the board– and the not-for-profit– function more effectively.
Some desirable qualities to seek out include:
- An understanding of the services provided;
- A passion for the organization’s mission;
- A willingness to commit the time to attend most, if not all, board functions;
- An ability to work well in a team environment;
- Communication skills; and
- A desire to represent the organization in a positive manner.
Once you determine the personal attributes of your ideal board member, identify the professional skills needed by the board. Most boards include individuals with backgrounds in finance and accounting, business management, marketing, human resources and areas specific to the not-for-profit’s services, such as health care, education or literacy.
Put Team Goals Front and Center
You also should consider your organization’s strategic goals and current challenges. Think about the makeup of the current board and ask: Do we have any gaps in experience that we need filled? What new board member skills are top priorities?
You may be able to recruit community members with some of those skills to serve on committees rather than as board members. That way you can get to know the volunteers’ strengths and skills first without making a long-term commitment. Over time, you may be able to groom these committee members for viable board membership.
Search Well and Widely
Identifying candidates is the next step. Just as you would for a paid leadership position, assemble a pool of candidates for each board seat. In many organizations, current board members supply candidates’ names. Recruiting new board members “cold” might not be as simple. If your not-for-profit is finding it difficult locating the right people to sign on, try these strategies:
- When representing the organization in a speech or other public appearance, mention that you are always looking for people interested in becoming active volunteers or board members.
- Get the word out that you are looking for new board members by asking friends, business colleagues and family members whether they know someone who would be a good candidate.
- Advertise in a local newspaper, alumni newsletter and the not-for-profit’s newsletter, and post an ad on the organization’s website.
- Consider whether current volunteers are qualified to serve as board members.
- Invite 20 community leaders to an informational luncheon to learn about your organization. Ask each to recommend a potential board member (after checking with that person) and then contact him or her.
- Pick four or five organizations that have common missions or interests and ask their boards if they have retiring board members who might be interested in joining your board.
Keep in mind that the candidates will be interviewing your organization, too — it is a two-way street. Be ready to provide information on your not-for-profit.
After you have identified a group of prospective candidates, ask them to fill out an application — and then pick the best ones for the board to consider. This approach gives control to the board, with the applicants competing as they would for any job.
The application form should outline some of your expectations. For example, a good question might be: Are you willing to contribute about six hours a month for board meetings and committee work? Be sure to also ask about the applicant’s background and expertise, especially in the areas where you have identified a needed skill.
Make Your Draft Picks
Offer a brief orientation and tour for prospective board members to introduce them to your organization and explain your mission. Invite the prospects to attend a board meeting to meet current members and see how the board functions. You may want to have the director or a member of the board’s nominating or executive committee interview each candidate one-on-one. This helps determine whether the person will be a good fit and a productive addition to your board.
Once you complete this process, you will have enough information for the board members to select the best candidate. You also may find that you have gathered information on several other possible board members whom you can consider for the next opening.
Transition New Players
Once you have selected a new board member, you can do several things to make his or her transition a smooth one. Give a full orientation on your organization, including the issues you are facing and all of the services and programs you provide. You also should brief new members on their legal responsibilities. The background will help your new board member represent your organization well in the community. For additional tips on selecting your not-for-profit’s board, contact Sarah Widlock at [email protected] or call her at 312.670.7444.
By the Book—Setting Executive Compensation Correctly
Overpaying executives is a hot topic this year, as legislators and the public fume over salaries in the financial, automotive and other industries receiving federal bailout dollars. In the not-for-profit arena, the IRS is also cracking down on salaries it considers to be unreasonable and is requiring stringent information about compensation on the new Form 990. To protect yourself from sanctions, you need to make sure that your board of directors, at the time it sets an executive salary, arrives at a “reasonable” amount based on comparables for similar positions and adequately documents that research. And, if compensation is above the norm, you need to be ready to justify it.
Excessive executive compensation is a controversial topic in the current world of business, in both the for-profit sector and not-for-profit sector. In the not-for-profit industry, the IRS is cracking down on salaries it considers to be unreasonable and is requiring stringent information about compensation on the new Form 990.
To protect yourself from sanctions, you need to make sure that your board of directors, at the time it sets an executive salary, arrives at a “reasonable” amount based on comparables for similar positions and adequately documents that research. Additionally, the person who will benefit from the salary-setting decision should not be involved in the data-collecting and salary-setting process.
Ensuring Compensation is “Reasonable”
The IRS demands “reasonable compensation” for key employees, defining it as the amount that ordinarily would be paid for like services by like enterprises, whether taxable or tax-exempt, under like circumstances.
Your board of directors ultimately is responsible for compensation, even if a compensation committee determines the amount. Either way, disinterested parties should set compensation, and specific procedures should be in place for times when a conflict of interest arises. For example, committee members with a conflict of interest should excuse themselves from the compensation discussion and abstain from taking part in the decision.
In addition, board committee members making compensation decisions should properly document their steps for determining the appropriate level of compensation and how that conclusion was reached. For instance, they should retain the data used for comparability, an analysis of the employee’s qualifications and documentation of the discussions leading to the final decision.
Comparing Apples to Apples
When evaluating a compensation issue, your board’s committee should compare the position with others sharing similar duties. It should also consider the scope of the position (national or local), number of subordinates managed and size of the budget it oversees.
Another factor in the compensation decision is whether the employee will manage multiple functions, facilities, departments or entities. For example, it would be reasonable to expect higher compensation for an executive director who oversees an organization with a $100 million budget and multiple locations and/or programs than one who leads a $5 million organization with only one program.
Using comparables from both not-for-profit and for-profit entities is important in establishing compensation. Organizations should have at least three comparables, with more recommended for larger not-for-profits. For example, your board could use comparables from a similar geographic area. To expand further, a suburban not-for-profit hospital might, for example, use salary information from both for-profit and not-for-profit hospitals in the same, or an economically similar, suburb.
Commissioning a custom survey is arguably the most accurate method of obtaining comparables. An accounting or consulting firm can help design a survey to match the specific position you want to compare.
You also can obtain this information from trade association surveys, telephone polls and Internet research. Because the information from not-for-profits is public record, it should be readily available from sites such as GuideStar.org, which publishes an annual Nonprofit Compensation Report.
Justifying High Compensation
When awarding above-average compensation, your organization must clearly justify it. Some factors to consider are:
- The ratio of your organization’s revenue and expenses to the proposed compensation;
- The executive’s track record within and outside your organization;
- The difficulty of replacing the executive;
- Other written offers received by the executive;
- Competitive market pressures; and
- Special circumstances that may impact the decision, such as the executive’s unique talents that will be valuable in addressing your not-for-profit’s specific needs.
Even when you feel that above average compensation is justified, the IRS can determine it is excessive and impose intermediate sanctions. These sanctions stipulate that the employee must repay the excess compensation to the organization, with interest, and a 25% penalty tax. If the employee does not make repayment in a reasonable amount of time, he or she is subject to a 200% penalty.
In addition, an officer, director or trustee of a not-for-profit who knowingly approved what the IRS considers to be an excess benefit can be liable for an excise tax of 10% of the excess amount.
It is important to note that, if you follow the steps described above, the burden of proof for imposing any sanction will be on the IRS. If you do not follow these steps, however, the burden of proof in a challenge is shifted to the not-for-profit organization.
Disclosing on Form 990
Sanctions aside, your executive compensation practices are now subject to heightened public scrutiny due to the required reporting of substantial compensation information on the IRS’s new Form 990. Starting with tax year 2008, Part VII of the Form 990 requires you to report compensation directly from employee W-2 forms and independent contractors’ Form 1099s. There are also additional disclosures in Schedule J, including information on base pay, bonuses, severance, deferred compensation and nontaxable benefits, that are required reporting in the Form 990.
Compensation information is required for officers, directors, trustees, key employees and your five highest-compensated employees other than the aforementioned. The IRS defines key employees as employees other than officers, directors and trustees who: 1) had reportable compensation above $150,000, 2) had organization-wide authority or control and 3) were among your not-for-profit’s top 20 highest-paid employees who satisfied the previous two tests.
The new Form 990 also includes the definition of an officer, which includes, at a minimum, a not-for-profit organization’s CEO. Similarly, IRS officials have warned against claiming there to be no officers in an organization. The IRS deems this to be a “bad position” to take.
Getting the Best Talent
The process of setting appropriate executive compensation is a balancing act. On the one hand, you need to make sure compensation is in line with similar positions elsewhere and that the research to determine the compensation amount is unbiased and thorough. On the other hand, you must consider what the competition is offering.
For assistance setting your not-for-profit’s executive compensation, contact Kelly Seames at 312.670.7444.
Health Care GroupLaw Firm GroupManufacturing and Distribution GroupNot-For-Profit GroupReal Estate Group