On August 10th, 2004 the IRS issued a News Release that it would begin scrutinizing executive officer compensation practices among non profit organizations. This initiative has been dubbed the “Tax Exempt Compensation Enforcement Project“.
According to the news release, the initiative is a “new enforcement effort to identify and halt abuses by tax-exempt organizations that pay excessive compensation and benefits to their officers and other insiders.”
Throughout the course of the investigation, the IRS will investigate and gather information from nearly 2000 registered charities to “learn more about the practices organizations are following as they set compensation and report it to the IRS and the public on their annual Form 990 returns.”
To me, all of that seems like a reasonable initiative. The IRS wants to make sure that no one out there in non profit land is fleecing the American public by overpaying organization executives.
But then something struck me as I continued to read. The news release reports that this initiative is being launched because of discrepancies they’ve discovered during routine audits of non profit organizations.
Do you see the potential problem? If the IRS is going to use the current system of compensation practices as a model to evaluate whether or not an executive is being excessively overpaid, (and don’t forget that the IRS initiated the investigation because they’ve already found instances of compensation abuse) then wouldn’t the current system of compensation not be an ideal model to use in order to establish a benchmark?
Fortunately, I crawled through the bowels of online IRS documents and ran across this excerpt from the “Written Statement of Mark W. Everson, Commissioner of Internal Revenue, before the Committee on Finance, U.S. Senate: Hearing on Charitable Giving Problems and Best Practices”.
Commissioner Everson had this to say about the Tax Exempt Compensation Enforcement Project:
“This is an aggressive program that will include both traditional examinations and correspondence compliance checks. The purpose of the project is to enhance compliance by learning what practices organizations use to set compensation; learning how organizations report compensation to the IRS and the public; and creating positive tension for organizations as they decide on compensation arrangements. These organizations need to know that their decisions will be reviewed by regulatory authorities In general, reasonable compensation is measured with reference to the amount that would ordinarily be paid for comparable services by comparable enterprises under comparable circumstances.”
Although that helps clarify things a bit, it’s still a little cloudy.
The news releases and reports go on to say that the IRS will concentrate on non profits that pay officers or employees an annual salary of $1 million or higher.
Fortunately for orchestra executives, even the highest paid among them (LA Phil’s Deborah Borda at $738,804) are still about $250,000 below the IRS red flag line. But when you look at music director compensation, that’s a different story.
Seven orchestras are over that $1 million mark:
- Boston Symphony
- Chicago Symphony
- Los Angeles Philharmonic
- New York Philharmonic
- Philadelphia Orchestra
- Pittsburgh Symphony
- San Francisco Symphony
And one which is toeing the line: the Cleveland Orchestra.
I’ve written about executive compensation several times before regarding executive directors and music directors. It will be interesting to see if the IRS concludes that self governance among non profits has been the best route for setting compensation figures or not.