Step #4 - Value the Benefits
Last week we discussed identifying all of the benefits bestowed to an employee. This week we finally start to look at some numbers. Each of the benefits identified now has to have a value assigned to it. This may or may not be associated with the cost paid by the church for a benefit.
Example: First Church provides their senior pastor with a car. It pays all of the expenses associated with buying the car and maintaining the car. The Internal Revenue Regulations tell us explicitly how we should value the auto. The primary method uses what is called the annual lease value table. The assigned value from this table is used to value the car and it is not related to how much the church spends on the car during the year.
Some items are easy to value and some are more difficult. Some items have stated values, i.e., the value of a tuition discount granted to an employee at the school operated by the organization, while others require outside appraisers like may be needed to value housing provided by the organization.
It is imperative that the benefits be valued in order to complete Step #5.
Step #5 - Is It Too Much
Remember the earlier posts which discussed determining the "umbrella" of reasonable compensation. Now is the time to look to the umbrella. After all the elements of compensation are determined and then they are valued, the total value of the benefits provided has to be compared to the umbrella of reasonable compensation. If it doesn't fit under the umbrella, then something has to be cut or removed from the compensation package. If this exercise is performed as a part of the compensation planning at the beginning of the year, then there can be no surprises for the employee or the organization at the end of the year.
Step #6 - Write It Down
Once everything is defined, and it all fits within reasonable compensation, it is time to write it down. Compensation should be formally documented in a manner that is appropriate for the level of employee being compensated.
Example #1: A secretary may have her compensation approved and defined by one of the officers of the organization. The package would be written down, approved by the appropriate officer and then placed in the secretary's personnel file.
Example #2: The president of an organization is considered a disqualified person (see post on intermediate sanctions). His compensation package must be authorized by the appropriate governing body, i.e, the board of directors, the personnel committee, etc. and it must be writtten down in the minutes of the meeting where the compensation package is approved. Failure to formally document the compensation for a disqualified person can cause the entire package to be considered as not authorized for payment. Also remember that "documenting the compensation in writing" is one of the required steps in meeting the safe harbor test for excess benefit transactions and intermediate sanctions.
This post has covered three important steps in the compensation planning process. While it should be considered as mandatory for any employee that is considered to be a "disqualified person", it is a good practice for all employees.