Monday, February 4, 2019

Compensation Planning

Building the Basic Foundation - Part 1

Virtually all organizations face a lot of moving parts and pieces in establishing compensation plans for employees, but nonprofit organizations face even more considerations in the planning process.  In 2012, this blog presented a series of posts related to compensation planning and covered many of the planning considerations.  This presentation summarizes some of the most important aspects of creating a strong foundation for handling compensation processes in organizations of all sizes. 

There are eight basic blocks to building a nonprofit organization's foundation for compensation planing.  Four of the blocks are presented in this post with the other four presented in a future blog:

Building Block #1 – Define the Decision Makers

Approval of compensation plans is critical for many positions in nonprofit organizations.  Therefore, all organizations should know who makes decisions on compensation plans and who approves any changes or unusual transactions during the year.

It isn’t enough to define the decision makers.  Consider any potential conflicts of interest that may exist in the decision-making process.  For individuals defined as “disqualified persons” under IRC Section 4958, it is critical that the decision makers are independent of the person being compensated.

Building Block #2 – Define the Position

No one enjoys the tasks of creating job descriptions, but a strong job description is a valuable building block in the foundation for compensation planning.  Job descriptions should describe the duties to be performed and the criteria and qualifications required of the person holding the position.  It is also a good place to define the position for wage and hour rules.  For religious organizations, clarify if the position qualifies under the DOL’s ministerial exception or as a minister under the IRS rules and regulations.  The job description is the first document requested by either of these regulatory agencies to support these positions.  If the position should qualify as ministerial for the IRS, the job description should require ministerial credentials as a part of the position's qualifications.

Building Block #3 – Know the Compensation Limits for a Position

While all organizations should not pay more than “reasonable” compensation, this requirement is even more important in compensation planning for nonprofit organizations.  The payment of unreasonable compensation can be cause for the revocation of an organization’s tax-exempt status and/or the assessment of excise taxes against individuals.   Reasonable compensation can be determined through salary surveys, comparison with other similar organizations and/or using an outside compensation expert.

Building Block #4 – Determine the Goals of the Compensation Package

Funds in nonprofit organizations are often stretched thin.  The result is compensation packages may be below market value for the position and fringe benefit plans may be limited.  However, it is important that nonprofit organizations see compensation planning as more than just the paycheck.  A nonprofit organization should acknowledge the varied needs of its employees and determine what is important for the organization to provide.  Organizations should consider if they desire or intend to provide for benefits such as health benefits, retirement needs, educational programs or dependent care programs. 


There are many excellent resources for compensation planning.  Nonprofit organizations of all types have access to more resources than ever before.  However, even with all of the resources, organizations still struggle getting a compensation structure in place properly.  Two publications associated with this author are PPC's Nonprofit Tax and Governance Guide:  Helping Organizations Comply available at and Christianity Today's Church Compensation: From Strategic Plan to Compliance available at  

For the final four building blocks in building a solid foundation for an organization's compensation process see next week's blog. 

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.