COMPENSATION POLICY

[ORGANIZATION NAME]

Adopted by the Board of Directors on: [DATE]

Last Reviewed/Amended: [DATE]

ARTICLE I - PURPOSE

1.1 Policy Statement

[ORGANIZATION NAME] (the "Organization") is committed to establishing and maintaining a compensation program that:

(a) Attracts, motivates, and retains qualified employees;
(b) Provides fair and reasonable compensation;
(c) Complies with all applicable federal, state, and local laws;
(d) Demonstrates responsible stewardship of charitable resources;
(e) Avoids "excess benefit transactions" under Internal Revenue Code Section 4958.

[// GUIDANCE (IRS): IRC Section 4958 imposes excise taxes on "excess benefit transactions" - transactions in which a "disqualified person" (officer, director, or key employee) receives compensation that exceeds fair market value. This policy helps ensure compliance.]

1.2 Legal Framework

Intermediate Sanctions (IRC Section 4958):
The IRS can impose significant excise taxes on individuals who receive excess compensation from a 501(c)(3) organization, and on organization managers who knowingly approve such compensation.

• First-tier tax: 25% of the excess benefit (paid by the recipient)
• Second-tier tax: 200% if not corrected (paid by the recipient)
• Manager tax: 10% of the excess benefit, up to $20,000 (paid by approving managers)

1.3 Rebuttable Presumption of Reasonableness

This Policy is designed to establish a rebuttable presumption that compensation is reasonable under Treasury Regulations Section 53.4958-6, which requires:

(a) Approval by an authorized body composed of individuals without conflicts of interest;
(b) Reliance on appropriate comparability data; and
(c) Adequate contemporaneous documentation.

ARTICLE II - SCOPE

2.1 Covered Positions

This Policy applies to compensation decisions for:

(a) Officers: Chair, Vice Chair, Secretary, Treasurer, and other officers;
(b) Executive Director / CEO: The chief executive officer of the Organization;
(c) Key Employees: Employees meeting the IRS definition of "key employee" for Form 990 purposes;
(d) Highly Compensated Employees: Employees earning more than $[AMOUNT] annually;
(e) Disqualified Persons: As defined under IRC Section 4958.

2.2 Definition of Disqualified Persons

Under IRC Section 4958, "disqualified persons" include:

(a) Persons who were in a position to exercise substantial influence over the Organization's affairs at any time during the five-year period ending on the date of the transaction (includes officers, directors, and certain key employees);
(b) Family members of such persons;
(c) Entities in which such persons own more than 35% interest.

2.3 Definition of Compensation

For purposes of this Policy, "compensation" includes all economic benefits provided, directly or indirectly:

(a) Salary and wages;
(b) Bonuses and incentive payments;
(c) Deferred compensation;
(d) Retirement plan contributions;
(e) Health and welfare benefits;
(f) Expense allowances and reimbursements;
(g) Housing allowances or housing provided;
(h) Vehicle allowances or vehicles provided;
(i) Club memberships;
(j) Severance payments;
(k) Any other economic benefit.

ARTICLE III - COMPENSATION COMMITTEE

3.1 Establishment

The Board of Directors shall establish a Compensation Committee (or the Board itself may serve this function) to oversee executive compensation.

3.2 Composition

The Compensation Committee shall consist of at least [NUMBER] independent Board members who:

(a) Are not employees of the Organization;
(b) Do not receive compensation from the Organization (other than Board service);
(c) Do not have a material financial interest in any transaction with the Organization;
(d) Are not related to any person whose compensation is being determined.

3.3 Independence Requirement

[// GUIDANCE (IRS): To establish the rebuttable presumption, compensation must be approved by persons without conflicts of interest. Committee members must be truly independent.]

A Compensation Committee member has a conflict of interest with respect to a compensation arrangement if the member:

(a) Is the person whose compensation is being determined;
(b) Is a family member of the person whose compensation is being determined;
(c) Has a financial interest affected by the compensation determination;
(d) Receives compensation subject to approval by the person whose compensation is being determined;
(e) Has any other conflict that could affect independence.

3.4 Responsibilities

The Compensation Committee shall:

(a) Establish the Organization's compensation philosophy;
(b) Review and approve compensation for the Executive Director/CEO;
(c) Review compensation for other officers and key employees;
(d) Obtain and review comparability data;
(e) Document compensation decisions;
(f) Ensure compliance with this Policy and applicable law;
(g) Report to the full Board on compensation matters.

ARTICLE IV - COMPENSATION PHILOSOPHY

4.1 Guiding Principles

The Organization's compensation philosophy is based on the following principles:

(a) Market Competitiveness: Compensation should be competitive with comparable positions at similar organizations to attract and retain qualified individuals.

(b) Internal Equity: Compensation should be fair relative to other positions within the Organization.

(c) Performance-Based: Compensation should recognize individual and organizational performance.

(d) Sustainability: Compensation must be affordable within the Organization's budget and consistent with its charitable mission.

(e) Transparency: Compensation decisions should be made through a clear, documented process.

(f) Compliance: Compensation must comply with all legal requirements and avoid excess benefit transactions.

4.2 Target Market Position

The Organization targets compensation at the [XX]th percentile of the relevant market:

☐ 25th percentile (below market)
☐ 50th percentile (at market median)
☐ 75th percentile (above market)
☐ Varies by position

ARTICLE V - PROCESS FOR SETTING COMPENSATION

5.1 Comparability Data

Before setting compensation for covered positions, the Compensation Committee shall obtain and review comparability data, which may include:

(a) Compensation surveys: Published surveys of nonprofit compensation from reputable sources (e.g., GuideStar, ASAE, state nonprofit associations);

(b) Form 990 data: Compensation reported on Form 990 by comparable organizations;

(c) Consultant studies: Compensation benchmarking studies by qualified consultants;

(d) Peer organization data: Information from similar organizations (similar budget, geography, mission).

5.2 Comparability Factors

When selecting comparable organizations, consider:

(a) Size (budget, staff, assets);
(b) Geographic location;
(c) Type of organization (mission, tax-exempt category);
(d) Complexity of operations;
(e) Scope of responsibilities of the position.

5.3 Documentation Requirements

[// GUIDANCE (IRS): Contemporaneous documentation is required for the rebuttable presumption. Create written records BEFORE or at the time compensation is approved.]

The Compensation Committee shall create written documentation of compensation decisions that includes:

(a) The terms of the compensation arrangement;
(b) The date of the approval;
(c) The members of the approving body present during discussion;
(d) The comparability data obtained and relied upon;
(e) Any actions by members with a conflict of interest;
(f) The basis for the determination that compensation is reasonable.

5.4 Annual Review Process

Executive compensation shall be reviewed at least annually using the following process:

Step 1: Gather Information
- Performance evaluation of the Executive Director
- Financial position of the Organization
- Updated comparability data
- Compensation trends in the nonprofit sector

Step 2: Compensation Committee Review
- Review comparability data
- Assess performance
- Consider organizational factors
- Develop compensation recommendation

Step 3: Board Approval
- Compensation Committee presents recommendation
- Board discusses (without the Executive Director present for their own compensation)
- Board approves compensation
- Decision documented in minutes

Step 4: Communication
- Communicate decision to the individual
- Update employment records
- Ensure Form 990 reporting compliance

ARTICLE VI - COMPONENTS OF COMPENSATION

6.1 Base Salary

Base salary is the primary component of compensation and should reflect:

(a) Market rates for comparable positions;
(b) The individual's experience and qualifications;
(c) Performance;
(d) Internal equity.

6.2 Incentive Compensation / Bonuses

☐ No Incentive Compensation: The Organization does not provide bonuses or incentive compensation.

☐ Incentive Compensation Permitted:

Incentive compensation, if provided, shall:

(a) Be based on objective, measurable criteria established in advance;
(b) Not be based solely on revenue generation that could encourage inappropriate fundraising;
(c) Be approved by the Compensation Committee;
(d) Be included in the reasonableness analysis.

[// GUIDANCE (IRS): The IRS scrutinizes incentive compensation closely. Ensure bonuses are reasonable and not tied to metrics that could encourage private benefit.]

6.3 Benefits

The Organization may provide the following benefits:

☐ Health insurance
☐ Dental insurance
☐ Vision insurance
☐ Life insurance
☐ Disability insurance
☐ Retirement plan contributions
☐ Paid time off
☐ Professional development
☐ [OTHER]

Benefits should be:
(a) Comparable to those provided by similar organizations;
(b) Applied consistently to all eligible employees;
(c) Included in the total compensation analysis.

6.4 Deferred Compensation

If deferred compensation is provided:

(a) It must be included in the reasonableness analysis;
(b) Plans must comply with IRC Section 457(b) or (f) requirements;
(c) Plan terms must be documented.

6.5 Expense Reimbursement and Allowances

Expense reimbursements shall be:

(a) For legitimate business expenses;
(b) Documented with receipts;
(c) Subject to an accountable plan under IRS regulations;
(d) Reasonable and not excessive.

6.6 Severance

Severance arrangements, if provided, shall:

(a) Be approved by the Compensation Committee before the severance obligation arises;
(b) Be reasonable in amount (typically limited to [NUMBER] months' salary);
(c) Be documented in the employment agreement or severance policy.

ARTICLE VII - EXECUTIVE DIRECTOR / CEO COMPENSATION

7.1 Authority

The Compensation Committee shall review and recommend, and the Board of Directors shall approve, all compensation for the Executive Director / CEO.

7.2 Annual Performance Review

The Board Chair (or Compensation Committee) shall conduct an annual performance review of the Executive Director, which shall inform compensation decisions.

7.3 Employment Agreement

The Executive Director's compensation should be set forth in a written employment agreement that includes:

(a) Base salary;
(b) Benefits;
(c) Bonus or incentive compensation (if any);
(d) Severance provisions;
(e) Term and termination provisions;
(f) Other material terms.

7.4 Recusal

The Executive Director shall recuse from all discussions and votes regarding their own compensation.

ARTICLE VIII - FORM 990 REPORTING

8.1 Reporting Requirements

The Organization is required to report compensation on IRS Form 990, including:

(a) Compensation of officers, directors, and key employees (Part VII);
(b) Compensation of highest compensated employees;
(c) Details on Schedule J for reportable compensation over $150,000;
(d) Process used to establish compensation (Schedule O).

8.2 Compensation Review Process

Form 990 asks whether the Organization followed a process for determining executive compensation that included:

☐ Review and approval by independent persons;
☐ Comparability data;
☐ Contemporaneous substantiation of the deliberation and decision.

This Policy is designed to ensure affirmative answers to these questions.

8.3 Disclosure

The Executive Director and CFO shall ensure that all compensation is accurately reported on Form 990.

ARTICLE IX - PROHIBITED PRACTICES

9.1 Excess Benefit Transactions

The Organization shall not engage in any transaction that would constitute an excess benefit transaction under IRC Section 4958.

9.2 Private Inurement

No part of the Organization's net earnings shall inure to the benefit of any private individual, except as reasonable compensation for services rendered.

9.3 Automatic Increases

Compensation shall not be set to increase automatically without periodic review and reauthorization.

9.4 Loans to Officers and Directors

The Organization shall not make loans to officers, directors, or key employees.

ARTICLE X - POLICY REVIEW

10.1 Annual Review

This Policy shall be reviewed annually by the Compensation Committee and updated as necessary.

10.2 Amendment

This Policy may be amended by the Board of Directors at any time.

ADOPTION

This Compensation Policy was adopted by the Board of Directors of [ORGANIZATION NAME] on [DATE].

_________________________________________
[NAME], Board Chair

_________________________________________
[NAME], Secretary

APPENDIX A: COMPENSATION APPROVAL DOCUMENTATION TEMPLATE

COMPENSATION DECISION DOCUMENTATION

Date: ________________________

Position: ________________________

Individual: ________________________

Compensation Approved:
- Base Salary: $________________________
- Bonus/Incentive: $________________________
- Benefits (estimated value): $________________________
- Other: $________________________
- Total Compensation: $________________________

Comparability Data Reviewed:

Market Percentile: _____%

Compensation Committee Members Present:

Basis for Determination:

The Compensation Committee determined that the compensation is reasonable based on:

[EXPLAIN RATIONALE - e.g., compensation is at the 50th percentile of comparable organizations, reflects the individual's experience and performance, is within budget, etc.]

Certification:

The undersigned certifies that this compensation was approved in accordance with the Organization's Compensation Policy and that this documentation was prepared contemporaneously with the compensation decision.

_________________________________________
Compensation Committee Chair

Date: ___________________________________

[END OF DOCUMENT]