Attorney General’s Guide for Charities | Directors & Officers of Public Benefit Corporations | 53
Both the IRS and
Attorney General
audit allegat
ions
excessive
corporations must be composed of at least 51 percent of directors who
are “disinterested” persons.
7
Disinterested means that neither the director
nor any member of the director’s family is paid by the corporation to do
anything other than act as a director. For example, a director who is a
paid employee or whose spouse is a paid employee of the corporation is
not a “disinterested person” for the purposes of this limitation.
In addition, the compensation including benefits paid to officers such as
the president or chief executive officer, the treasurer or chief financial
officer, or those with comparable responsibilities, must be reviewed by the
board or an authorized committee, at the time of hiring, whenever the
term of employment is renewed or extended, and whenever such
compensation is modified.
8
In evaluating compensation, the board should
analyze whether the proposed amount to be paid is in the best interest of
the nonprofit. For instance, does the officer bring a lot of experience to
the organization, and has he or she effectively and successfully improved
or promoted the charity’s programs? (Additional factors are listed below.)
Note that if the charitable organization has declining revenue, is
experiencing staff or donor dissatisfaction, or is subject to multiple
lawsuits (which may reflect mismanagement), it may not be in the
corporation’s best interest to give the chief executive officer or chief
financial officer a raise.
Furthermore, compensation paid to officers and directors cannot be
concealed from donors or the public at large. Nonprofits that file IRS
Form
990, Form 990-EZ, or Form 990-PF, must list compensation paid to
directors, officers, trustees, and key employees (as defined by the IRS).
In addition, these forms must list the compensation of its five highest-paid
employees who are not directors, officers, trustees, and key employees,
and earn more than $100,000 annually. The failure to provide this
information may result in IRS fines.
Form 990 also requires the charitable
organization to provide explanations about the methods used to establish
and approve executive compensation levels.
Both the IRS and Attorney General audit allegations of excessive
compensation. The Attorney General may recover excessive
compensation from the directors and officers who received the
overpayment, and from the directors who approved the compensation if
they failed to exercise due care. Likewise, the IRS may levy penalties for
excessive compensation ranging from fines to revocation of an
organization’s tax-exempt status. IRS fines may be levied against both
the person who received the overpayment and the directors who
7
(Corp. Code, § 5227.)
8
(Gov. Code, § 12586, subd. (g); Cal. Code Regs., tit. 11, § 312.1.)