Disclosure rules to build an effective executive compensation strategy.

Author:Cherry, Brandon

The evolution of disclosing the total value of executive compensation packages and the methodology organizations use to compensate senior management has occurred at a rapid pace in the past few years. Since the first major changes in the public sector with the Securities and Exchange Commission modifying the disclosure requirements for publicly traded companies, investors have demanded further transparency in executive compensation and the methodology behind how compensation levels are set. Now the Internal Revenue Service (IRS) is requiring nonprofits, charities and other tax-exempt organizations to provide more clarity regarding the way competitive executive compensation is defined and delivered, due to revisions to the Form 990 tax return.

The two critical components that have the broadest impact on key executive compensation and how that information is disclosed are tabular disclosures and the Governance, Management and Disclosure section of Form 990.

The first component-tabular disclosures--presents all of the key components of compensation including base salary, annual incentives and longterm incentives, such as stock options and stock awards. The clarity such disclosures provide in how key employees and executives are paid will prove invaluable for companies that rely on Form 990 for competitive peer-group pay data.

The second component--the Governance, Management and Disclosure section of Form 990 may be particularly challenging for many organizations as the entire section will be new to fliers and may lead to more complex disclosures involving the organization's process for determining compensation.

Fundamentally, it is important for compensation professionals and members of the board of directors or governing body to recognize that, while the time commitment for new compensation governance disclosure rules may be substantial, there is a tremendous opportunity. The process of completing the disclosures will enable an organization to design and deploy an effective compensation strategy and ensure that competitive compensation levels are achieved through a rigorous methodology.

While the tabular data is an important component of the Form 990 filing, this article will focus mostly on how organizations can embrace the new governance disclosures as a catalyst for modifying or creating a complete and effective executive compensation strategy.

Who is Affected

For those organizations that believe the new disclosure and reporting rules are an opportunity to modify or create an effective compensation strategy, the first step is to determine when your organization will be required to file the complete Form 990 and use the new disclosure format. This step will help set the timeline for implementing any compensation strategy that is ultimately chosen. Figure 1 presents the gross receipt and total asset thresholds at which point organizations will be required to file the modified Form 990. Organizations that fall below these thresholds may choose to file the Form 990-EZ, which does not require many of the disclosures of the full Form 990. For example, an organization with $780,000 in gross receipts and total assets of $1.67 million would not be required to file the Form 990 for the 2008 tax year.

The following table presents the gross receipt and total asset thresholds at which organizations...

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