Over the course of a typical governing board member’s service, he or she will probably be involved in hiring at least one new chief executive. It’s an enormous and consequential responsibility, including approval of the complex terms and conditions of employment. Although accompanied by less fanfare, annual compensation decisions may be just as significant for ensuring the continued success of the president, and they should be a matter of interest for every board member—whether a trustee serves on the committee charged with this work or not.
The full board should approve, and every board member should be informed of, the president’s compensation and benefits package. That’s the recommended good practice from the recently published 2011 AGB Survey of Higher Education Governance, generously supported by the TIAA-CREF Institute.
There are many reasons boards should devote sufficient attention to presidential compensation: to fulfill the board’s fiduciary responsibilities, to recognize and reward the president’s accomplishments, to help retain an effective president, to avoid unwanted media and public attention, and to comply with applicable laws. The IRS provides additional incentives for boards to understand their responsibilities in regard to compensation: If it determines that the president has been awarded excessive compensation, it can impose fines on both the president and the board, as well as order the president to repay compensation deemed excessive. Moreover, the headlines resulting from an investigation can damage the institution’s reputation.
Private nonprofit institutions and public institutions that file the IRS Form 990 should know and follow IRS guidelines for establishing the “rebuttable presumption of reasonableness,” a legal standard showing that the board’s decision on presidential compensation was made by the appropriate body, informed by comparative data, and documented in a timely manner. This standard may be useful for all boards to show that they meet high standards for good practice.
The 2011 AGB Survey on Higher Education Governance asked who had responsibility for determining presidential compensation and whether comparative data were used, the process was documented, and the full board was informed of the president’s compensation. More than 700 colleges and universities responded. The survey found that it was typical for the full board to determine the compensation of presidents of public colleges and universities. Nearly three-quarters (74 percent) reported that the final decision on compensation was made by the full board; about 9 percent charged the executive committee with this decision; and about 13 percent reported “other,” including decisions made by system heads for presidents of institutions in systems. Independent colleges and universities reported that the final decision was most commonly made by the full board (39 percent), followed by the executive committee (32 percent), and compensation committee (22 percent). Only 3 percent of independent boards and less than 1 percent of public boards charged the board chair with this final responsibility. (See Table 1.)
Only 22 percent of independent and 3 percent of public boards reported that final decisions on presidential compensation were made by the compensation committee. That is consistent with AGB’s 2010 survey on policies, practices, and composition of governing boards, which found that governing boards at only 21 percent of independent institutions and 7 percent of public colleges, universities, and systems reported having a compensation committee. Since most boards don’t have a compensation committee, it’s especially important that such boards understand the full range of responsibilities with which this committee is typically charged, and then assign them otherwise. The updated version of AGB’s The Compensation Committee may be a useful resource.
Informing the full board of the total compensation package for the president was routine for public colleges and universities; 96 percent of public governing boards did so. This wasn’t as common among independent college and university governing boards; only 72 percent reported that the full board was informed, a significant increase over two years from 64 percent (as reported in the prior survey). Boards of private nonprofit colleges and universities should be aware that presidential compensation is often public knowledge, even if the institution isn’t subject to open meetings and records laws. Compensation reported in the IRS Form 990 is available about a year later through GuideStar, the Chronicle of Higher Education, and other sources. While it’s important to respect confidentiality in personnel decisions, including compensation, boards need to be in the know. (See Table 2.)
Boards of private colleges and universities were more likely than those of public institutions to use comparative data in determining the president’s compensation; 87 percent of independent boards did so, compared to 76 percent of public boards. Nearly three-quarters of both private (74 percent) and public college boards (71 percent) formally documented the process used by the board in determining presidential compensation. (See Table 2.)
Using comparative data and formally documenting the decision-making process are both good practices for all governing boards to use to support the board’s decisions, establish a defensible record, and manage institutional risk. These practices are essential for institutions that file the IRS Form 990 in order to satisfy IRS guidelines for establishing a rebuttable presumption of reasonableness.
Internal Revenue Service Rebuttable Presumption— Intermediate Sanctions
If an organization meets the following three requirements, payments it makes to a disqualified person under a compensation arrangement are presumed to be reasonable, and a transfer of property or the right to use property is presumed to be at fair market value. The three requirements for establishing the rebuttable presumption are:
- The compensation arrangement must be approved in advance by an authorized body of the applicable tax-exempt organization, which is composed of individuals who do not have a conflict of interest concerning the transaction,
- Prior to making its determination, the authorized body obtained and relied upon appropriate data as to comparability, and
- The authorized body adequately and timely documented the basis for its determination concurrently with making that determination.
From the IRS website.
Share on LinkedIn
