I see many cases where staff at a nonprofit doesn't work very hard, is not organized well, or otherwise appears to be what we would call "classic under-performers" in the for-profit business world. Is there anything to legally prevent a charitable organization from basing part of employee compensation (bonuses) on the nonprofit’s success or the success of an individual’s role within the organization?
Nonprofits don’t have a monopoly on under-performers. They exist in all fields, including the for-profit business world. And more money does not necessarily generate better performance. A number of very prominent under-performing business CEOs have walked away with multi-million dollar bonuses.
But to answer your specific question, the IRS permits reasonable bonuses to employees of charitable organizations but not if they are based on net earnings or profits. The IRS does not believe that it is consistent with providing the broadest charitable service to encourage employees to cut costs (and possibly service) for personal gain. Reasonable bonuses based on gross revenue or total activity are permissible, but those based on net revenue are not.
Schedule J of the Form 990 tax information return asks for a description of any compensation based on revenues or profits, or of any other “non-fixed” payments. Charities seldom award such bonuses, at least not on any broad basis. If they have the funds to afford it, they tend to want to use the money to provide more services.
Comments from our Readers
Pay for performance is very common in the not-for-profit sector, although, as was said, not for net earnings. If you are a board member I would encourage your board to set up performance goals with your CEO based on achievement of the strategic plan or movement toward it. Then ask the CEO to set up similar performance goals with employees.
As a not-for-profit executive, I take great offense at the assertion made by the poster, which makes me question the actual experience of this person in the not-for-profit sector. Many not-for-profit employees do amazing things with little resources, low pay and no benefits. However, I am happy that this person seems to want to establish a reasonable and fair way to compensate the employees with whom he or she works. --D.S. via e-mail
Planned giving sounds complicated, with its CRUTs and CRATs, CLUTs and CLATS, and CGAs. It can be incredibly complicated, but it needn’t be. Keeping it simple may be the best way to start a planned giving program for a charity that hasn’t already put one in place.
This webinar offered a review of major planned giving instruments and a discussion of ones that make the most sense to emphasize in starting a planned giving program. It discussed the advantages of integrating planned giving into an existing development program, targeting the best prospects, getting buy-in from the board that is likely to generate results, and setting a structure to make it all happen.
Weekly question and answer
Notice of each full edition
and its free stories
Report on 501(c)(3) electioneering
What our readers say about Nonprofit Issues
Once again you've tackled a tricky question and explained it so we all can understand the issue.--M.V.
Thank you for your informative and keen advice on nonprofit matters. I believe it's a unique and concise place to get answers to this often wispy area called nonprofit. --R.T.
Have a question?
Other ways to
Talk to the Editor
Next Conference Call:
Wednesday, September 10, 2014
Participate in this bi-monthly telephone seminar conference call and ask your questions directly to Editor Don Kramer.
Access the entire site
($9.95/24 hours, $17.95/3 months).
Full Day Program
A well-received full-day program that covers the current hottest topics in nonprofit law. Qualifies in Pennsylvania for Continuing Education credits.
Don is available for programs and speaking engagements ranging from a one-hour presentation to a full-day primer on nonprofit law. Contact us if you are interested in having him speak at your program.