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Should private foundations have independent managers to review salaries?

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Should private foundations have independent managers to review salaries?

Tax Code Section 4958 on intermediate sanctions is the standard for determining reasonableness when considering executive compensation issues for public charities. Many private foundations, however, have boards that consist of mostly family members, which would negate the “rebuttable presumption” regulation under 4958 of having “independent board members” determining the compensation. Our advisory firm has taken the position that in a private foundation, it is best to have some independent board members, if possible. As an alternative, they can engage a qualified third party to conduct an appropriate market study to determine reasonableness, supported by an opinion letter.  Does this appear to be a sound logic that you would agree with?

You are correct that the intermediate sanctions provisions of section 4958 apply to public charities and not to private foundations, but private foundation managers can be charged with self-dealing if they take compensation that is unreasonable.  The key therefore is determining that the compensation is reasonable under the circumstances.

Having an “independent” board member or two may help the determination.  But having the family lawyer, or accountant, or a next door neighbor, may not signal real independence that would be able to put a check on the recipient managers.  And a tight family may not want outsiders involved in their family philanthropy.

A third party opinion might be helpful, but they can be expensive and there is always a certain skepticism about them because they tend to justify the numbers that the managers want to justify.    

Your recommendations are valid ones, but may be overly conservative. Even a small family foundation can do a quick study of comparables to assure that their salaries are not unreasonable.  The Council on Foundations has extensive salary data broken down by geographic area, size of foundation and other characteristics.  As long as the managers aren’t being greedy, they should be ok on their own.

Tuesday, September 4, 2018

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