BE AWARE OF REASONABLENESS OF COMPENSATION RULES

The Internal Revenue Service has specific rules for compliance under the Intermediate Sanctions ruling (IRC Section 4958) regarding reasonableness of compensation. These rules apply to nonprofits that take donations in all sectors of the economy. These organizations should periodically review the compensation levels for their most senior executives (“disqualified persons” as specified in IRC Section 4958).   The IRS acknowledges broad compliance with the Intermediate Sanctions regulations. However, all nonprofits should be aware of these rules and how to comply with them.

REASONABLENESS OF COMPENSATION FOR SENIOR EXECUTIVES

For purposes of determining the reasonableness of compensation of senior executives who have a material impact on the nonprofit institution, the Internal Revenue Service has determined that, in the absence of a formal audit, an organization may achieve a “rebuttable presumption of reasonableness” if it meets three pre-established criteria:

1. The organization must have an independent committee of the Board of Directors comprised of “disinterested” individuals approve the actual pay levels of the executives;
2. The organization must rely on comparability data (compensation and benefits) applicable to the executives; and
3. The organization must document, the results of the comparability study, any inference regarding adjustment of pay for executives and the decision of the Board of Directors to approve any adjustment of the executives’ compensation levels.

A more tailored methodology

IRC Section 4958 establishes a general approach in the three steps above. However, the comparability study requires a more tailored methodology for determining the reasonableness of compensation including:

• A compilation of data from actual peer organizations that meet specific criteria
  • Comparable industry types of nonprofit organizations;
  • Similarly sized nonprofit organizations;
  • Organizations in the same geographic location; and
  • Organizations in related industries that compete for executive talent.

• A review of the role of each disqualified senior executive in the nonprofit including an assessment of the duties and responsibilities of the executive.

• A report on the comparability of the following compensation elements:
  • Base Salary,
  • Incentive pay (short-term bonuses),
  • Benefits plans, and
  • Perquisites.

The Board of Directors, through its Compensation Committee, determines the appropriate compensation levels for these positions based on this review of the competitive labor market as well as executive performance.

When this procedure is applied, tax exempt organizations can use the three steps above to justify their total remuneration policies and help avoid assertions of excessive compensation and benefits for the nonprofit’s senior executives.

Third party objectivity

A third-party, objective consulting group can assist the Board of Directors of a nonprofit by completing a comparability study from a totally independent perspective. The approach that this third party can offer includes:

1. Using a comprehensive survey or surveys of the nonprofit’s industry group to determine competitive levels of salary, bonus or incentives, benefits, and perquisites for the senior executives; and
2. Using a comprehensive analysis on specific peer organizations (similar industry, size and scope of operations) to establish a rebuttable presumption of reasonableness for the nonprofit organization and its most senior executives.

For a complete copy of the recent IRS reports concerning this ruling, please visit:

https://www.irs.gov/pub/irs-tege/exec._comp._final.pdf or https://www.irs.gov/charities/charitable/article/0,,id=123301,00.html

We continue to see healthcare costs rise at an incredible pace, placing an additional burden on employees.

As an employer, it is important to understand this trend and how it affects your workforce and to look for ways to balance costs to remain competitive.

A few of the facts:

• Aon’s 2019 Global Medical Trend Report shows that in 2019 the global average medical trend rate was 7.8% and the average general inflation rate was 2.8%
• According to Mercer’s 2018 National Survey of Employer-Sponsored Health plans, overall cost growth remains moderate, averaging 3.3% annually over the past five years compared to 5.7% over the prior 10-year period, but continues to outpace inflation and the growth of workers’ earnings.
• A Kaiser Family Foundation Employer Health Benefits Survey states that on average, workers this year are contributing $5,547 toward the cost of family coverage, with employers paying the rest. Since 2008, average family premiums have increased by 55%, twice as fast as workers’ earnings (26%) and three times as fast as inflation (17%).
• Additionally, 85% of covered employees have a deductible in their coverage plan, a 4% increase from the year prior and a 59 percent increase from a decade ago. The average single deductible now stands at $1,573. The average deductible in 2008 was $735.
• The foundation estimates that these factors have resulted in a 212 percent increase in burdens of deductibles on covered employees.

What can you do to best support your workforce and remain competitive?

Focusing on cost containment plus promoting a culture of health by encouraging healthy behaviors and offering annual tests and physicals, supports long term health and overall engagement and productivity.

Cost containment strategies + plan design changes

Cost containment strategies vary, but some may include the elimination of unreasonable plan uses, the introduction of alternate plan designs, negotiation of premium costs with carriers, and development of programs that will reduce chronic medical conditions.

Focusing on improved access and affordability support a long-term sustainable success strategy. One such strategy includes the offering of telemedicine services as well as medical opinion services, programs targeting chronic health problems, and access to centers of excellence (COE) for surgeries and a growing range of other complex treatments. 

Create a Culture of Health

A culture of health is broadly defined as one in which good health and well-being foster healthy equitable communities, allowing everyone the opportunity to make choices that lead to healthy lifestyles. Supportive cultures are important determinants in lasting lifestyle improvement and long-term health outcomes. Some of the largest influencing factors affecting health today include:

• Poor nutrition
• Poor stress management
• Obesity
• Physical inactivity
• Aging

Creating an internal culture of health begins with shared values, established norms, support, and positive social climate.  Provide, encourage and support opportunities for employees to complete health risk assessments – questionnaires about enrollees’ medical history, health status, and lifestyle. Offer biometric screenings, health examinations conducted by a medical professional.

• Facilitate the management of chronic health conditions
• Prevent/reduce the risk of accidents and illness
• Detection: Help employees understand their health risks and steps to improve it
• Encourage healthy behaviors
• Promote wellness and provide coaching

Consider offering financial incentives for participation in these and other wellness programs.

How can we help?

Compensation Works will work with you to assess your current benefits package and recommend the best approach for you to help you control costs, support your workforce and remain competitive in the market.

As the saying goes, “all good things must come to an end…” – while our economy continues to grow, the growth is slowing.

According to The Kiplinger Letter, the United States gross domestic product (GDP) will grow 2 percent, annually, over the next five years.  However, it could drop below two percent in the fourth quarter.

The 2 percent (average) annual growth is about 1 percent lower, on average, than our annual growth between 1970 and the “Great Recession.” (Kiplinger)

Inflation is expected to remain around 2.3 percent in 2019, due to the slowing economic growth and rate increases within the Federal Reserve. (Kiplinger)

The new Department of Labor (Federal) Overtime Rule is expected in March 2019.  Proskauer predicts that the minimum salary for exemption will likely increase to the low-to-mid $30,000s.  Automatic future increases are unexpected, and the new rule is not likely to take effect until 2020. (Proskauer)

When we receive news on the March 2019 overtime ruling, we will report it to you.

Additionally – As of January 2019, though deemed unconstitutional, the Affordable Care Act, colloquially known as “ObamaCare,” remains unaffected.  Subscribers will continue to wait for a final ruling. (Kiplinger)

Though the salary budget increases are at a standstill, with projections between 3.0 – 3.2 percent for the fifth consecutive year (WorldatWork), there are a few industries that are expected to see a surge of growth by 2024.

As reported in The Kiplinger Letter – with the growing aging population, health-care related jobs are expected to increase over the next five years.  Likewise, with the expansion of 5G networks impending, vast opportunities in the telecommunications field will likely be needed.

TRENDS IN HR – 2019

1. Technology and Analytics – Increased use of analytics to predict and assess retention, recruitment, etc. and increased use of technology for everyday tasks such as payroll.  (SHRM)

2. People Focus – Maintaining the humanity of HR – remembering to focus on the person-to-person interactions, despite growing use of technology. (SHRM)

3. Updated Benefits – To meet the demands of modern society – updating benefits package offerings to retain and attract talent (SHRM)

4. Certification – There will be increased emphasis on updating skill sets or becoming certified to stay relevant and keep abreast of new technologies and other trends (SHRM)

5. Automation and Digitization – HR processes are becoming more automated and/or digitized for efficiency – employers and employees alike should be prepared for these changes. (Workspan)

As stated by a McKinsey Global Institute report, 62 percent of executives expect the need to replace a quarter of their workforce, by 2024, due to the growth of automation and digitization.  (Workspan)

While these trends may change the face of HR and its methods, the focus remains the same – “the bottom line always gets down to people.”

The Board of Directors and management in hospitals and healthcare institutions rely on third party, objective comparability studies to ensure that executive pay is reasonable.  Its relatively easy to identify and acquire objective sources with real-time compensation data.  Using these sources, any healthcare organization can establish a range of compensation opportunities for the executive suite.  However, evaluating executive performance and rewarding these individuals for their performance, is not as easy.  This step can be complicated by subjective factors.  True performance management and evaluation can be misguided by personal impressions and individual conflicts that almost never offer a foundation for effective performance evaluation.

Performance should always be objectively evaluated and should always have a strong foundation based on hospital and individual performance.  Successful performance plans are guided by empirical tests that use quantitative and qualitative measures to evaluate success.  These plans provide a link between compensation dollars and level of performance. When applied conscientiously, they allow top management to effectively communicate their assessment of individual executive performance and they allow the Board to effectively communicate their level of satisfaction with a CEO’s performance.

Using a recent survey of hospital executive compensation allows top management and the Board of Directors to develop a range of pay opportunity which is appropriate for the size of the hospital as well as its geographic location.  The following tables show Total Cash Compensation by Revenue and by Cost-of-Living area (Low-Medium-High).

All Hospitals – Median Total Cash Compensation By Revenue 

Total Cash Compensation Reported in $000’s.

All Hospitals – Median Total Cash Compensation By Cost-of-Living Area

Total Cash Compensation Reported in $000’s.

Source: 2018 Total Compensation Solutions Hospital Executive Compensation Survey.

We’ve found that business owners – especially those in middle market companies – are often surprised by how much it costs to replace an employee.

According to Zane Benefits, a CAP study found average costs to replace an employee are:

• 16% of annual salary for high-turnover, low-paying jobs (earning under $30,000 a year). So the cost to replace a $10/hour retail employee would be $3,328.
• 20% of annual salary for mid-range positions (earning $30,000 to $50,000 a year). For example, the cost to replace a $40,000 manager would be $8,000.
• Up to 213% of annual salary for highly educated, executive positions. That means the cost to replace a $100,000 CEO is $213,000.

With costs this high, it’s wise to invest in hiring and retaining the right people for your organization. The resources on the McDermott Associates website can help you design compensation plans that help you recruit and retain individuals who can help your organization grow.

Our economic growth is flourishing!

The United States’ unemployment rate is as low as 3.9 percent, as reported by the United States Bureau of Labor Statistics (BLS) and our real gross domestic product (GDP) increased at a rate of 4.2 percent in the second quarter of 2018, according to a “second estimate” by the United States Bureau of Economic Analysis (BEA).  Considering these numbers, it appears our economy is on an upturn.

However, salary budget increase projections remain stagnant for the fifth consecutive year.

According to WorldatWork, the 2019 projected salary budget increases will remain between 3.0 to 3.2 percent with a median of 3.0 percent, and a mean (average) of 3.2 percent.  Actual increases for 2018 were 3.0 and 3.1 percent for the median and mean, respectively.

The construction industry is one of very few industries that is expected to have slightly higher increases with average projections between 3.6 to 3.7 percent, while the education sector is projected to have an average increase at least half a percentage lower than the national projected average.  (WorldatWork)

Company size also plays a role in the projections, regarding company size by employee head count.  Organizations reporting 2,499 employees or fewer are projecting average increases approximately one- to two-fifths of a percent higher than organizations reporting 2,500 or more employees.  (WorldatWork)

Surprisingly, the same is not true regarding organization size by revenue.  Organizations of all revenue sizes are projected to have average increases between 3.0 to 3.2 percent, regardless of revenue size.  (WorldatWork)

The Conference Board also projects salary budget increases at a median of 3.0 percent overall – when including all industries and/or all employee categories.  Additionally, they are projecting inflation rates at 2.4 percent for both 2018 and 2019, at the time of this newsletter.

The projected 3.0 to 3.2 percent increases are expected nationally, with no states projecting increases above or below the 3.0 to 3.2 percent projection.  (WorldatWork)

As the economy continues to thrive, perhaps salary budget increases will finally surpass their standstill and reach pre-2009 levels.

However, for the foreseeable future, it seems, salary budget increase projections will remain at the 3.0 to 3.2 percent rate that we have become accustomed to over the recent half-decade gridlock.

Barely a day goes by without some mention of pay equity.

Whether it’s in the news or in a briefing from your legal firm or HR society, there is quite a buzz about pay equity – and for good reason:

• The National Women’s Law Center (NWLC) published a report based on the most recent U.S. Census Bureau data showing that women earn 80 cents for every dollar paid to their male counterparts across 97% of occupations. The report finds the wage gap is due in part to the fact that women are overrepresented in low-wage jobs and underrepresented in high-wage jobs. But even when comparing women and men in the same occupations, the report finds women are still paid less than men doing the same jobs in nearly every sector of work
• An April 2016 congressional report of the Joint Economic Committee concluded that women working full-time earn $10,800 less per year than a man (based on median annual earnings). Over a career, this adds up to $430,000 for white women, $877,000 for African-American women, and over $1 million for Latina women
• The World Economic Forum’s 2017 Global Gender Gap Report stated that at the current rate of progress, it will take 61 years to close the gender pay gap in Western Europe, 161 years in East Asia and 168 years in North America

Equitable pay is good business

Pay inequities exist, and they are not just a legal issue – there are compelling business reasons for paying employees equitably:

• 34% of employees are not engaged and cite fair pay as the top reason for lack of engagement (Quantum Workplace, State of Employee Engagement study)
• In a 2017 Glassdoor study, 67% of US employees said they would NOT apply for jobs at employers where they believe a gender pay gap exists
• A Gallup study concluded that organizations with high employee engagement have 4.3X higher growth rates than organizations with low employee engagement
• According to Deloitte, gender-diverse companies are 15% more likely to outperform national industry medians, and ethnically-diverse companies are 35% more likely to outperform national industry medians

Now is the time to address pay inequities in your workplace. If employees perceive a pay gap, regardless of whether their perceptions are correct, there is a 16% decrease in intent to stay – according to Gartner, that’s 50% worse than the typical impact of a pay freeze.

Organizations can gain a competitive advantage by getting in front of pay equity perceptions and potential morale, retention, and even legal issues by conducting a pay equity analysis. Once an analysis is conducted, organizations can be transparent by communicating with employees about any pay gaps and what they are doing to alleviate the pay gaps. To truly close pay gaps, organizations can analyze their pay practices to ensure pay is administered fairly. Organizations can also look at their talent management programs to ensure they are promoting diversity.

Gain a competitive advantage by acting now

People are inclined to work for and with companies focused on achieving pay equity. Taking action and communicating this internally can boost morale and engagement. Communicating externally can drive more business your way. Contact Compensation Works today for a free consultation!

We are often involved in reviewing a client’s sales compensation plan document for clarity and completeness.

What we find when we read this document is that it appears to have been “written by attorneys for attorneys.”

If your sales compensation plan document is the primary means by which you communicate compensation to your sales people, read it from their point of view. Does it engage and inspire them? Does it make clear how they can earn significant income for doing things that truly benefit the company? Do they see themselves in alignment with the company’s goals?

Many times, the definitions and terms of conditions appear at the beginning of the document, and not until you get considerably into the Appendices or Attachments do you see how the plan works. It is important that the plan document doesn’t indirectly or inappropriately communicate the message that “We really don’t want to pay you, but if you do these things, I guess we’ll have to!”

Compensation Plans Guiding Principles

To optimize understanding and engagement while providing legal protections, there are three guiding principles to consider:

1. The plan description is primarily a reference document, usually in pdf format. Make it easy to find what the seller needs to know.
2. Don’t describe every possible situation in the terms and conditions section of the document. Describe the most prevalent and develop a governance process and authorized management for sellers to find out the answer to other issues.
3. Emphasize the awesome compensation opportunity your company is providing when the seller performs. Move the terms and conditions towards the end of the document, start with the sales strategy, compensation and quota and account assignment practices.

Organizing Plan Content

Below are specific guidelines for reordering and reorganizing the content of your company’s sales compensation plan description for clarity and meaning.

Cover Page

Create an inviting cover page and consider creating a tagline for your sales compensation program that ties to your strategy, e.g., “Growing. Winning. Collaborating”.

Table of Contents

Make the content a seller needs to reference easy to find with the beginning of each section and subsections identified with a page number. As a pdf, create links from the table of contents.

Introduction

Describe the purpose of the document and include any legal references or terms, such as names that go in quotations, like the “Plan” or “Participant”. For example, “the purpose of this Sales Compensation Plan (“SCP”) is to communicate the philosophy, description and the most prevalent terms and conditions by which sales incentive compensation is calculated and paid at BestCompany, Inc. (“Company”).”

Plan Purpose, Effective Date and Eligibility

The reason for sales compensation is to achieve the sales strategy. The compensation plan is also meant to drive certain sales behaviors and the fulfillment of key responsibilities. The purpose of the plan should integrate the annual sales strategy and desired sales behaviors/responsibilities of the role. For example, “the purpose of the plan is to reward sellers for increasing the number of products in existing accounts, achieving or exceeding product xyz’s quota and ensuring accounts renew their contracts.”

Components of the Sales Compensation Plan

This section describes each of the components of total cash compensation, including any salary, commission, bonus and draws. Begin the section with a sentence describing the essence of the compensation, e.g., “your total compensation is designed to deliver more compensation with the achievement of higher levels of quota and from the sale of product xyz”. Equity awards are usually described in a separate document but can also be included as appropriate. Recognition programs or SPIFFS can also be described in this section.

Illustrative Example of Commission and Bonus Calculations

Examples are provided in this section to show how formulas, such as commission accelerators, work. It will require developing a sample of a realistic attainment level of quota or related targets and showing how it is calculated and paid. Then add in the annual base salary to reinforce their total potential earnings at year end. Illustrative tables and graphs help reinforce understanding. Some organizations put these illustrations at the end of the document in an appendix if there is a need to show many examples or if the plan has been in place for many years.

Territory, Account and Quota Assignments

The sales compensation plan components are not believable to sellers until they understand how accounts are assigned, what that means for quota and under what circumstances they might be reset. The tone of this section should communicate both fairness and performance in describing how quotas are assigned.

Sales Compensation Payout Timing or When Sales Incentives are Earned

In this section, you want to be clear when commission is earned versus paid, what happens when the customer does not pay or returns the product and any requirements or steps the seller must meet or follow to ensure they are credited with the sale. Typically, this is where the revenue crediting process is described, such as when the company recognizes the sale for purposes of paying the commission or bonus, such as when it is booked, invoiced or paid by customer. Due to varying state laws around what a seller has earned when they terminate, it is always safer to say that commission is earned once the customer pays even though the company is paying at the time it is booked.

New Hires, Leave of Absences, Terminations and Transfers

This section describes how sellers are paid if they terminate, transfer to another position or take a leave of absence.

Sales Crediting Terms and Conditions

This section can cause much angst among sellers as there can be many situations that limit whether they receive any or full compensation for a sale, such as when other sellers are involved in the sale, what happens in the case of a windfall, multi-year contracts and certain products that are not given full credit or may be given additional credit. These are the most typical changes that can occur each year and can really disengage a seller if not appropriately designed or described with the right tone. It is most effective to be factual and clear about the circumstances where incentive is reduced and reinforce any cases where they receive additional sales crediting or incentives.

General Terms and Conditions

This is where most of the legal language should be placed, such as employment at will, interpretation of the plan provisions, etc.

Glossary of Terms

Define each of the terms used in the document but don’t describe policies. Select the terms you put in the glossary from the perspective of a new hire. This could be put in the appendix.

Signatures

There are two approaches to signatures. One is to have a signature line in this document, usually completed using an electronic signature tool like DocuSign. The other approach considers that the seller is also receiving an individual incentive plan statement which lists their specific quota, incentive, base salary, etc. For organizations with incentive software, this is generated by the software and then the Sales Compensation Plan Description is attached. If this is the case, the signature for the individual statement will also cover this document with the sentence: “By signing this individual incentive plan, the seller is also acknowledging that the Sales Compensation Plan Description has been read and accepted.”

Need Help Documenting Your Sales Comp Plan?

This article may have created questions, or you may want additional detail about documenting your plan. If you would like to discuss your specific situation or questions, we would enjoy speaking with you.

Wilson Group develops customized sales compensation plans and has worked across industries to:

• Analyze competitive market compensation
• Collect and provide insights about salesforce feedback
• Define and articulate the core sales strategy
• Describe sales roles and key accountabilities
• Develop “costing” models and provide insights to understand the impact of the new plan
• Facilitate the resolution of key issues that impact compensation plan design and success—such as, quota setting, revenue crediting and territory management
• Develop a framework for sales recognition, SPIFFS and Presidents Club
• Create presentations, calculators and compensation plan documents
• Prepare sales plan documents, illustrations and tools
• Assist in the selection of technology to administer the plans