Avoid Risky Executive Compensation Schemes

Two Illinois nonprofits that were in the news in recent years provide good examples of ill-considered schemes to hide the compensation of their chief executives.

Executive Club of Chicago. In 2007, The Executive Club of Chicago’s long-time CEO raised eyebrows and brought on an inquiry by Crain’s Chicago Business when she formed a solely owned company and hired it as the employee base for the Club.  She was the manager.  Because the cost of management was not revealed in the Club’s 990s, it was impossible for anyone to tell how much she was paid.

The Executives’ Club cancelled the arrangement in 2009 and put her back on its payroll.  She left the Club that year amid speculation that the gambit had cost her a very well-paid job.

Bridgeway, Inc.  In Galesburg, a nonprofit by the name of Bridgeway, Inc., more than doubled its CEO’s compensation over a four-year period.  In the last year in which his compensation was actually disclosed, the CEO’s reported income had hit $428,000 in pay and benefits.  He then formed a for-profit company to run the organization’s day-to-day operations and he was its sole employee.  In the next year’s filings, the nonprofit reported no compensation whatsoever for the CEO.[1]

The Bridgeway organization, which provides care and job training services to the disabled and elderly, was cited by the Chicago-based Charity Watch as a concern for regulators.  “Current IRS rules allow charities to hide what they pay their executives,” said Daniel Borochoff, president of Charity Watch, in an article in the Chicago Tribune.  “There’s a loophole that some of them are using to avoid transparency.”

The loophole has closed at least a bit. The Illinois Department of Human Services (IDHS) – one of the state’s largest contractors – has implemented a new requirement that all contracted vendors must disclose the salaries and benefits of executives that are paid through private companies.  In the first year of this requirement, it affected only those agencies that received $250,000 or more in IDHS funds. That threshold has now been lowered to $25,000 per year.

An IRS official noted recently that shenanigans of these sorts put a target on the organization for audit.  The IRS has seen all kinds of methods used to keep information out of the public eye, and it is not friendly to them.  If your organization is contemplating such an arrangement, be sure to work with qualified counsel to be sure that it is done in a way that will avoid future scrutiny.

[1] Bridgeway, Inc. reported on its 2012 Form 990 return that the President received $0 in reportable compensation.  It lists “$1.5 million in “Other expenses”.