Compensation: nonprofits also urged to heed IRS scrutiny.

With not-for-profit pay practices being scrutinized by the Internal Revenue Service (IRS), charities and private foundations need to be proactive in ensuring their practices are compliant and sound, warns the Hay Group, a global organizational and human resources consulting firm. By failing to do so, nonprofits could face penalties and resulting bad publicity.

Through extensive research with not-for-profits, Hay has found that many charities and tax-exempt institutions are unprepared for a high level of IRS scrutiny and resulting dissatisfaction with their compensation practices. "There are a number of key questions that boards and executives must consider when developing these plans or pay potential penalties," says Adam E. Meyers, Vice President and Director of Hay Group's Not-for-Profit practice.

Hay has identified 12 questions for not-for-profit management and boards to consider when establishing executive compensation and benefit programs. These questions address the organization's internal and external competitive environment, as well as its operational strategy and performance.

1. Are compensation plans, approval processes and reporting sufficiently transparent?

2. Is the board governance process on compensation appropriate?

3. Is there a conflict between benefit programs and all-employee benefit policies?

4. Are there severance payments

5. Are compensation programs tax-compliant?

6. Is the compensation internally equitable?

7. Is it appropriately balanced for both short- and long-term reward and motivation?

8. Is compensation reflective of the scope of operations?

9. Does the plan encourage and reward ethical and appropriate behaviors?

10. Are rewards and goals tied to significant improvements in key metrics?

11. Are plans both comprehensible and comprehensive?

12. Does pay correlate with performance?