The SESCO Report – January 2007

A Not-for-Profit Guide to Corporate Governance in the Wake of Sarbanes-Oxley

Corporate governance remains an important issue on the national domestic agenda. It began in 2001 with the Enron scandal. Enron's fraudulent accounting practices and executive enrichment shook investor confidence in the markets and resulted in one of the largest corporate bankruptcies in the history of our country. But it is the fact that the spotlight has not dimmed in the intervening years ? with additional corporate scandals, criminal and civil suits, newspaper reports, legislative and regulatory responses and the media with an intense appetite to be critical of corporate America ? that has caused good corporate governance practices to become ingrained as part of our values.

Nonprofit organizations have not been immune from their share of scandals, particularly with respect to whether they are sufficiently charitable, misuse of the tax deduction for charitable gifts, self-dealing by insiders, conflicts of interest, and compensation-related issues, including excessive compensation, loans, spousal travel, and personal use of organization assets.

At the heart of the scrutiny of nonprofits is compensation. There is some limit to what constitutes reasonable compensation, even where the total amount is properly reported as compensation. Second, process is at least as important as substance with respect to executive compensation. In this regard, cases such as the New York Stock Exchange (May 2004) reminds us that:

? All factors relevant to the compensation determination need to be disclosed to a Compensation Committee;

? The compensation consultant on which the Compensation Committee relies must be privy to all relevant facts and must disclose all pertinent facts in its report;

? The "comparables" that are to be relied upon must be truly comparable and valid; and

? All decision makers need to understand the actual amounts that are at issue (and not simply formulas).

The IRS announced in May of 2004 that it has initiated a Tax-Exempt Compensation Enforcement Project. This project is resulting in reviews of varying intensity with the compensation paid to officers and other insiders and the processes employed in establishing the compensation, for approximately 2,000 exempt organizations. The goals of the IRS are to address compensation of specific individuals or instances of questionable practices, to increase awareness of IRS interest in compensation and the processes by which it is determined, and to help the IRS learn more about how exempt organization compensation is set and reported.

To reduce a nonprofit's exposure in applying Sarbanes-Oxley reforms, a compensation committee composed solely of independent directors should be formed. The committee would determine the compensation of the Chief Executive Officer and determine or review the compensation of other executive officers and managers, and ensure that compensation decisions are tied to the executive's performance in meeting predetermined goals and objectives. The committee should:

1. Use objective, comparable data for executive and other compensation determinations. The Compensation Committee should be responsible for determining the need for and selecting compensation consultants to provide comparable information and assist in crafting an overall compensation package that includes appropriate executive incentives tied to articulated performance goals. Such compensation determinations may be done annually or as part of a multi-year employment agreement.

2. Compensation Committees also should conduct an overall performance evaluation of the Chief Executive Officer, although such responsibility may be exercised by the Board itself or delegated to another
Committee. In making compensation decisions, such Committee needs to consider the degree to which the executive satisfied prior performance goals. The Compensation Committee or another Committee may also be charged with responsibility for ensuring that a succession plan is in place for the CEO and other executives, with procedures for development of potential future leaders from within the organization.

3. The Compensation Committees of nonprofit Boards should verify the compensation (salary, bonuses and other payments made to executives)
is based on an analysis of compensation received by executives at comparable organizations (including applicable for profit corporations) and are reasonable with respect to the organization's revenues, assets and complexity, and that any incentive portions of executive compensation are tied to the accomplishment of organizational or executive performance goals. Unlike for profit businesses, the goals set for a nonprofit executive may focus more on mission-related accomplishments rather than financial results.

In summary, nonprofit organizations need to learn from the Sarbanes-Oxley reforms and structure the necessary committees and processes to reduce vulnerability.

- Bill Ford

Test Your HR Knowledge

Find out how savvy you are in dealing with people issues (answers are at the bottom of the page).

1. Under the Fair Labor Standards Act (FLSA), private sector employers may offer compensatory time off in lieu of overtime pay, if the employee agrees.
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2. Paying an employee a salary is sufficient to make that employee an exempt employee under the FLSA.
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3. Federal law requires employers to continue to pay employees who are on military leave.
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4. Employers must pay an employee while traveling for company business.
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5. A company may inspect employees' purses, briefcases, packages, cabinets, and any other items on company property if it suspects theft.
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6. Employers can force employees to accept direct deposit of their paycheck.
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7. Stepchildren are covered by the Family and Medical Leave Act as family members.
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8. An employer must keep copies of the documents employees provide during the Form I-9 process.
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9. Employers are required to pay overtime on company bonuses and commissions.
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10. Employers can terminate an employee without liability if it's within the "probationary" period.
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Never Stop Recruiting The People You Work With

The best managers realize that they are in the "people" business ? even if they have nothing to do with hiring and managing employees. That's because they know that if they want to retain employees, they have to constantly recruit them. Use these tips to help you develop a recruiting mindset:

Put employees' needs to work. In order to recruit your employees, you first have to understand their needs and motivations. Why do your employees do what they do? What drives them? What are their basic needs? Put these elements to work in your recruiting efforts.

Match interests with work that needs to be done. Don't try to jam your workers into jobs that don't suit them ? just because you need the work to get done. Find perfect fits, and watch turnover disappear.

Judge people on their best days. Many managers do the opposite: They pass out judgment based on an employee's worst day. If you believe in your employees, they will be more likely to stick around when they get another job offer ? and your best employees will get another job offer.

Recruit from all departments. Are there people in other areas of the company whose abilities you could use? Always be on the lookout for talent and ideas from all parts of the organization.

Never use guilt to motivate people. This tactic may work in the short-term, but it will eventually drive people out of your organization.

Retaining Younger Workers Isn't Hard If You Know What To Do

While it's hard to retain Generation X workers, it's not impossible. Not if you follow these strategies:

Beg for their opinions. Studies have shown that one way to reduce turnover with younger employees is to convince them that you value their opinions. Surveys of younger workers always indicate that the top quality they look for in a boss is "someone who listens." Don't just ask them for their opinions; beg them.

Give them some space. Younger workers don't like bosses who hover over them. They want to work at their own pace, according to their own style. Help them set their goals, and then give them the freedom to reach those goals any way they see fit.

Let them see your face. Despite the fact that most young workers are comfortable with technology, they also put a premium on face-to-face feedback concerning their performance. The more you meet and communicate with them face-to-face, the happier they'll be.

Focus on short-term incentives. Younger workers want incentives now ? such as flexible work schedules, performance-based compensation incentives, increased freedom in the workplace, and other programs where they can reap the benefits immediately. Long-term, big-picture incentives, such as a 401(k) plan, aren't as effective in recruiting or retaining younger workers.

The 10 Worst Hiring Practices

10. No employer brand/identity
9. No strategy for targeting job ads
8. Bungling of employee referrals
7. No system for interviewing
6. No applicant assessment method
5. No recruiter/screening training
4. Unskilled managers
3. No customer service
2. No candidate review system
1. No action

Test Your HR Knowledge Answer Key

1. False, except for exempt employees.
2. False, they must meet one of the exemption tests.
3. False; however, the leave is regulated by USERRA.
4. True, non-exempt employees are paid for travel during scheduled working hours including weekends.
5. True, provided the company has a stated policy.
6. False, depends upon state regulations.
7. True, as defined.
8. False, allowed but not required, practice must be consistent for all employees.
9. True, except for discretionary bonuses.
10. False, all employees are protected by non-discrimination laws.