Proposed Limits on Executive Compensation at Certain New York-Based Non-Profit Organizations

Proposed Limits on Executive Compensation at Certain New York-Based Non-Profit Organizations

December 6 2012

Executive Summary
This is an update to our Client Alert issued June 1, 2012, describing the preliminary round of proposed regulations designed to implement Governor Cuomo’s Executive Order, which stated generally that organizations receiving state funding would need to cap compensation paid to any executive at $199,000 per year.  This update describes the relevant changes that have been made to the Revised Regulations and the possible impact of such changes on qualifying non-profits.

The “Revised Regulations” were released by 13 NY State agencies to clarify a number of ambiguities and concerns raised in response to the preliminary draft regulations.1 These regulations are now scheduled to take effect on April 1, 2013.

State funds cannot be used to pay a non-profit executive any amount of compensation in excess of $199,000, however this cap will be reviewed annually to assess whether an adjustment is necessary.  The Revised Regulations go on to clarify that absent a waiver to the contrary, where alternative funding sources are used to pay an executive in excess of $199,000, the non-profit still must do both of the following:

  1. Pay 75th percentile or less of compensation as established by a compensation survey identified, provided, or recognized by the applicable State funding source(s), and
  2. Ensure that compensation is assessed based on appropriate comparable data and approved by the Board (or equivalent body) including two independent members.

 

What are the Consequences of Non-Compliance?
After receiving notice on non-compliance and a failure to remediate the non-compliance, the sanctions could significantly impact the non-profit.  Sanctions may include:

  1. Redirection of State funds to be used to provide program services;
  2. Suspension, modification, or revocation of license(s) for program services;
  3. Suspension, modification or termination of contracts with the organization; and
  4. Other lawful actions or penalties deemed appropriate by the applicable State agency.

 

What do These Regulations Apply to?

Only Certain Non-Profits
The Revised Regulations clarify that a “Covered Provider” is an organization that (i) received NY State funds in excess of $500,000 in an average annual amount over the prior two years and (ii) at least 30% of its prior year funding came from in-state revenues.

In calculating the percentage of revenue that came from in-state sources, a non-profit must consider funding/revenue received from:

  1. NY State Funds;
  2. State-authorized payments;
  3. Payments authorized by county and local governments, and
  4. Revenues derived from and in connection with the provider’s activities within the State.  The Revised Regulations clarify that “such revenues shall include those from sources outside New York State if such revenues were derived from or in connection with activities inside New York State, including, for example, contributions by out-of-state individuals or entities for in-state activities.”2

Covered Executives
A “Covered Executive” is:

  1. Any director, trustee, managing partner, or officer of a Covered Provider;
  2. Any employee if his or her compensation is equal to or exceeds $199,000 during a reporting period; or
  3. The executive of a related organization that the non-profit contracts with for administrative or program services.

Almost All Payments or Benefits to a Covered Executive
The “total compensation” is any reportable payments (salary, bonus, etc.) or benefits (direct or indirect) to a Covered Executive.  The total compensation does not include:

  1. The value of any benefit that is substantially the same as a benefit provided to other employees (such as short-term disability, retirement plan contributions, etc.); and
  2. Any compensation paid to a Covered Executive that is documented and attributable to executive’s provision of program services outside his managerial/policy-making duties.

 

Can a Covered Provider Pay More than $199,000?
The Revised Regulations clarify that, absent obtaining a waiver (as described below) a Covered Provider paying a Covered Executive over $199,000 must satisfy the following:

  1. Any compensation paid to a Covered Executive in excess of $199,000 cannot be paid with NY State funds;
  2. Using a compensation survey (identified, provided or recognized by the applicable agency), the compensation must be 75th percentile or less of compensation provided to comparable executives at similar non-profits (size, program service sector, comparable geographic area); and
  3. The Board (including at least two independent members) must assess “appropriate comparable compensation data” and approve the total compensation package.

Exception to Limits on Executive Compensation
Contracts or other agreements with Covered Executives agreed to prior to April 1, 2012 shall not be subject to the limits in this section until the earlier of (i) the end of the initial term of the contract or (ii) April 1, 2014.

Obtaining a Waiver
Upon a showing of good cause, the Covered Provider may (i) obtain a waiver from the applicable state funding source(s) so as to pay the executive a pay package that does not comply with the restrictions described above, (ii) obtain an increased cap on compensation (e.g., $250,000 as opposed to $199,000), or (iii) obtain revised restrictions on the compensation (e.g., pay 85th percentile or less of compensation in survey as compared to 75th percentile).  Unless the agency deems applicable, the waiver will only apply to the annual reporting period.  A waiver:

  • Must be filed no later than 90 calendar days prior to:
    • The reporting period for which the waiver is sought;
    • A position is filled during a reporting period; or
    • Date of a contract with the applicable State agency or its renewal or extension.
  • Will be decided based upon, but not limited to, the following factors:
    • Whether excess compensation is reasonably comparable;
    • The nature and size of the operations and services provided;
    • Whether the compensation was carefully and thoroughly considered, reviewed, compared and approved by the Board; and
    • The qualifications and experience possessed by or required of the executive.

Our View
The Revised Regulations have imposed greater restrictions on Covered Providers.  We therefore urge all non-profits to carefully consider:

  • Their funding sources (including any funds received with respect to instate services even if they are from out-of-state sources);
  • The total compensation paid to all employees, particularly to any director, trustee, managing partner, or officer;
  • Where the compensation exceeds $199,000 the Board must:
    • Take steps to ensure that other funding sources are used to pay for any compensation to a Covered Executive that exceeds the cap;
    • Ensure the compensation falls within the 75th percentile of the appropriate survey; and
    • Assess and approve the compensation (including two independent members).
  • Document all steps taken in assessing and approving such compensation.

For information on establishing reasonable non-profit compensation or related IRS penalties, please see “What is Reasonable Compensation for a Non-Profit Executive?” on our website.

Contacts
Sandra Pace
212-488-5400
space@shallpartners.com

Endnotes

  1. Details of the proposed revised regulations can be found in the New York State Register October 31, 2012, Volume XXXIV, Issue 44.  A copy of which can be found here: http://www.dos.ny.gov/info/register/2012/oct31/pdf/rulemaking.pdf
  2. For example, see Part 1002.1(d)(2) of Title 10 NYCRR as proposed by the New York State Department of Health.  A copy of the proposed regulations can be found here: http://w3.health.state.ny.us/dbspace/propregs.nsf/4ac9558781006774852569bd00512fda/8a903fdca7deb4a685257aa60057f4f3?OpenDocument