Retirement Perks Help Keep Workers

As non-profit boards have realized in recent years that they must compete with businesses for executive talent,

they’ve been forced to adopt many of the strategies that corporations use to reward and retain key staff members.

One of the most important, say several financial consultants to non-profit groups, is offering deferred-compensation packages to supplement pension plans.

Deferred-compensation plans are similar to pensions in that the organization invests a set percentage of an executive’s pay into securities or other investment tools, where it will earn enough interest to provide an agreed-upon sum on retirement. And like any other pension plan, the employee doesn’t owe taxes on the compensation until collecting it. But unlike in a pension, 401(k) account, or similar retirement plan, the employee must meet certain conditions (such as not switching to another employer) in order to collect.

“Deferred compensation is a way of retaining valued employees — not just the C.E.O., but people in other critical positions,” says Hugh Mallon, president of Executive Compensation Concepts, in Baltimore. “Using deferred compensation is an increasing trend.”

One reason for using deferred compensation, Mr. Mallon adds, is that federal law limits how much a non-profit organization can put into a pension plan. Organizations can set aside for pensions a percentage of salaries of up to $170,000, but nothing above that limit. “If I’m making $200,000 and I have an arrangement with my employer for a 10-percent pension, but the law only allows them to give me 10 percent of $170,000, I’m losing $3,000,” he notes. To make up the difference, organizations are putting cash into deferred-payment plans.

Risk of Forfeiting Benefits

Under most plans, the employee who receives a deferred benefit only receives the cash if he or she stays with the organization until retirement; people who quit or are fired earlier aren’t eligible.

Mr. Mallon estimates that as many as 40 percent of all tax-exempt organizations (including trade associations and other groups that do not have charity status) now offer deferred-compensation packages to newly hired top officials.

The Chronicle’s survey found that 20 of 164 groups that provided detailed breakdowns of what they pay their top officials (or about 12 percent) offered a deferred-compensation package.

Mr. Mallon says Internal Revenue Service regulations and generally accepted accounting rules make it clear that any payments into such deferred-compensation plans must be reported on Form 990, the informational tax return non-profit organizations file. But James Abruzzo, managing director of the non-profit and e-philanthropy practice at the StratfordGroup, an executive-search firm in New York, said he’s not convinced charities are following those rules.

“I’ve spoken to chief financial officers who say they do not include these payments on the 990,” Mr. Abruzzo says. That would mean that an organization could pay an executive a substantial amount of deferred compensation that wouldn’t show up on the publicly available Form 990 until he or she was ready to retire — at which point it would become taxable and would have to be reported by the non-profit organization.

But Mr. Mallon doesn’t think many groups are failing to report their contributions to deferred compensation plans, because the I.R.S. has made it clear they must be included on the tax return. In any case, he adds, non-profit organizations will continue to expand the use of such arrangements.

“These are changing times,” he notes. “In order to attract and retain good people, non-profit boards are pushing the edge of the envelope, looking more and more like the for-profit world. But it’s necessary, because you need good people, and good people cost money.”