Assure that the reasons for the compensation arrangement are appropriate (such as benefiting the community) and not suspect. Be particularly careful with incentive compensation as poorly crafted incentives can incentivize employees in ways that are detrimental to the charity and the public interest.
Assure that compensation does not exceed reasonable compensation (such as by reference to compensation surveys or other data).
It's useful to have contemporaneous support to justify compensation (reasonableness, mission, reviews and approvals, and arm’s length negotiations).
Compensation should be determined by independent persons.
It's useful to have independent board designated committee review and approve executive compensation and other arrangements that might be suspect (such as incentive compensation plans and recruitment incentives).
Desirability of complying with intermediate sanctions presumption of reasonableness at least where compensation is paid to disqualified persons.
Remember importance of adopting and following a conflicts of interest policy (prevents conflicts and assures proper review/handling of conflicts).
Non-cash compensation, particularly personal use of charity assets, is more suspect. Extra scrutiny is critical in such valuations.
Caps useful with contingent compensation. In some situations, caps are not practicable (e.g., some percentage of gross revenue plans). A provision such as the following might be considered:
Employee acknowledges that employer is a nonprofit corporation that is described in Section 501 (c)(3) of the Internal Revenue Code and as such is prohibited from paying total compensation (including benefits) to any person in excess of that considered reasonable under Section 162 of the Code or that is of a type that my not be paid by such an organization. While the parties believe that the compensation and benefits provided pursuant to this Agreement are well within the range of reasonable and are otherwise allowed to be paid by an organization described in Section 501(c)(3) of the Code, employee agree that in no event will employer be required to pay employee total compensation in excess of that considered reasonable under Section 162 of the Code or compensation of a type that may not be paid by an organization described in Section 50l(c)(3) of the Code.
Consider an audit program or other safeguards against illegal or improper compensation.
Critical that all compensation be reported properly (employee/independent contractors, Forms W-2 1099, Form 990).
Remember The Smell Test: Think about how it will look on the front page of the paper, because it may appear on the front page of the paper.