Yeckel v. Abbott and Nonprofit Executive Compensation

The compensation paid to senior executives of nonprofits has come under scrutiny, with the spotlight being directed by state charity regulators, the IRS, grantmakers, and members of Congress.

Author Jack B. Siegel writes: In recent years, senior executives heading Fortune 500 corporations have come under criticism for the high levels of their compensation. Efforts to curb excessive executive compensation in the for-profit sector have largely failed, however.

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 The court's ruling in Yeckel v. Abbott, 2009 Tex. App. LEXIS 3881 (Tex. App. Austin, June 4, 2009) offers another opportunity to examine the perils that senior nonprofit executives take when they set their compensation without the full and informed approval of the organization's board of directors or trustees.

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In 1966Texas oilman established the Carl B. and Florence E. King Foundation as a Texas nonprofit corporation (the Foundation). The Foundation also applied for and received recognition as a Section 501(c)(3) charitable organization. Carl L. Yeckel is the Kings' grandson. Yeckel was elected a Foundation director in 1971 and became a full-time employee in 1975. In 1993, Yeckel became the Foundation's president. Shortly thereafter, Yeckel sent a memorandum to the board proposing raises for him and two other Foundation employees. Yeckel's memorandum prompted one board member to raise concerns as to whether Yeckel's proposed compensation was reasonable or might create tax problems...

The jury awarded the Foundation $10.5 million in punitive damages and required Yeckel to forfeit $5.28 million, which represented excess compensation received by Yeckel, the attorney's fees incurred by the Foundation, and prejudgment interest.

Few will argue that Yeckel acted admirably or that his compensation was appropriate. In that sense, the jury's verdict was more than justifiable to the extent it required disgorgement of ill-gotten gains.

Holding. The appeals court sustained all of the probate court's judgment except for the award of punitive damages, which the appeals court reversed.

Best Practices and Lessons. Yeckel offers some important lessons and best practices for nonprofits and executives when setting executive compensation.

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Develop a compensation package that reflects the comparables and the executive's performance. There is a widespread perception that once organizations obtain compensation comparables, the decision-making body then sets compensation for the executive at the 75th percentile. Most organizations and their boards don't believe that their executive director is just average.

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Organizations can look to a variety of sources for comparables. Many large organizations rely on compensation consultants to assemble an appropriate database of comparables. While third-party consultants often are viewed as the gold standard, organizations are not required to use consultants, nor are consultants the only ones who have access to compensation data. One excellent source is the Form 990, which is the publicly available information tax return filed by tax-exempt organizations. Returns for over 1.8 million organizations can be downloaded at no cost from GuideStar's website (http://www.guidestar.org). Part VII of the Form 990 contains detailed compensation information for officers, directors, key employees, and the five highest compensated employees. This database permits organizations to assemble their own database of compensation comparables. Certain organizations (generally larger ones) are required to supplement their compensation disclosures by filing Schedule J.

Organizations that don't want to search for individual returns can take advantage of relatively inexpensive online search software that will assemble a database of comparables based on criteria that the organization selects. GuideStar offers these services, as does the Economic Research Institute (http://www.erieri.com).

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Conclusions...  In the case of charities and social welfare organizations, the Internal Revenue Code imposed severe sanctions when an organization pays an executive unreasonable compensation. For the most part, the burden of these sanctions falls on the executive, but if the abuses are sufficiently egregious, the abuses can result in loss of tax-exempt status.

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LEXIS.com subscribers can viewe further discussion of executive compensation taxation issues at 1-1 Taxation of Executive Compensation § 1.09 and at 1-7 Taxation of Executive Compensation § 7.07