In an exposé published in 2003, The Boston Globe reported that officers and directors at scores of foundations were themselves the principal beneficiaries of their foundations' assets, receiving compensation packages that sometimes surpassed what those foundations actually gave to charity.1 The Globe series — along with other media reports and an ongoing congressional inquiry spearheaded by Senator Charles Grassley (R-Iowa) in 20042 — set off a national and political debate about compensation at charitable organizations in general and private foundations in particular. Some of the reports and testimony were shocking. The Globe reported, for example, that the Paul and Virginia Cabot Charitable Trust paid one of its trustees more than $5 million during a five-year period, topping out at $1.4 million in the year he said he gave himself a raise to help pay for his daughter's wedding.

On the heels of the media and congressional attention, the Internal Revenue Service announced in August 2004 that — as part of a new enforcement plan — it planned to contact 2,000 charities and foundations to seek information regarding their compensation practices and policies. About 400 private foundations will be examined.3 This means that, any way the nation's non-profit organizations are counted, less than 1 percent will face IRS review. While the IRS estimates that there are almost 1 million tax-exempt charities and 100,000 private foundations, The Chronicle of Philanthropy reported in January that there were nearly 800,000 charities now listed on the IRS's official roster.4 The Foundation Center, a non-profit organization that collects and organizes information on philanthropy in the United States, lists more than 70,000 grant making foundations on its Foundation Finder website.5

Perhaps in an effort to reach more charities, the Service on Nov. 1, 2004, issued a revised Form 1023, “Application for Recognition of Exemption,” which every new charitable organization must file to obtain tax-exempt status. The form now includes questions demanding detailed information about how compensation and other financial arrangements with directors and trustees are determined, what these individuals' qualifications are, how many hours they will work, what their specific duties will be, and whether the organization has developed a conflict-of-interest policy.6

The light shone on the philanthropic world by the media, Congress and the IRS is beneficial. Fraud and abuse should be exposed — and stamped out. But outrage over the misdeeds of a few should not blind lawmakers, regulators and the public to the good works and dedication of most directors and officers at our nation's not-for-profits — the vast majority of whom serve without any compensation. And before legislators and regulators create new laws that may go unenforced or merely create uncertainty and confusion, they should look to clarify and enforce the formidable laws that are already on the books. The IRS is to be applauded for its new enforcement efforts, which should help prove the integrity of most charitable organizations and flush out the villains.

It also would be useful for professionals working in public charities and private foundations to develop guidelines for reasonably compensating directors and officers at not-for-profits. These guidelines should not dictate precise numbers. Instead, they should focus on what constitutes a standard of reasonableness and discuss the specific tasks for which directors and trustees should be compensated. Such standards should take into account such factors as: whether direct program administration is undertaken; whether pro forma grant making or direct and active grant making is occurring; what the applicable state duty of care and standard of judicial review is; whether state laws allow for indemnification of directors and trustees; and whether directors and trustees are able to obtain insurance to protect themselves and their personal assets from liability claims.

The Globe reporters conducted their investigation by using a computer database to sort through tens of thousands of tax returns filed annually by private foundations. Although they found the majority of private foundations are governed by trustees who take no compensation at all, they reported the abuses that do exist are more extensive and deeply rooted than government regulators and foundation experts apparently thought. Part of the problem is the tax returns that not-for-profits file (Form 990s for charities and 990-PFs for private foundations) are hardly models of clarity and are difficult to fill out. These returns also fail to ask relevant questions. In one example cited by The Chronicle of Philanthropy in its 2004 annual salary survey report, the 990 filed by Christian Aid Ministries, in Berlin, Ohio, listed a salary of zero for its chief executive. In fact, its chief executive is paid, but by Christian Aid's fully owned for-profit subsidiary.7

While the IRS is working to redesign the tax returns, it does not anticipate introducing new forms until 2007. Meanwhile, some charities and foundations continue to compensate their directors and trustees in ways that do not have to be reported on their tax returns. This makes it difficult for watchdog groups and donors to evaluate compensation spending. In fact, reports on compensation generally have only two sources: 990s and voluntary surveys. In formulating its annual salary report, The Chronicle of Philanthropy asked 309 charities and foundations to complete a survey and provide supporting information from their 990s and audited financial statements.8 The Council on Foundations, a Washington-based membership organization serving more than 2,000 grant makers and foundations worldwide — also conducts an annual survey on compensation. Its 2004 Grant-makers Salary and Benefits Survey, based upon responses from 401 private foundations, reported that 72 percent of family foundations and almost 45 percent of independent foundations do not compensate their board members. The practice was generally more prevalent among private foundations with larger assets.

Among not-for-profits that do offer compensation, figures vary widely. The Chronicle of Philanthropy reported that the median salary for executives at 52 community, operating and private foundations it surveyed rose 4 percent from 2003 to 2004, to $307,765. The council's 2004 report stated that the median salary for a chief executive was $110,000. Although The Chronicle of Philanthropy's survey focused on the wealthiest foundations, compensation still varied greatly. The president of the Bill & Melinda Gates Foundation, holding almost $27 billion in assets, received no compensation, while 20 private foundation executives received more than $500,000 in compensation.

ENFORCE THESE LAWS

The IRS already has the power to decide if these, or any compensation figures at not-for-profits, are reasonable. If they are not, the Service has the right to impose severe penalties. Unfortunately, the definition of reasonable is hazy and, even the IRS admits it has long failed to fully exercise its powers in this arena — auditing only about 100 private foundations a year.

However, some laws governing not-for-profits' directors and trustees are very clear. For example, federal law prohibits any part of the net earnings or assets of a tax-exempt charitable entity to inure to the benefit of private shareholders or individuals (the “private inurement doctrine”).9 Any amount of inurement is potential grounds for revocation of tax-exempt status. Private inurement includes the payment of unreasonable compensation to insiders, including officers, directors and trustees.

Tax-exempt entities also must be operated exclusively for charitable, educational, religious or other exempt purposes (the “private benefit doctrine”).10 The organization's activities may not serve the private interests of any individual or organization, not just insiders. The sanction for violating the private benefit doctrine is, again, revocation of tax-exempt status.

In 1969, Congress determined that these prohibitions were inadequate for private foundations and passed legislation targeting individuals at foundations who were receiving compensation and other benefits. It refined the definition of “insider,” making new sanctions applicable to “disqualified persons,” which it defined to include substantial contributors, officers, directors and trustees, and family members of any of them.11

Federal lawmakers also enacted Internal Revenue Code Section 4941 to prohibit a private foundation and its “disqualified persons” from engaging in self-dealing — that is, any financial transaction, direct or indirect, with the foundation. Section 4941 imposes excise taxes on “disqualified persons” as well as on certain managers who participate in such acts. These are strict prohibitions; it's immaterial whether the transaction results in a benefit or detriment to the foundation. And the penalties are severe: A disqualified person is subject to an initial tax of 5 percent of the amount involved; a participating foundation manager is subject to an initial tax of 2.5 percent. If the abuse goes uncorrected, the disqualified person is subject to an additional tax of 200 percent of the amount involved; the foundation manager is subject to an additional tax of 50 percent of the amount involved.12

Section 4941 specifically includes the payment of compensation (or payment or reimbursement of expenses) by a foundation to a disqualified person in its definition of self-dealing.13 The statute provides an exception, however, for such payments “for personal services which are reasonable and necessary to carrying out the exempt purpose of the foundation…if the compensation (or payment or reimbursement) is not excessive.”14 Unfortunately, neither the law nor regulations define “excessive” and they do not include either a de minimis threshold or safe harbor. If a payment is deemed excessive, in addition to the self-dealing penalties imposed upon the disqualified person and any participating foundation manager, the foundation may itself face excise tax under IRC Section 4945 for making impermissible expenditures.15 If the prohibited transactions are never cured and the foundation repeatedly and willfully violates the sanctions, the final punishment is a termination tax, which is equal to the lesser of all of the tax benefits the entity and its contributors ever received, or all of the assets of the entity.16

As severe as the penalties against self-dealing are, they seem to have had little effect. Perhaps that's because they've been imposed on so few violators. Researchers for a study of trustee fees at 238 foundations published in September 2003 by the Georgetown Public Policy Institute17 examined the 1998 990-PFs of 176 of the largest foundations and 62 of the smallest foundations in the United States. They also interviewed foundation representatives by telephone to verify the accuracy of the data collected from the 990-PFs and to obtain related information. While the researchers noted that this group of foundations represented only a small part of the U.S. foundation world, their study concluded that the self-dealing provisions in the IRS regulations had “neither been a deterrent to large trustee fees nor served adequately as a tool by which to punish foundations and trustees guilty of providing excessive compensation.”

REASONABLE PAY

While the numbers, statistics and anecdotal reports obtained from 990s and surveys are informative, they do not provide the detail needed to determine how much and what kind of compensation is reasonable. The Georgetown study's authors noted that 990-PFs do not shed any light on foundation governance or whether compensated board members or trustees are also professional staff.

To determine what is reasonable, we must look beyond the numbers and ask: How mature is the charitable entity? How large is its endowment? What is its charitable purpose? What are the responsibilities of a particular director or trustee? How much work is required to fulfill those tasks? What resources does the person have? Are others qualified to do the job or is a specialized set of skills needed? How much research is required to make grants that will further the charity's mission? How much expenditure responsibility is involved? Is insurance available to protect individual directors and trustees from personal liability?

While the self-dealing prohibitions include an exception for not-excessive payments for “personal services” that are reasonable and necessary to carry out the exempt purposes of the foundation, neither the statutes nor regulations define what constitutes “personal services.” According to the Tax Court, they are limited to those “essentially professional and managerial in nature.”18 According to treasury regulations, this includes legal and accounting services, investment advice, banking services, asset management and management of charitable programs.19 The Tax Court has found other services, such as property maintenance, janitorial and security services provided by disqualified persons, are not personal in nature, and must be furnished without charge to avoid self-dealing.20

Foundation directors and trustees are responsible for carrying out the foundation's charitable goals. Are they rendering “personal services”? The IRS has ruled that compensation paid to trustees for asset management and grant making activities was not self-dealing when the fees were proven to be less than those charged by an institutional trustee.21 But what about directors and trustees who are compensated equivalent amounts or are paid a stipend for simply agreeing to serve as a trustee because of the fiduciary liability that comes with the title? Is such service “personal”? If so, what compensation is reasonable? Neither the IRS nor the courts have directly addressed these issues, which is, perhaps, at the heart of the present debate.

Rather than waiting for guidance from the IRS that may or may not come or for judicial fiat to decide these questions, it would be better for tax advisors and professionals from the not-for-profit community to compile a list of acceptable “personal services” that can become the industry standard. While some may quibble over the list, some road map would be better than none at all. It's time we stopped guessing when the penalties are so severe — particularly if the IRS begins to enforce them.

The assumption should be that allowing certain types and amounts of compensation makes sense. It's the types and amounts that need to be discussed, and should be based on the effort directors and trustees must expend. Clearly that effort varies greatly.

Consider: The primary work of a foundation is the administration of its charitable programs, which involves developing its charitable mission and figuring out how best to implement it. Grant making foundations must develop written grant making policies and conflict-of-interest policies to ensure compliance with federal law. That takes work. But once those policies are established, some foundations make the same grants from one year to the next. Others engage in much more active grant making, reviewing grant applications, responding to those applications, conducting site work, exercising expenditure responsibility for the grants, reviewing reports, and determining the effectiveness of the grants in achieving the purposes for which the grants were made.

Foundations are required to make “qualifying distributions” that total 5 percent of their net assets, other than assets used directly in carrying on their exempt activities (such as libraries, historic buildings, art collections and research laboratories).22 Qualifying distributions include grants to instrumentalities of the U.S. government on a national, state or local level (for example, a town library or a state college or university), and to U.S. public charities, as long as those grants are not earmarked for lobbying activity, subject to material restrictions on their use and the charity is not controlled by the foundation or its disqualified persons. Grants to public charities are by far the most common, and if a foundation is willing to limit its grant making to domestic public charities, the foundation is much easier and less expensive to administer.

But consider foundations that make direct grants to individuals through scholarship programs, make grants to foreign charities or other private foundations23 or support other types of tax-exempt organizations such as social and garden clubs, civic leagues, chambers of commerce and fraternal orders. These donations can count as qualifying distributions, but for them to do so foundations must exercise “expenditure responsibility,” which imposes additional administrative costs on the foundation and subjects the directors and trustees to additional liability.

Private operating foundations must implement active and direct charitable programs as opposed to grant making. The result is that their directors and trustees often engage in lots of hands-on involvement to run these charitable enterprises. Yet the IRC and regulations do not distinguish between private grant making foundations and private operating foundations — despite the fact that the differences in administrative and managerial work can be enormous.

In addition to what work is actually being formed, it's also important to look at who, exactly, is doing the work. A survey of about 20,000 foundations conducted by The Foundation Center in 2002 found that, while the number of foundations with paid staff increased by more than 50 percent since 1993, only one in six foundations even had paid staff.24 In those without paid staff, the directors and trustees were responsible for all of the foundation's administrative work, laboring alongside any investment advisors, accountants and lawyers they decide to engage. The type and quantity of work these directors and trustees perform is directly relevant to what compensation for them should be permissible and reasonable — especially if the director's or trustee's services preclude the need to hire costly staff or contract out for professional services.

While larger foundations typically employ investment advisors to manage foundation assets, it's the directors and trustees who handle this task for many smaller foundations. Compensating them for investment advisory services is appropriate under the personal services exception to the self-dealing rules. But how should the reasonableness of the compensation be determined? Is it justifiable to pay compensation equivalent to what the foundation would pay an outside broker or must it be less? Most professional managers charge between 50 and 100+ basis points for investment management, depending on the total value of assets under management and types of investment choices (equity management costs more). For a foundation with $5 million in assets, a median of 75 basis points translates into $37,500 for investment services alone.25

The self-dealing regulations cite the IRS regulations governing the deductibility of compensation as a business expense to determine whether compensation is excessive.26 But these regulations do not offer much guidance, merely providing the rather general statement that “reasonable and true compensation is only such amount as would ordinarily be paid for like services by like enterprises under like circumstances.”27

LIABILITY

Another critical factor in determining how much directors and trustees should be paid is how much liability they assume in working with a foundation. While the laws governing director and trustee liability may at first seem straightforward, how courts interpret and apply those laws varies greatly. Foundations can be organized as corporations or trusts. Directors govern corporate foundations; trustees preside over trust foundations. State non-profit corporation laws, under which corporate foundations are formed, borrow from a legacy of for-profit corporate laws governing director duties and liabilities. These include corporate indemnification laws that allow corporate foundations to limit, and even eliminate (in the case of uncompensated directors), the personal liability of directors.28

Foundations formed as trusts are governed by state trust laws, based upon common law principles that are more likely to impose personal liability upon trustees than limit it. Trustees are expected to exercise reasonable care and skill and are held personally liable for ordinary negligence.29 This duty includes an affirmative duty to preserve capital and invest as a prudent person would.30 Even if trustees do their best, if that falls short of the standard they can be held liable for any resulting loss.31

Non-profit directors owe a duty of care to the foundations they serve as well, but, like their for-profit counterparts, they are protected by a standard of judicial review called the “business judgment rule,” which presumes that directors act on an informed basis and in good faith.32 This rule shields them from liability even if their decisions turn out to be in error, as long as their conduct was rational and based on mere error of judgment.33 In effect, the rule serves as a safe harbor against all but gross negligence.34

General trust law and many state non-profit corporation statutes permit an organization's governing document to relieve a trustee or director of personal liability for breach of the standard of care (except in cases of bad faith, intentional or reckless disregard of the trustee's duties, or where the trustee derives an improper personal benefit from such breach). However, exculpatory clauses are strictly construed against trustees and may not always be given effect.35 In some states, such as New York, they are void against public policy.36 And many courts are reluctant to exculpate non-profit corporate directors from a standard of conduct (that is to say ordinary care) under corporate standards of judicial review. For both trustees and directors, a great deal of uncertainty exists.

While there is directors' and officers' liability insurance, policies are expensive and not always available, particularly to trustees, because their errors-and-omissions policies at-tempt to insure against liability for negligent acts. It is also unclear whether these policies can be used to reimburse directors or trustees for federal excise tax liability — an entirely separate standard of review.

New scrutiny may add to the burden directors and officers undertake at foundations — and possibly should be factored into their compensation. As publicly traded companies are scrutinized by new accountability standards set by legislation like the Sarbanes-Oxley Act,37 so may it go for foundations. The Senate Finance Committee staff recommendations would either prohibit or limit director and trustee compensation to a published, de minimis amount and would make compliance with federal law much more complicated and expensive for foundations. As a result, the personal exposure of individual directors and trustees could significantly increase for little or no pay.38

The senate finance recommendations include regulating the structure of boards of directors, including requiring a percentage of independent directors, requiring foundations to submit extensive information to the IRS every five years for a review of their tax-exempt status, increasing the excise taxes applicable to self-dealing and taxable expenditures, requiring foundation managers to file accurate and complete tax returns signed by their chief executive officer or face stiff penalties, and requiring foundation financial statements to be reviewed by certified public accountants or independent auditors, depending upon the foundation's level of income.

California is at the forefront of this trend. A new law introducing statutory corporate governance rules for charitable organizations went into effect Jan. 1.39

SUGGESTED STANDARDS

Public opinion seems to favor setting limits on compensation. The National Center for Family Philanthropy has concluded that “only in very special cases should a foundation consider compensation or reimbursement.”40 The formal policy of the Council on Foundations takes a more reasoned approach, urging its member foundations to carefully weigh decisions regarding director and trustee fees.41 It published an article in March of 2003 providing useful guidance to foundations in determining what they can afford to pay either professional staff or directors and trustees while preserving their endowment.

Because foundations are required to distribute at least 5 percent of their assets to charity each year, the Council on Foundations formula assumes that a foundation's charitable budget will be in the range of 5 percent to 6 percent of its assets, and that no more than 15 percent of a foundation's annual charitable budget be used for administrative expenses (which would include director and trustee fees, as foundations are permitted to include a portion of those fees in their 5 percent annual distribution requirement).

Under the formula, a $5 million foundation would have an administrative budget of $41,250 and, if annual legal and accounting fees were $5,000, the foundation could pay a director/trustee or CEO an annual salary of $36,250. Investment advisory fees would be a separate expense. (See “Calculating Pay,” this page).

Another place to look for guidance on the compensation matter is the law on “excess benefits” that applies to public charities.42 IRC Section 4958 imposes penalties upon officers, directors and trustees who authorize the payment of excess benefits such as unreasonable compensation to disqualified persons. These penalties, coined “intermediate sanctions,” were promulgated in 1996 when the Code offered the IRS no statutory means to control financial abuses of tax-exempt organizations short of revoking their tax-exempt status. While the self-dealing rules, rather than intermediate sanctions, apply to private foundations, many of the concepts are the same and the intermediate sanctions regulations issued by the IRS actually define criteria for determining the reasonableness of compensation. That criteria includes a rebuttable presumption that compensation is reasonable if certain conditions are satisfied, including that an authorized body of the public charity approved the compensation arrangement before it was agreed upon and after examining appropriate data as to comparability and documenting the basis for its determination.43 The regulations also list what they define as “appropriate” data, including compensation levels paid by similarly situated organizations (both taxable and tax-exempt) for functionally comparable positions, the availability of similar services in the geographic area of the applicable charity, current compensation surveys compiled by independent firms, and actual written offers from similar institutions competing for the services of the disqualified person.44

The United States has a great history of philanthropy. The compassion and generosity of its citizens is clearly demonstrated by the enormous outpouring of support for the victims of the Indian Ocean tsunami. That rush of donations would not find its way to the victims without charities and foundations, run by directors, officers and trustees who are collecting, organizing and channeling those dollars to people in desperate need. Rather than stifle this spirit with more laws, regulations and fear, we must first try clarifying and enforcing the laws we already have.

The author thanks Nancy Marx, a principal at Cummings & Lockwood LLC in Stamford, Conn., for her suggestions and contributions to this article.

Endnotes
  1. Beth Healy, Francie Latour, Sacha Pfeiffer, Michael Rezendes and Walter V. Robinson, “Some Officers of Charities Steer Assets to Selves,” The Boston Globe (Oct. 9, 2003); “Charity Money Funding Perks,” The Boston Globe (Nov. 9, 2003); “Foundation Lawyers Enjoy Privileged Position,” The Boston Globe (Dec. 17, 2003); “Philanthropist's Millions Enrich Family Retainers,” The Boston Globe (Dec. 21, 2003); “Foundations' Tax Returns Left Unchecked,” The Boston Globe (Dec. 29, 2003).
  2. Senate Finance Committee, “Charity Oversight and Reform: Keeping Bad Things From Happening to Good Charities” (June 22, 2004).
  3. IR-2004-81, June 22 2004; IR-2004-106, Aug. 10, 2004.
  4. IR-2004-81, June 22 2004; Ben Gose, “America's Charity Explosion,” The Chronicle of Philanthropy (Jan. 6, 2005).
  5. www.fdncenter.org.
  6. IR-2004-133, Nov. 1, 2004.
  7. Ben Gose, “Disclosure of Charity Salaries Is a Complicated and Confusing Process,” The Chronicle of Philanthropy (Sept. 30, 2004).
  8. Cassie J. Moore, “How The Chronicle Conducted Its Annual Survey of Pay at Big Nonprofit Groups,” The Chronicle of Philanthropy (Sept. 30, 2004).
  9. IRC Section 501(c)(3); Treas. Reg. Section 1.501(c)(3)-1(c)(2).
  10. IRC Section 501(c)(3); Treas. Reg. Section 1.501(c)(3)-1(b).
  11. IRC Section 4946; Treas. Reg. Section 53.4946.
  12. IRC Section 4941(c)(1); Treas. Reg. Section 53.4941(c)-1.
  13. IRC Section 4941(d)(1)(D); Treas. Reg. Section 53.4941(d)-2(e).
  14. IRC Section 4941((d)(2)(E); Treas. Reg. Section 53.4941(d)-3(c).
  15. Under IRC Section 4945 the foundation may be subject to a tax of 10 percent of the amount involved, and each approving manager is subject to an additional 2.5 percent tax. Uncorrected abuse taxes are 100 percent to the foundation and 50 percent to the managers. IRC Sections 4945(b)(1), (b)(2); Treas. Reg. Sections 53.4945-1(b)(1), (b)(2).
  16. IRC Section 507.
  17. Christine Ahn, Pablo Eisenberg and Channapha Khamvongs, “Foundation Trustee Fees: Use and Abuse,” The Center for Public and Nonprofit Leadership, Georgetown Public Policy Institute (September 2003).
  18. Madden, Jr. v. Comm'r, T.C. Memo 1997-395 (1997).
  19. Treas. Reg. Section 53.4941(d)-3(c); PLR 9703031; PLR 200238053.
  20. Madden, Jr. v. Comm'r, T.C. Memo 1997-395 (1997).
  21. PLR 200135047.
  22. IRC Section 4942.
  23. Foundations must exercise expenditure responsibility over grants made to other private foundations, other than unrelated private operating foundations described in IRC Section 4940(d)(2).
  24. Josefina Atienza and Leslie Marino, Foundation Staffing: Update on Staffing Trends of Private and Community Foundations (The Foundation Center, New York, September 2003).
  25. Payment for investment advisory services does not count toward the foundation's 5 percent distribution requirement, but can be deducted against income for purposes of the 2 percent excise income tax imposed by IRC Section 4940.
  26. Treas. Reg. Section 53.4941(d)-3(c).
  27. Treas. Reg. Section 1.162-7(b)(3).
  28. Indemnification statutes commonly entitle compensated directors who successfully defend themselves in litigation to mandatory indemnification from the corporation for the costs of their defense, and permit the corporation to decide (in the discretion of the board) to indemnify directors who are not successful, other than in cases of intentional misconduct, knowing violations of law or receipt of improper personal benefit. See Del. Code Ann. Tit. 8, Section 102(b)(7).
  29. Restatement (Second) of Trusts, Section 174 (1959).
  30. Ibid at Section 227.
  31. William F. Fratcher, Scott on Trusts, Fourth Edition, Section 201 (Little, Brown and Company, Boston, 1988).
  32. Black's Law Dictionary, eighth edition.
  33. Ibid. The Revised Model Nonprofit Corporation Act, Section 8.30 (1987).
  34. Denise Ping Lee, “The Business Judgment Rule: Should It Protect Nonprofit Directors?” 103 Colum. L. Rev. 925 (2003).
  35. Restatement (Second) of Trusts, Section 222 (1959).
  36. New York EPTL 11-1.7 (voiding exculpatory provisions contained in testamentary trusts).
  37. Sarbanes-Oxley Act of 2002, P.L. 107-204.
  38. The cost of directors' and officers' insurance and errors-and-omissions insurance likely would increase in step with the increase in accountability standards, excise taxes and penalties.
  39. California Senate Bill 1261.
  40. Jason C. Born, Board Compensation: Reasonable and Necessary? (National Center for Family Philanthropy, Washington, D.C., June 2001).
  41. Council on Foundations, Governing Boards, Vol. 2, Foundation Management Series, 10th ed., 2002.
  42. IRC Section 4958; Treas. Reg. Section 53.4958.
  43. Treas. Reg. Section 53.4958-6(a).
  44. Treas. Reg. Section 53.4958-6(c)(2).
CALCULATING PAY Suggested guidelines

The Council on Foundations offers this formula to help foundations to determine what they can afford to pay professional staff or directors and trustees — while still preserving their endowment.

TOTAL ANNUAL CHARITABLE BUDGET

Assets × 5.5 percent = Total annual charitable budget (grants + expenses)

ADMINISTRATIVE COSTS

Total annual charitable budget × 15 percent = Administrative budget
Carolyn DeVore

Collectors' Spotlight

Pricey Baubles: This brooch — designed by David Webb with eight emeralds, 16 cabochon rubies and 176 diamonds — sold for $36,000 at the Sotheby's “Magnificent Jewels Sale” in New York on Dec. 7, 2004.