# EXECUTIVE COMPENSATION REVIEW PROCEDURE

**BAU Farm Foundation** — A North Carolina Nonprofit Corporation

*Draft — starter template. Review and adopt by the Board of Directors. Consult NC nonprofit counsel and a qualified compensation consultant before execution.*

**Adopted:** __________, 20__
**Last reviewed:** __________, 20__

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## ARTICLE I — PURPOSE AND AUTHORITY

**Section 1.1 Purpose.** This Executive Compensation Review Procedure (the "Procedure") governs the process by which BAU Farm Foundation (the "Foundation") reviews, approves, and documents compensation for its Executive Director, other officers, and any other "disqualified persons" as defined in IRC § 4958 and Treasury Regulation § 53.4958-3.

**Section 1.2 Objectives.** The Procedure is intended to:

1. establish the **rebuttable presumption of reasonableness** under Treasury Regulation § 53.4958-6, thereby shifting the burden to the IRS to prove that any compensation arrangement is an "excess benefit transaction";
2. avoid intermediate sanctions excise taxes under IRC § 4958 on both the disqualified person (25% initial tax; 200% if not corrected) and organization managers who knowingly approve excess benefits (10% tax, up to $20,000 per transaction);
3. avoid private inurement in violation of IRC § 501(c)(3), which can threaten the Foundation's tax-exempt status;
4. produce accurate, complete, and honest disclosures on IRS Form 990, Part VI (Governance) and Schedule J (Compensation Information); and
5. maintain public trust and comply with the Foundation's Bylaws (Article VII — Conflicts of Interest) and Conflict-of-Interest Policy.

**Section 1.3 Authority.** The Board of Directors delegates responsibility for administering this Procedure to the **Finance and Audit Committee** (or, if constituted separately, a **Compensation Committee**) (either, the "Committee"), subject to full Board approval of the final compensation determination.

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## ARTICLE II — SCOPE AND DEFINITIONS

**Section 2.1 Covered Persons.** This Procedure applies to the total compensation of:

1. the **Executive Director** (CEO-equivalent);
2. any **officer** of the Foundation (Chair, Vice Chair, Secretary, Treasurer, and any other officer under Bylaws Article V);
3. any **key employee** as defined in the Form 990 instructions (generally, an employee with reportable compensation exceeding $150,000 who has responsibilities, powers, or influence over the organization similar to those of officers, directors, or trustees; who manages a discrete segment representing 10% or more of activities, assets, income, or expenses; or who has authority to control 10% or more of the organization's capital expenditures, operating budget, or employee compensation);
4. any other **"disqualified person"** under IRC § 4958(f), including substantial contributors, family members of the foregoing, and 35%-controlled entities; and
5. any **independent contractor** whose arrangement could constitute an excess-benefit transaction.

**Section 2.2 Total Compensation.** "Total Compensation" means all economic benefits provided in exchange for services, including:

- base salary and cash wages;
- signing, retention, and performance bonuses;
- deferred compensation (qualified and nonqualified);
- retirement plan contributions;
- health, dental, vision, life, disability, and long-term-care insurance;
- housing, vehicle, and travel allowances;
- expense reimbursements not made under an accountable plan;
- severance and change-in-control payments;
- fringe benefits taxable and nontaxable;
- loans, loan forgiveness, or below-market loans;
- equity or profits-interest equivalents; and
- any other economic benefit, direct or indirect, whether or not currently taxable.

**Section 2.3 Excess Benefit Transaction.** An "excess benefit transaction" under IRC § 4958(c) is any transaction in which an economic benefit is provided by the Foundation to or for the use of a disqualified person if the value of the economic benefit exceeds the value of the consideration received by the Foundation, including performance of services.

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## ARTICLE III — REBUTTABLE PRESUMPTION REQUIREMENTS

To establish the rebuttable presumption under Treas. Reg. § 53.4958-6, the Committee shall satisfy all three of the following requirements:

**Section 3.1 Approval by Authorized Body of Independent Persons.**

1. The compensation arrangement must be approved in advance by an authorized body of the Foundation composed **entirely of individuals who do not have a conflict of interest** with respect to the arrangement.
2. An individual is treated as having a conflict of interest if the individual: (a) is the disqualified person or a family member; (b) is in an employment relationship subject to the direction or control of the disqualified person; (c) receives compensation or other payments subject to approval by the disqualified person; (d) has a material financial interest affected by the arrangement; or (e) approves a transaction providing economic benefits to the disqualified person, who in turn has approved or will approve a transaction providing benefits to the individual.
3. The Committee shall document that each member has no conflict, drawing on annual conflict disclosure forms and any interim disclosures. Any conflicted member shall recuse from the deliberation and vote.

**Section 3.2 Use of Appropriate Comparability Data.**

1. The Committee shall obtain and rely upon **appropriate data as to comparability** prior to making its determination. For organizations with annual gross receipts of **less than $1 million**, the safe harbor requires data on compensation paid by **three (3) comparable organizations** in the same or similar communities for similar services. For organizations at or above $1 million in gross receipts, a broader dataset is required.
2. Acceptable sources include:
   - published compensation surveys by independent firms (e.g., GuideStar/Candid, Economic Research Institute, Association of Fundraising Professionals, National Council of Nonprofits);
   - IRS Form 990 data for comparable exempt organizations, filtered by NTEE code, geography, budget size, and staff size;
   - written offers received by the disqualified person from similar institutions (documented);
   - independent compensation consultant reports (subject to Section 3.2(3)); and
   - expert compensation testimony from persons with no financial interest in the arrangement.
3. If a compensation consultant is used, the Committee shall confirm the consultant's independence, retain the consultant's engagement letter and report, and document the methodology, comparator selection, and adjustments.
4. Comparability data shall be drawn from **similarly situated organizations** with respect to: (a) mission and program area (agriculture / food systems / rural development / conservation education); (b) geographic scope (national, regional, or NC-specific as appropriate); (c) annual expenses and revenue; (d) staff size; (e) complexity of operations; and (f) sources of revenue.
5. The comparability data must not be more than **thirty-six (36) months old** at the time of the decision.

**Section 3.3 Contemporaneous Documentation.**

The Committee shall **adequately and concurrently document** the basis for its determination. Under Treas. Reg. § 53.4958-6(c)(3), documentation is "concurrent" only if it is prepared before the later of (a) the **next meeting** of the Committee or (b) **sixty (60) days** after the final action of the Committee is taken. Records must be **reviewed and approved** as reasonable, accurate, and complete within a reasonable time thereafter.

Documentation shall include, at a minimum:

1. the **terms** of the approved compensation arrangement and the date it was approved;
2. the **members of the authorized body** present during debate and those who voted, and the names of any members who recused and the reason for recusal;
3. the **comparability data** obtained and relied upon, and how the data was obtained;
4. any **actions taken with respect to consideration of the transaction** by anyone otherwise a member of the authorized body who had a conflict of interest;
5. **documentation of the basis** for the determination that the compensation is reasonable, before approval, including any adjustments to the comparability data and the reasons for such adjustments; and
6. the **date** the documentation was prepared, reviewed, and approved.

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## ARTICLE IV — REVIEW PROCEDURE

**Section 4.1 Frequency.** The Committee shall review Executive Director compensation:

1. at the time of initial hire;
2. **annually** thereafter, in connection with performance review, typically in the first quarter of the fiscal year;
3. whenever a **material change** in duties, responsibilities, or compensation is proposed; and
4. upon renewal or extension of an employment agreement.

**Section 4.2 Preparation.** In advance of the review, the Committee shall:

1. define or confirm the position description, key performance indicators, and organizational context;
2. commission or obtain comparability data meeting the criteria in Section 3.2;
3. gather the Executive Director's current total compensation package, prior-year performance evaluation, and any external offers;
4. confirm that all Committee members have completed the annual Conflict-of-Interest Disclosure Form and are free of conflicts with respect to the compensation decision; and
5. distribute meeting materials at least **seven (7) days** in advance to allow adequate review.

**Section 4.3 Meeting.** The Committee shall meet in executive session — with the disqualified person absent during deliberation and vote — and shall:

1. review the position, performance, and market data;
2. deliberate on the appropriate level and mix of total compensation, considering mission fit, budget capacity, retention risk, and public perception for a small-farm-serving public charity;
3. document the analysis in real time, including comparability data, adjustments, and rationale;
4. approve, modify, or reject the proposed compensation by majority vote of disinterested members; and
5. record the vote and dissent, if any, in the minutes.

**Section 4.4 Full Board Ratification.** The Committee's determination shall be reported to the full Board at the next regular meeting for ratification. The full Board vote shall be taken with the disqualified person absent during deliberation and vote.

**Section 4.5 Written Agreement.** The final compensation arrangement shall be memorialized in a written employment agreement or offer letter signed by the Chair (or Vice Chair, if the Chair is conflicted) on behalf of the Foundation and by the disqualified person.

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## ARTICLE V — SPECIAL CIRCUMSTANCES

**Section 5.1 Initial Contracts.** Under the "initial contract exception" of Treas. Reg. § 53.4958-4(a)(3), a fixed payment made under an initial contract with a person who was not a disqualified person immediately prior to entering the contract is generally not an excess benefit transaction. Nonetheless, the Committee shall follow the full Procedure for initial hires to establish good governance and prepare for subsequent renewals.

**Section 5.2 Bonuses and Incentive Compensation.** Any bonus, incentive, or contingent compensation arrangement shall be established in writing **before** the services are performed, shall be based on **objective criteria**, and shall be subject to the same rebuttable-presumption process. The Committee shall avoid net-revenue-based formulas that could be characterized as private inurement.

**Section 5.3 Severance and Change-in-Control.** Severance and change-in-control payments shall be pre-approved under this Procedure at the time the underlying employment agreement is negotiated, using comparability data specific to such payments. Ad-hoc severance approved at termination is presumptively suspect and requires heightened documentation.

**Section 5.4 Reimbursements and Fringe Benefits.** Expense reimbursements shall be made under a written **accountable plan** meeting the requirements of Treas. Reg. § 1.62-2. Non-accountable-plan reimbursements, personal-use fringe benefits, and taxable working-condition fringes shall be included in Total Compensation for purposes of this Procedure and reported on Form W-2 as required.

**Section 5.5 Related-Party Transactions.** Any contract with a disqualified person for services other than employment (e.g., consulting, professional services, real property lease) shall be reviewed under this Procedure and under the Conflict-of-Interest Policy, using comparability data for the specific service.

**Section 5.6 Loans to Officers or Directors.** The Foundation shall not make loans to directors or officers except in the ordinary course of a bona fide program serving its exempt purposes and on terms available to unrelated third parties, and never in violation of applicable state or federal law.

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## ARTICLE VI — RECORDS AND FORM 990 REPORTING

**Section 6.1 Records Retention.** All records generated under this Procedure — including comparability data, consultant reports, meeting minutes, written analyses, and executed agreements — shall be maintained in a secure file by the Secretary and Treasurer for a minimum of **seven (7) years** after the end of the arrangement's term, or longer if required by applicable law or funder requirements.

**Section 6.2 Form 990 Disclosures.** The Treasurer, working with the Foundation's independent accountants, shall ensure that:

1. **Form 990, Part VI, Line 15** correctly describes the process for determining compensation of the Executive Director and other officers/key employees, including independent-person review, comparability data, and contemporaneous documentation;
2. **Form 990, Part VII** and **Schedule J** report reportable compensation and other compensation accurately, including base compensation, bonus and incentive, other reportable, deferred, and nontaxable benefits;
3. **Schedule L** reports any excess benefit transactions or business transactions with interested persons, if required; and
4. related-party disclosures are consistent across Schedules J, L, and O.

**Section 6.3 Correction of Excess Benefit.** If the Foundation determines that an excess benefit transaction has occurred, the Board shall take prompt corrective action, including obtaining full repayment plus interest from the disqualified person, and shall consult tax counsel regarding voluntary disclosure and Form 4720 filing to mitigate manager liability.

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## ARTICLE VII — REVIEW AND AMENDMENT

**Section 7.1 Review.** The Committee shall review this Procedure at least every **three (3) years**, and shall recommend changes to the Board.

**Section 7.2 Amendment.** This Procedure may be amended by the affirmative vote of a majority of directors then in office at any regular or special meeting, provided the proposed amendment has been provided in writing to all directors at least **fourteen (14) days** in advance. Amendments must remain consistent with the Foundation's Bylaws, Articles of Incorporation, IRC § 501(c)(3), IRC § 4958 and Treasury Regulations thereunder, and applicable NC law.

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## CERTIFICATION

I certify that the foregoing Executive Compensation Review Procedure was adopted by the Board of Directors of BAU Farm Foundation on __________, 20__.


____________________________
**Secretary**, BAU Farm Foundation


____________________________
**Chair**, BAU Farm Foundation

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## APPENDIX A — CONTEMPORANEOUS DOCUMENTATION WORKSHEET

*Complete before the later of (a) the next Committee meeting or (b) 60 days after final action. Retain with Committee minutes.*

### 1. Compensation Arrangement Under Review

- **Covered Person:** __________________________
- **Position:** __________________________
- **Type of action:** ☐ Initial hire  ☐ Annual review  ☐ Material change  ☐ Renewal  ☐ Bonus  ☐ Severance  ☐ Contractor
- **Effective date:** __________________________
- **Term:** __________________________

### 2. Proposed Total Compensation

| Component | Amount / Value | Notes |
|---|---|---|
| Base salary | $__________ | |
| Bonus / incentive (target) | $__________ | Objective criteria attached |
| Retirement contribution | $__________ | |
| Health / dental / vision | $__________ | |
| Life / disability insurance | $__________ | |
| Deferred compensation | $__________ | |
| Housing / vehicle / allowances | $__________ | |
| Severance provisions | $__________ | |
| Other fringe benefits | $__________ | |
| **TOTAL COMPENSATION** | **$__________** | |

### 3. Authorized Body — Independence Confirmation

| Member Name | Present | Voted | Recused (reason if any) |
|---|---|---|---|
| __________ | ☐ | ☐ For ☐ Against ☐ Abstain | __________ |
| __________ | ☐ | ☐ For ☐ Against ☐ Abstain | __________ |
| __________ | ☐ | ☐ For ☐ Against ☐ Abstain | __________ |
| __________ | ☐ | ☐ For ☐ Against ☐ Abstain | __________ |
| __________ | ☐ | ☐ For ☐ Against ☐ Abstain | __________ |

All voting members have completed the annual Conflict-of-Interest Disclosure Form and have no conflict with respect to this arrangement: ☐ Yes  ☐ No (explain: __________).

### 4. Comparability Data

- **Source(s) used:** __________________________
- **Date(s) of data:** __________________________ (must be within 36 months)
- **Comparator organizations / roles:**

| Organization | Role | Base | Total Comp | Budget / Staff | Source | Notes |
|---|---|---|---|---|---|---|
| __________ | __________ | $______ | $______ | __________ | __________ | __________ |
| __________ | __________ | $______ | $______ | __________ | __________ | __________ |
| __________ | __________ | $______ | $______ | __________ | __________ | __________ |
| __________ | __________ | $______ | $______ | __________ | __________ | __________ |
| __________ | __________ | $______ | $______ | __________ | __________ | __________ |

- **Comparability range:** $__________ (25th) — $__________ (median) — $__________ (75th)
- **Adjustments made and rationale:** __________________________
- **If consultant used:** name / firm __________, engagement letter attached ☐, report attached ☐.

### 5. Basis for Determination of Reasonableness

Explain, in narrative form, why the approved compensation is reasonable in light of position responsibilities, performance, comparability data, budget, and mission:

__________________________________________________________________
__________________________________________________________________
__________________________________________________________________

### 6. Approval

- **Committee action date:** __________________________
- **Vote:** For __ / Against __ / Abstain __ / Recused __
- **Full Board ratification date:** __________________________
- **Written agreement signed:** ☐ Yes, dated __________

### 7. Documentation Certification

I certify that this worksheet and the attached materials accurately reflect the Committee's deliberation and decision, and were prepared before the later of the next Committee meeting or sixty (60) days after final action.

Prepared by: __________________________  Date: __________

Reviewed and approved by Committee: __________________________  Date: __________

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## APPENDIX B — ANNUAL COMPLIANCE CHECKLIST

- ☐ Annual Conflict-of-Interest Disclosure Forms collected from all Committee members
- ☐ Position description reviewed and current
- ☐ Performance evaluation completed
- ☐ Comparability data obtained (≤ 36 months old, ≥ 3 comparators for small orgs)
- ☐ Meeting held in executive session; disqualified person absent for deliberation and vote
- ☐ Contemporaneous Documentation Worksheet (Appendix A) completed and signed within 60 days
- ☐ Committee minutes reflect the vote and rationale
- ☐ Full Board ratification recorded
- ☐ Written employment agreement or offer letter executed
- ☐ Records filed with Secretary and Treasurer for 7-year retention
- ☐ Form 990 Part VI Line 15, Part VII, and Schedule J prepared consistent with this record