Building Blocks of Employee Compensation

Incentive Compensation:

A one-time bonus or lump sum payment paid to an employee as a reward for certain behavior

Rules:

1. Uniform Guidance, 2 CFR § 200.430(f) – Reasonable incentive compensation is allowable if earned for a permissible purpose (“cost reduction, efficient performance, suggestion awards, safety awards, etc.”) under a consistently-followed, pre-existing policy or agreement.
2. Internal Revenue Service, Information Letter 2002-0021 – Incentive pay must have a real and discernible business purpose and cannot confer an impermissible benefit.
3. Office of Head Start, ACF-IM-HS-21-05 – Programs are encouraged to use one-time ARP and other sources of COVID-19 relief funding to provide incentives, such as hiring and retention bonuses, to staff to support retention.

In practice: A CAA may adopt a recruitment bonus policy awarding a cash incentive to employees who refer candidates for employment that end up being hired by the CAA and retained for a certain period of time.

Remember! Federal funding sources review bonus policies and payments very closely and have made large disallowances in this area. CAPLAW’s 2019 article on incentive compensation discusses issues to consider when drafting and implementing a policy to mitigate the risk of disallowance.

Cost-of-Living-Adjustment (COLA)

A permanent salary or wage increase to reflect the rising cost of goods and services over time
Rules: Head Start Act, Sec. 640(a)(3)(A)(i)(I) – The Office of Head Start’s annual funding allocations provide a cost-of-living increase for each Head Start agency to maintain the level of services provided during the prior year. In practice: A CAA may adopt a policy to raise all employee salaries commensurate with the annual Head Start COLA, so long as funding is available. Remember! The Head Start Act requires that programs implement annual COLA increases for Head Start employees regardless of whether the CAA can grant COLA increases to non-Head Start staff.

Hazard Pay

A temporary supplement to an employee’s salary or wages for performing dangerous or physically distressing work

Rules:

1. Uniform Guidance, 2 CFR § 200.430(a) – Compensation must be reasonable, conform to the CAA’s established written policy, be supported by sufficient documentation, and be allocable to the grant charged.
2. Office of Head Start, ACF-IM-HS-21-05 – Programs are encouraged to use one-time Head Start funding under the ARP and other COVID-19 relief funding to support staff retention, including instituting hazard pay.

In Practice: A CAA may adopt a hazard pay policy for employees with increased exposure to certain risks, such as COVID-19, threats to physical safety, or other disasters, as a result of their working conditions.

Remember! Hazard pay should correlate with an employee’s exposure to a dangerous hazard. Applying this principle consistently means that employees who have not been exposed should not receive hazard pay.

Fringe Benefits

Allowances and services provided to employees in addition to regular salaries and wages  Rules:

1. Uniform Guidance, 2 CFR § 200.431(a) – Fringe benefits must be reasonable and established by law, agreement, or the CAA’s established written policy.
2. Office of Head Start, ACF-IM-HS-21-05 – Programs are encouraged to use one-time Head Start funding under the ARP and other COVID-19 relief funding to support staff retention, including offering child care stipends and student loan repayment assistance.
3. Internal Revenue Service, IRS Publication 15-B – Some employee benefits will be subject to withholding and treated as taxable employee compensation.

In practice: Fringe benefits can take many different forms, such as paid leave, health and wellness benefits, retirement plans, technology reimbursement, student loan repayment or forgiveness, parking/commuter reimbursements, cell phone/technology allowances, or gym memberships.

Salaries and Wages

Regular, periodic payments for work performed in the ordinary course of business Rules:

1. Federal, state, and local minimum wage and overtime – CAAs must pay at least minimum wage and overtime in accordance with federal, state or local laws, whichever is most favorable to employees.
2. HHS Appropriations Act – Funds appropriated by the Department of Health and Human Services may not be used to pay the portion of compensation that exceeds Executive Level II (set annually by the federal Office of Personnel Management).
3. Head Start Act, Sec. 653(a) – Head Start salaries and wages must be comparable to the rates paid for comparable services in the area, and federal funds may not be used to pay any part of the compensation of a Head Start employee whose salary exceeds Executive Level II.
4. Uniform Guidance, 2 CFR § 200.430(a) – Total compensation for each employee must be reasonable, follow the CAA’s written policy, be supported by sufficient documentation, and be allocable to the funding source charged.
5. Internal Revenue Code, 26 CFR § 53.4958-6(a) – Compensation must not confer an “excess benefit” on key employees. Compensation paid to key employees will be presumed reasonable if approved in advance by independent members of the board and based on documented, objective comparability data evaluated concurrently with approval.

In practice: CAAs often maintain a salary table developed using wage comparability data collected from peer organizations and resources from its community action state association or state association of nonprofits. Remember! Tax-exempt charities must report compensation (including benefits) on their annual tax return, Form 990, for key employees (those with certain responsibilities and reportable compensation greater than $150,000) and the five highest compensated individuals with reportable compensation of $100,000 or more.