ARC's Compensation Study

From 1986 through 2002, ARC’s management team periodically addressed and adjusted compensation and benefit strategies for direct labor and salaried employees. At the end of 2002, ARC’s Board determined that the time had come to address key personnel compensation as part of an examination of its’ overall business transition strategy. During this period of change, not only did the revenue basis for the organization experience significant complex growth and change, but the operating framework of the organization was revised from a membership managed entity to a Board managed entity, with changes made in accordance with revisions of the Tennessee Corporations Act and revisions to IRS charitable organization rules.

From 2003 – 2004, and as part of this process, ARC’s Board engaged the legal firm of Chambliss, Banner and Stophel [1] to study compensation and retirement issues for long term key personnel termed by the IRS as ‘highly compensated employees.’[2] This type of employee is ‘disqualified from’ or exempt from the definitions of the Fair Labor Standards Act and therefore it is assumed that their compensation is set by other ‘rebuttable’ methods for determination of compensation parity. Recommended by Wimberly, Lawson and Seale,[3] this Chattanooga based firm had extensive practical experience in studying compensation issues and making recommendations to not for profit organizations to meet the ‘rebuttable presumption’[4] requirements of the IRS. In 2003, prior to the installation of the MAS500 accounting system upgrade, the then Board began a multi-year phase in based on external recommendations generated by John Stophel Esq., of the lawfirm of Chambliss, Bahner and Stophel[5] who reviewed historical agency revenue information from 1986 through 2002, studied comparable not for profits and commercial industrial activities, evaluated essential functions of comparable commercial and ARC’s key management, and subsequently made a set of recommendations for redetermination of wages and benefits based on essential functions, current industry practices, agency requirements and the constraints imposed by regulations. Stophel’s report identifies the lengths that he went to for review of published data, his sources, and his contacts with regulating entities including the IRS. The resultant wage and benefit numbers were subsequently phased in over a three year period, appropriately disclosed on the agency’s annual reports to the Internal Revenue Service on Form 990 and reflected in agency minutes and work documents. In 2003, the ARC’s Board made a decision to establish and ‘salt’ a retirement fund for three long term key personnel in recognition of the short period of time remaining and available to plan for retirement. This fund was fully taxable and reported as required on Form 990 at year end 2004.

While the Oregonian articles made significant note of the changes that were reported for ARC’s ‘highly compensated employees’ from 2003 to 2004, they failed to add definition or detail the numbers in question, properly represent the context of the organizational change and growth in complexity or current work practices that had guided ARC’s Board through the process of developing compensation strategies designed to ensure the ability of the key personnel, all approaching fifty five years of age and employed for nearly twenty years without benefits, to (1) aggressively plan for retirement with their remaining years of employment, (2) recruit and replace key executive management to lead the now complex organization, and (3) properly represent overhead costs for compensation in accordance with both the IRS rebuttable presumption requirements and OMB Circular A-122’s definitions for ‘Fair Market Prices.’. Nor did the authors of the Oregonian articles ask any clarifying questions about these matters until after their articles were framed in the media and reprinted widely. Their reports led to a firestorm of misperception based on incomplete statements and misrepresentations of readily available information and became the fuel for political interference in ARC’s contracting environment.

Further, this process of achieving compensation parity as required by regulation, was knowingly, willfully, and repeatedly, misrepresented by Kraft Recovery Services, LLC as part of their overall manipulation of ARC’s Board of Directors into a ‘voluntary’ bankruptcy Chapter 11 (liquidation) filing. Adopting the allegations circulated in the Oregonian’s media reports, proceedings documents continuously misrepresented the processes used, the intention of the parties and the independent consultants, the data collection period, and the management and Board. They further alleged that key personnel knowingly provided false information to the independent consultant to manipulate the outcome for their personal gain and knowingly and willfully failed to include and submit the readily available materials which counter and refute their claims made to the court.

[1] For more information about this law firm visit www.cbslawfirm.com
[2] “Highly compensated employees” are defined by the IRS in Publications 560 (Revised 2007) and 7335 (Revised 11-2006).
[3] For more information about this law firm visit www.wimberlylawson.com.
[4] According to the IRS, If an organization meets the following three requirements, payments it makes to a disqualified person under a compensation arrangement are presumed to be reasonable, and a transfer of property or the right to use property is presumed to be at fair market value. The three requirements for establishing the rebuttable presumption are: (1) The compensation arrangement must be approved in advance by an authorized body of the applicable tax-exempt organization, which is composed of individuals who do not have a conflict of interest concerning the transaction, (2) Prior to making its determination, the authorized body obtained and relied upon appropriate data as to comparability, and (3) The authorized body adequately and timely documented the basis for its determination concurrently with making that determination.
[5] See John Stophel’s written recommendations to ARC’s Board of Directors dated December 17, 2003.