Compensation and benefit packages are increasingly important in this quest. The good news is that the IRS doesn't say you can't offer compensation that is comparable to what a for-profit offers. It does, however, define the factors that determine if compensation is reasonable. It must obtain and rely on appropriate comparative data. It must adequately document the basis for its determination.
Data collection is vital when determining appropriate compensation.
Part of the employee files should be a complete employment history of every executive in your company. The employment history is a permanent file with static historical information regarding the original hire, promotions and the reasons for promotion. The employment history file should contain the original facts and circumstances surrounding the employee's hiring and the decision-making process used for hiring and salary determination. Annual reviews give you another tool to justify employee compensation. Use them to assess each employee's performance and explain why compensation increases are justified.