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Determining and Documenting the Reasonableness of Compensation
2. Rule and Regulation
Sec. 1 Setting of Compensation. Institutions of The University of Texas System are charged with setting compensation levels for Highly Compensated Personnel in such a way that compensation is reasonable and adequate documentation is maintained for supporting the reasonableness of compensation paid. Internal Revenue Code (IRC) Section 162 imposes a reasonableness requirement for the deductibility of compensation as a business expense and its applicability has been extended to tax-exempt organizations. IRC Section 4958 imposes excise taxes on excess benefit transactions between a tax-exempt organization and certain influential persons within the organizations. Although the U. T. System is not subject to the IRC sections, the process used to determine compensation by U. T. System shall be pursuant to a process in conformance with the spirit of the Internal Revenue Service (IRS) guidelines including any applicable factors previously used by the IRS to determine reasonable compensation (see Definitions) as well as any other factors deemed relevant.
Sec. 2 Compliance with IRS Guidelines. The Chancellor shall develop a Systemwide policy for establishing the compensation for Highly Compensated Personnel, not covered in Regents’ Rules and Regulations, Rule 20203 (which outlines the procedures for establishing the compensation of the presidents and executive officers at System Administration), that is in conformance with the spirit of the factors referenced in Section 1 above.
Sec. 3 Board Approval. Total Annual Compensation for all Highly Compensated Personnel must be approved by the Board of Regents, except as otherwise allowed by Rule 10501 for athletic directors or coaches when special circumstances exist. Changes in Total Annual Compensation for an institutional employee classified as Highly Compensated Personnel of up to five percent per year may be approved by the Chancellor if the initial compensation was previously approved by the Board. In all cases, the employing institution is responsible for providing documentation that the compensation was established or changed in accordance with applicable Systemwide policy.
Factors Previously Used by the IRS -
1) the nature of the employee's duties;
2) the employee's background and experience;
3) the employee's knowledge of the business;
4) the size of the business;
5) the employee's contribution to the profit making;
6) the time devoted by the employee to the business;
7) the economic conditions in general and locally;
8) the character and amount of responsibility of the employee;
9) the time of year when compensation is determined;
10) the relationship of shareholder-officer's compensation to stock holdings;
11) whether alleged compensation is in reality, in whole or in part, payment for
a business or assets acquired; and
12) the amount paid by similar size businesses in the same area to equally
qualified employees for similar services.
Highly Compensated Personnel – personnel whose Total Annual Compensation is, or may exceed, $1 million in any year and who are not covered in Regents’ Rules and Regulations, Rule 20203 (Compensation for Key Executives).
Total Annual Compensation – includes an employee’s salary or wages, practice plan supplements, incentive plan payments, and unpaid deferred compensation and excludes employer-provided insurance, expense allowances, employer contributions to Teachers Retirement System of Texas and Optional Retirement Program, and other fringe benefits.
4. Relevant Federal and State Statutes
5. Relevant System Policies, Procedures, and Forms
Regents’ Rules and Regulations, Rule 20202 – Cash Compensation for Chief Administrative Officers
Regents’ Rules and Regulations, Rule 20203 – Compensation for Key Executives
Regents’ Rules and Regulations, Rule 10501 – Delegation to Act on Behalf of the Board
The University of Texas System Administration Policy UTS144, Establishing Compensation for Highly Compensated Employees
6. Who Should Know
Executive Vice Chancellors
7. System Administration Office(s) Responsible for Rule
Office of the Chancellor
8. Dates Approved or Amended
September 27, 2019
Editorial amendment to Section 3 made September 17, 2014
May 15, 2014
Editorial amendments to Sections 1, 2, Definitions, and Number 4 made March 24, 2014
Editorial amendments to Section 3 made May 16, 2012
Editorial amendments to Section 3 and Number 5 made December 1, 2011
Editorial amendment to Section 3 made December 1, 2010
Editorial amendment to Number 6 made September 1, 2010
Editorial amendment to Number 5 made December 7, 2009
Editorial amendments to Section 3 and Number 5 made August 26, 2009
Editorial amendment to Number 5 made March 18, 2008
May 11, 2006
July 8, 2005
9. Contact Information
Questions or comments regarding this Rule should be directed to: