IRS Investigation of Test-Maker Pay Sought

University Testing

FairTest Examiner - January 2008

The Attorney General of Iowa has asked the U.S. Internal Revenue Service (IRS) to investigate the high fees ACT Inc., a non-profit corporation, pays its board members and officers. The test development and education research firm is based in Iowa City.

The call for a federal review came in response to a Des Moines Register newspaper exposé, which disclosed that some ACT board members received more than $40,000 annually to attend four meetings, review documents and participate in conference calls. In addition, the Chairman and Chief Executive Officer, Richard Ferguson, received total compensation of $596,000 in the company’s fiscal year ending in August 2005, the most recent on record. Four other top officers were paid more than a quarter million dollars each. FairTest assisted Register investigative reporter Lee Rood, who researched and wrote the article.

The IRS has the power to sanction non-profits that award excessive compensation. Agency rules state that no part of the net earnings of any charity “may inure to the benefit of any private shareholder or individual.” In addition, the U.S. Senate Finance Committee has been examining the pay structure of non-profits. Its late 2007 report concluded that board members of non-profits should “be expected to serve either without compensation other than reimbursement for related expenses or for compensation that is an appropriate level comparable to other boards.”

Unfortunately, high executive pay is not uncommon in the testing industry, even at firms set up in “non-profit” form. The president of the Educational Testing Service (ETS), Kurt Landgraf, had a total compensation package of more than $1,000,000 in the same period (see Examiner, May 2006). ETS reported annual payments to individual board members of between $35,000 and $45,000. College Board trustees, the association’s governing board, were not paid, but College Board President Gaston Caperton received close to $640,000.

In recent years, ACT has sought to enhance the company’s profile as part of a broad campaign to win a larger share of expanding testing markets. This effort has included electing to its board prominent educators and political figures, including former Colorado Governor and Los Angeles Schools head Roy Romer, ex-U.S. Department of Education Secretary Richard Riley, and former U.S. Senator Bob Graham.