John Commins, in a recent opinion piece for the Alliance for Advancing NonProfit Healthcare, argued that tax-exempt hospitals and health systems should disclose current executive compensation, not just what they used to pay, as required in 990 reports. “It is not unreasonable to expect that nonprofit hospitals that receive significant tax breaks would be willing to share the compensation information on their top executives on a real-time basis.” It’s a question of trust, he says: if you’re not willing to tell the public what your executives are paid, there’s no reason for the public to trust your commitment to serving your community and no reason for taxpayers to subsidize your organization through tax breaks. He was reacting to the refusal of Care New England to disclose the compensation package for its new CEO Dennis Keefe. Its spokesperson told the media that it was the system’s policy to provide information about executive compensation only through 990 reports. 990 reports, of course, are old information, often a year or two old. The reports are typically filed ten and a half months after the end of the year in question, and it takes a while before they are posted on Guidestar.com. For a CEO who starts in the middle of the year, it will be even longer before the public can get a picture of the compensation package, since the first 990 will disclose only a partial year’s compensation and no bonus for the months in question (other than a hiring bonus). So the policy of disclosing it only in the 990 amounts to saying “It’s none of your business.” Nonprofits are private organizations, and compensation is a personnel matter usually kept confidential. The question of how to disclose executive compensation, though, given that it must be disclosed on 990 reports, is only a question of when to disclose it, and how. When boards adopt the principles of transparency and full disclosure but refuse to disclose any more than what is required, and any sooner than required, they really aren’t honoring the principles they try to follow in other matters. There are times when it is probably appropriate to do that—as in the middle of a union organizing campaign or in the run up to contract negotiation—but most of the time it shouldn’t really matter. Current pay is generally not much more than what was reported in the last 990, so long as there are no new executives. But when the CEO is new, it’s hard to argue that the compensation package is none of the community’s business. It’s not just because of tax exemption, but because hospitals and health systems are asking the public for donations and asking legislators and the public to continue supporting Medicare and Medicaid. One of the reasons the IRS redesigned the 990, after all, was to give donors more information about the way tax-exempt charities allocate their resources. A 990 report on what the last CEO was paid reveals more about decisions made years earlier by prior boards than about the decisions the current board made in choosing a new CEO and deciding how much to pay. As Commins says, most executives are worth what they’re getting paid, but if it’s uncomfortable justifying the compensation, maybe there is something wrong with it.
Salinas Valley Memorial Healthcare System (SVMHS) is currently being audited by the State of California because of questions about the compensation of SVMHS’ former CEO, Samuel Downing. (This post gives an overview of the situation at SNMHS.) SVMHS is not a client of Integrated Healthcare Strategies and we have no inside knowledge of Downing’s compensation. The following discussion is based on media reports on Downing’s compensation. One aspect of Downing’s compensation that should be examined in the audit is Downing’s “severance payment.” Downing began working for SVMHS in 1972 and became CEO in 1985. In 2008 he received a “severance payment” of $947,594. However, Downing did not leave Salinas Valley, but continued on as CEO until 2011. Although SVMHS calls the $947,594 paid to Downing “severance,” this payment is not severance as practiced in the health care industry. Almost all top executives in health care organizations are eligible for some kind of severance under certain circumstances. Severance is most commonly provided for executives when they are involuntary terminated without cause. For example, executives receive severance when they are terminated because the hospital is acquired by another health system. Severance is a way to smooth over any difficulties encountered when an executive leaves an organization. Severance benefits make it easier for an employer to terminate an employee, by providing the terminated executive with income security until he or she finds a new position. In addition, severance makes it easier for the terminated executive to accept the change without feeling the need to extract damages for unjust treatment through litigation. Severance benefits are not paid for voluntary termination (except in the case of diminution of duties), termination for cause, or in the event of disability. Downing’s “severance” plan departs from health care industry practice by not being based on involuntary termination. It appears that the Board of SVMHS agreed to pay Downing the $947,594 no matter what the circumstances were when he left. Downing was to get the payment whether he was fired or whether he left on his own. The payment appears to be some type of deferred compensation, not severance. Why did SVMHS make the payment three years before Downing left the company? The Board decided to make the payment in 2008 to remove a future financial obligation. According to the Los Angeles Times, “the board's intent was to remove the severance from its books in 2008 by giving Downing the money rather than waiting until he left.” So if the “severance payment” provided to Downing in 2008 was not severance, but really deferred compensation, did Downing get an actual severance payment when he retired from SVMHS in 2011? The audit may answer that question.