New York Attorney General A. G. Schneiderman announced a new initiative to reduce regulatory burdens and strengthen governance and accountability of non-profits in New York. He plans to introduce legislation that will require enhanced board oversight of audits and executive compensation and adoption of conflict-of-interest and whistleblower policies, and give the Attorney General new tools to police self-dealing and other forms of corruption. The announcement comes shortly after Governor Cuomo announced new rules limiting compensation for executives of nonprofits and only months after Governor Cuomo’s Taskforce on Non-for-Profit Entities began an investigation of executive compensation in the state’s nonprofit sector. The Attorney General’s initiative appears to be based largely on recommendations from a taskforce he established last July, the Leadership Committee for Nonprofit Revitalization, made up of 32 representatives of nonprofit organizations. The rules for strengthening governance and accountability have yet to be determined, but they are likely to follow the Committee’s recommendations, which include these:
- Require that independent directors, or a committee of independent directors, annually affirm that compensation paid to the CEO, CFO, and other key employees (as reported in the IRS Form 990) is reasonable, justified and commensurate with services provided.
- Require that, in making their affirmation, the independent directors consider total compensation, including all perquisites and benefits, in relation to comparability data from nonprofits of similar size and type; employee’s qualifications and performance; payments or other benefits from related entities; and budgetary challenges and other issues affecting the organization’s overall financial position.
- Require that the basis for directors’ determination that total compensation is reasonable be recorded in contemporaneous minutes.
- Require that boards of nonprofits using compensation consultants adopt policies and procedures governing their selection and retention and oversight of their work, and affirm the qualifications and independence of any compensation consultants engaged by the board.
- Criteria for determining independence of directors and compensation consultants should be defined in law.
The taskforce generally followed the principles embodied in the requirements for a presumption of reasonableness under federal law and tax code, in recommending that the determination of reasonableness be made by independent directors; that it be based on a comparison of total compensation (including benefits and perquisites) to comparability data on total compensation paid by organizations of like size and type; and that the determination and the basis for it be recorded in contemporaneous minutes. It departs from the federal rules in requiring that boards do this every year; that they address compensation for all key employees whose compensation is reportable in Form 990 (not just those who are “disqualified individuals” covered by intermediate sanctions regulations); that they consider employees’ qualifications and performance and the organization’s budgetary challenges and overall financial position; that they adopt policies governing selection and retention of compensation consultants; and that they affirm the qualifications and independence of compensation consultants engaged by the board. Suggesting that federal rules for establishing the rebuttable presumption of reasonableness are inadequate, since they do not require that boards follow them, the taskforce recommended that New York law be amended to supplement and build upon the federal rules without imposing significant new costs and burdens. (This recommendation could be an indirect criticism of the investigation by Governor Cuomo’s taskforce, which recently began asking boards of nonprofits to complete a lengthy and redundant questionnaire covering information readily available already, in the main, in Form 990.) These developments in New York seem to be a response to public criticism of executive compensation paid by service providers that are dependent on state funding. They could foreshadow regulatory actions in other states. (California enacted its own rules in 2004, requiring boards of nonprofits to approve the compensation of the CEO and the CFO when they are hired, whenever their term of employment is extended, and whenever their compensation is modified, to assure that it is just and reasonable.) The proposed rules for New York are inherently more burdensome than the California or federal rules, in requiring that directors review compensation for a larger group of executives than the California and federal rules cover. This takes the board well beyond the usual boundary between governance and management, since some of the “key employees” whose compensation is reportable on Form 990 are not even executives. The proposed requirement that directors consider performance in approving compensation presents another challenge, in that directors are unlikely to know any more about an employee’s performance than what they are told by the CEO. The requirement that directors determine that compensation is “justified” seems to tighten the current New York and federal requirement that compensation be reasonable and fair market value for the services delivered. It is not clear what “justified” means, but it seems to represent the notion that the usual standard for determining reasonable pay—paying no more than what other organizations pay—is somehow too loose, since examples of extraordinarily high pay are so easy to find. Most of the proposed rules are eminently sensible. They correspond closely with the requirements for the presumption of reasonableness, and with what most authorities would regard as best practices for governing executive compensation in tax-exempt charitable organizations. One would hope that New York nonprofits were already following most of the proposed rules, since there is little new in them. Indeed, boards that aren’t already following them could be regarded as negligent, as the proposed rules have been recognized as best practices for close to a decade now. They simply explain in detail what due diligence in governing executive compensation amounts to. The notion that providing statutory guidance—embedding best practices in statutory requirements—will strengthen governance is misguided. The weaknesses in governance of executive compensation cannot be blamed on lack of clear standards—not after all the publications and seminars telling boards what they should be doing to govern executive compensation effectively. Boards should already know what the standards are in this arena. If they don’t know, it is only because they haven’t been paying attention. But even boards that know exactly what they should be doing often aren’t diligent about governing executive compensation, and it is not because the rules are too hard to follow. New statutory standards aren’t likely to make much difference.
The State of California’s audit of Salinas Valley Memorial Healthcare System (SVMHS) is scheduled to be released on March 8. The audit began because of questions about the compensation of SVMHS’ former CEO, Samuel Downing, and have expanded to include all of SVMHS' finances and operations. (This post gives an overview of the situation at SVMHS.) SVMHS is not a client of Integrated Healthcare Strategies and we have no inside knowledge of compensation at SVMHS. The following discussion is based on media reports. One aspect of executive compensation that may be examined in the audit are the supplemental retirement payments made to SVMHS executives. These two articles in the Monterey County Herald reveal that at least eight executives and, surprisingly, the CEO’s executive assistant had supplemental retirement accounts included in their compensation. Many organizations use supplemental retirement as a way to increase retirement payments for employees whose compensation exceeds the limits set by the IRS. This limit can change from year to year. In 2012, the IRS only allows pensions to be paid by a formula based on salaries up to $250,000. Supplemental retirement accounts are set up to allow additional retirement payments beyond the IRS limits. Because of the time and expense needed to set up a supplemental retirement plan, it is very rare for someone paid less than $250,000 to get a supplemental retirement pension. So why did the CEO’s executive assistant have a supplemental retirement plan? Was her salary more than $250,000? The audit may answer that question.
How has healthcare executive pay changed in the last ten years? Integrated Healthcare Strategies’ National Healthcare Leadership Compensation Survey has tracked executive pay since 2002. One way to show changes in executive pay is to examine internal equity by comparing the median salaries of benchmark jobs with the median salary of the Chief Executive Officer. For this comparison, we use the median salary from the total sample of healthcare systems and hospitals reported in our survey. The General Counsel position has seen one of the largest increases in relative compensation in the last ten years. In 2002 the median salary for an independent hospital General Counsel was 50% of the Chief Executive Officer’s salary. In 2011 the median salary of a General Counsel is 57% of the Chief Executive Officer’s salary. At healthcare systems, General Counsel salaries have increased from 45% to 48% of the Chief Executive Officer’s salary. The increase in the relative compensation for healthcare General Counsels is not surprising given the recent increased focus on legal issues such as:
- Mergers and Acquisitions
- Joint Ventures
- Recovery Audit Contractor (RAC) Audits
- Stark Laws
- Anti-Kickback Statute
- Civil False Claims Act
In the future, the legal aspects of healthcare reform and the creation of ACOs will cause many new challenges for healthcare organizations and their General Counsels. These challenges may cause further changes to the compensation of healthcare General Counsels. This is the second in a series of posts looking at changes in healthcare executive salaries over the last decade. The first post in the series can be read here. In future posts, I will discuss other changes in the relative compensation of healthcare executives.
You may have already seen our previous posts sharing the opportunity to join our Houston seminar that will focus on: Compensation in Healthcare - Strategies & Best Practices for Physician & Executive Compensation. But, our excitement for the event is mounting, and with just little over a week left, we want to make sure no Houston-area hospitals or health system miss their chance to attend. If you are the CEO, a Human Resource executive, or another interested healthcare position that is involved with physician and executive compensation in your organization, consider clearing your schedule on the morning of Thursday, February 23. For just 2-1/2 hours, you'll leave with insights and strategies to develop total compensation plans for your leaders and employed/affiliated physicians that will help your organization adapt to healthcare reform initiatives, and operate effectively in a changing and unchartered environment. This seminar will review key need-to-know trends and issues in physician and executive compensation. If you have the time, join us before the meeting starts for breakfast, included with the minimal registration fee. Please go to the event web page for a detailed description of the seminar agenda and to register.
The most common way to evaluate the compensation of a healthcare executive is to compare that position’s compensation to the compensation of other executives who do the same job at other healthcare organizations. For example, how much does a hospital’s Chief Nursing Officer make compared with Chief Nursing Officers at hospitals of similar size? Another way to evaluate an executive’s compensation is to make an internal equity comparison with the compensation of other executives within the same organization. For example, how much does a hospital’s Chief Nursing Officer make compared with the same hospital’s Chief Executive Officer? Integrated Healthcare Strategies’ National Healthcare Leadership Compensation Survey includes a comparison of the median salaries of several of the most common benchmark jobs with the median salary of the Chief Executive Officer. In our most recent survey, we found that the median salary of a system Chief Financial Officer was 57% of the median salary of a system Chief Executive Officer. We have followed the relationship of executive salaries as compared to the salary of the Chief Executive Officer for the last 10 years. For this comparison, we used the median salary from the total sample of healthcare systems reported in the survey. The internal equity data from our surveys from the last decade show some interesting trends in healthcare executive pay. Over the next few weeks, I will show how executive pay has changed and how it has stayed the same since 2002. I will also discuss how internal equity of executive pay reflects trends and changes in the healthcare industry. The most striking thing about the internal equity comparisons over the last ten years is how much has stayed the same. The relationship between the salaries of most executives and the Chief Executive Officer have not changed or have changed only slightly since 2002. In 2002 the median Chief Medical Officer’s salary was 57% of the median Chief Executive Officer’s salary. In 2011 Chief Medical Officers are also paid 57% of the Chief Executive Officer. The list below shows some of the positions where the median salary relationship with the Chief Executive Officer has changed by 1% or less in the last ten years:
- Chief Administrative Officer (59%)
- Chief Medical Officer (57%)
- Chief Financial Officer (57%)
- Chief Nursing Officer (35%)
- Physician Head of Quality Improvement (48%)
- Head of Human Resources (37%)
In future posts, I will discuss positions where the salary relationship to the Chief Executive Officer has changed over the last 10 years.