Somehow the most egregious examples of bad practices in executive compensation come from distinguished educational and cultural institutions, rather than from hospitals and health systems.
When Jacob Lew was nominated to become Secretary of the Treasury, the press discovered that NYU gave him a parting gift of $685,000 when he quit his position there to go to Citigroup. NYU called it severance, but acknowledged that Lew left voluntarily and that the payment wasn’t required by the terms of his contract.
A spokesman for NYU, John Beckman said, “It is not uncommon for large organizations to make payments to senior officials on their departure, as happened in this instance.”
He must have known something the rest of us didn’t, since no one else seems to think it is usual for tax-exempt organizations to give parting gifts to people who leave voluntarily.
It turns out he did know something the rest of us didn’t: the New York Times reported that NYU gave Dr. Harold Koplewicz, an executive at NYU’s medical center, $1,230,000 when he left to found a competing organization. This, too, was characterized by NYU as severance, even though Beckman said Dr. Koplewicz left voluntarily.
Severance is paid when an employer fires an executive—not when the executive quits voluntarily. It is either a payment of damages for breaking an executive’s employment contract or payment in exchange for a release from potential claims for discriminatory or unjust termination.
Yes, sometimes employers allow an involuntary termination to be characterized as voluntary resignation, and go ahead and pay severance anyway—but not when someone is resigning to take another job—since one of the purposes of severance is to provide income continuity while the person who was fired searches for another position.
Severance paid on voluntary termination, though, is nothing but a parting gift—and parting gifts are private inurement—gifts not earned through work, not warranted by contract, just a misappropriation of charitable assets. Why give a parting gift to someone who was paid $800,000 a year while working for NYU, as Mr. Lew was? Gifts of this magnitude—unearned gifts—expose the recipients to risk of intermediate sanctions, and it would be hard to defend as customary practice or fair market value for services rendered.
Other universities may provide parting gifts in the form of severance to executives who resign, but it is not something that can be easily justified or excused as a common practice among large organizations, as Mr. Beckman asserts. Most large organizations have better things to do with their resources than give money away to someone who was already paid fairly—even generously—while working.
It is one thing to provide a placque or a watch or a gift certificate when someone retires, but few employers want to give that kind of congratulatory recogniztion to an employee who is quitting to take a job elsewhere. It is quite another thing to provide a gift of this magnitude and claim that it is common practice.
If other colleges and universities do provide parting gifts of this magnitude, it must be because they ignore the fact that their tax-exemption depends on their using their resources to fulfill their mission, or because their trustees pay no attention to the way the university gives away its charitable assets to former employees.
Read more about David Bjork, Phd and INTEGRATED Healthcare Strategies on the INTEGRATED website.