iProtean—CEO Selection & Compensation

Executive compensation has made the news over the last several weeks, both in the U.S. and in the U.K.  As positive economic news continues to elude the corporate and political world, the spotlight sweeps across many corporate practices—and executive compensation has received full focus.  In the not-for-profit arena, scrutiny of hospital and health system executive compensation practices has not been spared; in fact, it is increasingly front-page news.


Deloitte Center for Corporate Governance recently released a publication from  Pearl Meyer & Partners that lists the 10 compensation committee agenda items for 2012.  Several on the list apply to not-for-profit healthcare boards including:


–       Understanding “total executive compensation”

–       Reassessing executive compensation benchmarking

–       Continuously assessing your succession planning strategy

–       Testing your compensation philosophy against its stated objectives


(Pearl Meyer & Partners.  Top 10 Compensation Committee Agenda Items for 2012. Deloitte Corporate Governance Monthly, May 2012.)


In the iProtean course CEO Selection & Compensation, Barry Bader, Monte Dube, Esq., Anne McGeorge and Elizabeth Mills, Esq., discuss executive compensation as well as CEO selection, succession planning and evaluation.


Monte Dube, Esq., Proskauer

People care a lot about how senior management of tax-exempt organizations are compensated.  Often times that compensation, for very good reason, is considered by your community to be high.  High, though, doesn’t mean unreasonable.  The key standard for executive compensation for tax-exempt organizations is fair market value, reasonable compensation.  The process for determining reasonable compensation for your executive management is extraordinarily important, almost as important as the substantive conclusions your board reaches.


Elizabeth Mills, Esq., Proskauer

It is important that you pay your executives market value so that you can have qualified people. At the same time, you can’t pay them more than reasonable compensation, for all sorts of reasons:  you are wasting your charitable money, the IRS won’t like it and so forth.  Executives don’t have to work for less just because they are working for a tax-exempt organization, but they shouldn’t be excessively paid either.  The board has the ultimate responsibility for making sure that compensation is reasonable for your top executives.


Barry Bader, Bader & Associates

Boards should avail themselves of an expert third party compensation firm that is right at the leading edge of the field in terms of compensation policies, practices, comparative payment levels and what the law requires.  It’s a complex and evolving area of regulatory law and Internal Revenue Service regulations, and it is very important that the board and its executive evaluation and compensation committee ensure that they are getting the best advice.


It is also important not to under compensate and, particularly, to not appropriately fund an executive’s retirement.  I’ve seen situations where CEOs remain in their positions and take an additional contract from a grateful board, but frankly they stay in their roles longer than ideally they should or ought to or want to because the board has not provided them sufficient economic security.  So it is important that a board not only avoid excessive compensation and benefits for its executives, which can run afoul of legal problems, but that it also not under compensate a high performing executive.


Anne McGeorge, Grant Thornton

. . .  tax-exempt organizations are highly regulated by the Internal Revenue Service and by the OIG with regard to executive compensation. The overarching rule in all of the regulations has to do with paying fair market value for compensation.  So how do you determine fair market value, and what is the role of the board member in determining that the executive’s pay is actually fair market value?


Generally, the IRS has set forth three guidelines, and if the organization meets these three guidelines, then the compensation will be determined to be reasonable, which in essence means fair market value, unless the IRS proves otherwise.  That is important because it shifts the burden of proof to the IRS in proving that the compensation is not reasonable.


Those three criteria are: 1) the salary is benchmarked to other executives’ salaries and the benchmarks actually used are published benchmarks; 2) the board has approved the salaries based on these comparables;  3) the approval decision is documented in the board minutes.  Those three criteria are called the “rebuttable presumption of reasonableness.”  If boards comply with the rebuttable presumption of reasonableness criteria, in 95 percent of the cases they will never have an issue with executive compensation.


Barry Bader, Bader & Associates

There are a number of best practices for a board in the area of oversight of executive compensation.  The board should approve a compensation philosophy that clearly connects compensation and incentives to the organization’s mission and quality, and that expresses why, for example, we pay our CEOs at 75th percentile of comparable executives.  Why we have both financial and quality goals—because both are important to the mission.  Why we have both annual and long term goals—because we want our executive team to have a strategic focus.  Why we have both quantitative, measurable goals like operating margin, and qualitative goals such as developing a positive culture with our physicians—because we believe that our executive needs to nurture a positive culture but also a metrically driven culture in a challenging, complex industry.


Next best practice is that the executive compensation committee should carefully review objective information including board input about the executive’s performance.  It should review the quantitative measures and then it should determine “What percentage of the incentive award do we want to give to the CEO?”  In addition, generally that committee doesn’t make the decision on the incentive awards for the rest of the senior management team. But all of those incentive bonuses for the rest of the team are a reflection and should be consistent with the overall compensation philosophy.


Increasingly, a part of that philosophy is that incentives for individual members of the senior team are based not only on their individual performance, but also on how the team performs as a whole.  In health systems, the executives of subsidiary organizations increasingly have goals that not only relate to their subsidiaries, their hospitals, but also system-wide goals because ultimately our compensation plan, our philosophy is saying we need to work together as an organization to achieve our goals.  We don’t want to incentivize silo behavior if what we want is high-level, system-wide performance.


For a complete list of iProtean courses, click here.


iProtean Symposium & Workshop

Mark the Date!! October 10 – 12, 2012 at The Lodge at Torrey Pines, La Jolla, CA. Faculty: Barry Bader, Dan Grauman, Marian Jennings and Brian Wong, M.D. For more information, click here.


For more information about iProtean, click here.