Newspaper headlines regularly report the compensation of local hospital CEOs in scathing terms. Hospital leaders are criticized for accepting bonuses while their employees suffer job cuts, or community members react with dismay at the six-figure salaries earned by their "non-profit" leaders. Jim Otto of Hay Group discusses three best practices for disclosing executive compensation at a non-profit hospital.
1. Take the opportunity to explain CEO compensation. The IRS released its overhaul of Form 990 in Dec. 2007, the first major overhaul of the form since 1979. "When it came to compensation, they changed a number of things, and the two that stand out most is that the disclosure of an individual's compensation is much more understandable than it was on the old form," Mr. Otto says. "There is also a schedule that the organization has to attach that essentially describes the process by which the CEO compensation is determined, as well as other identified executives." While the requirement is not as substantial as the proxy requirements for for-profit hospitals, the change gives organizations an opportunity to describe in detail the process of compensating their CEO.
Mr. Otto advises non-profit hospitals to view the change as an opportunity rather than a burden. The schedule gives facilities the chance to discuss compensation philosophy, market data and decisions around incentive plans and bonuses. By laying out the process of deciding compensation, hospitals can protect themselves to some extent from criticism when CEO compensation comes to light. "We have always advised clients that a compensation philosophy is very important, and the IRS points to a compensation philosophy as an important foundation on which you make good governance around compensation," he says. While you may not be able to control the public's opinions on your CEO's salary, you can take the time to describe a certain level of compensation is necessary to attract talent and reward the complexity of a CEO's responsibilities.
2. Address inquiries and requests for comments on compensation. CEO compensation scandals fill newspaper headlines on a regular basis, bringing negative attention to a hospital's board of directors, finances and leadership. Responses to such criticism vary: Some organizations refuse to comment; others speak to reporters about their rationale; some CEOs agree to take salary cuts. Mr. Otto recommends hospitals be proactive and reach out to local reporters once compensation comes to light. "Essentially what we've encourage is to describe, 'Here's our process, here's our philosophy. We make decisions within the context of our philosophy and take into account market data,'" he says. "You're not going to be able to argue somebody out of an emotional position that they think somebody's paid too much. All you can do is impress upon the person that we do have a foundation on which we make decisions."
He says hospitals can establish that board members are in no way incented to provide high compensation. "You can explain, 'We are independent of who's getting paid. We have to skin in the game rather than to make good, solid decisions,'" he says. In the end, the public may respond negatively to compensation disclosure anyway — but remaining calm and explaining your process will only help to humanize the hospital board and demonstrate the hospital's good intentions.
3. Be prepared to explain compensation in light of hospital finances. Hospital leaders come under fire frequently for accepting large bonuses or pay raises while cutting hundreds of jobs at their facilities. Mr. Otto says compensation committees should think about how to handle incentive plans if the organization or local economy is losing money. Some hospital CEOs choose to forgo bonuses to demonstrate solidarity with the facility or the community. Mr. Otto recommends looking at how similar facilities have adjusted executive pay in response to economic problems.
Learn more about Hay Group.
Read more about executive compensation:
-New York Hospital CEO Salaries Remain Untouched Despite Budget Cuts
-University of Cincinnati's David Stern Sees $900K Severance Package
-California District Hospital CEOs Earn Less Than Leaders at Other Non-Profit Hospitals
1. Take the opportunity to explain CEO compensation. The IRS released its overhaul of Form 990 in Dec. 2007, the first major overhaul of the form since 1979. "When it came to compensation, they changed a number of things, and the two that stand out most is that the disclosure of an individual's compensation is much more understandable than it was on the old form," Mr. Otto says. "There is also a schedule that the organization has to attach that essentially describes the process by which the CEO compensation is determined, as well as other identified executives." While the requirement is not as substantial as the proxy requirements for for-profit hospitals, the change gives organizations an opportunity to describe in detail the process of compensating their CEO.
Mr. Otto advises non-profit hospitals to view the change as an opportunity rather than a burden. The schedule gives facilities the chance to discuss compensation philosophy, market data and decisions around incentive plans and bonuses. By laying out the process of deciding compensation, hospitals can protect themselves to some extent from criticism when CEO compensation comes to light. "We have always advised clients that a compensation philosophy is very important, and the IRS points to a compensation philosophy as an important foundation on which you make good governance around compensation," he says. While you may not be able to control the public's opinions on your CEO's salary, you can take the time to describe a certain level of compensation is necessary to attract talent and reward the complexity of a CEO's responsibilities.
2. Address inquiries and requests for comments on compensation. CEO compensation scandals fill newspaper headlines on a regular basis, bringing negative attention to a hospital's board of directors, finances and leadership. Responses to such criticism vary: Some organizations refuse to comment; others speak to reporters about their rationale; some CEOs agree to take salary cuts. Mr. Otto recommends hospitals be proactive and reach out to local reporters once compensation comes to light. "Essentially what we've encourage is to describe, 'Here's our process, here's our philosophy. We make decisions within the context of our philosophy and take into account market data,'" he says. "You're not going to be able to argue somebody out of an emotional position that they think somebody's paid too much. All you can do is impress upon the person that we do have a foundation on which we make decisions."
He says hospitals can establish that board members are in no way incented to provide high compensation. "You can explain, 'We are independent of who's getting paid. We have to skin in the game rather than to make good, solid decisions,'" he says. In the end, the public may respond negatively to compensation disclosure anyway — but remaining calm and explaining your process will only help to humanize the hospital board and demonstrate the hospital's good intentions.
3. Be prepared to explain compensation in light of hospital finances. Hospital leaders come under fire frequently for accepting large bonuses or pay raises while cutting hundreds of jobs at their facilities. Mr. Otto says compensation committees should think about how to handle incentive plans if the organization or local economy is losing money. Some hospital CEOs choose to forgo bonuses to demonstrate solidarity with the facility or the community. Mr. Otto recommends looking at how similar facilities have adjusted executive pay in response to economic problems.
Learn more about Hay Group.
Read more about executive compensation:
-New York Hospital CEO Salaries Remain Untouched Despite Budget Cuts
-University of Cincinnati's David Stern Sees $900K Severance Package
-California District Hospital CEOs Earn Less Than Leaders at Other Non-Profit Hospitals