As healthcare reform provisions begin to be implemented, hospitals and health systems will need strong, capable leaders to guide the organization to success. "Healthcare reform efforts are making an already complicated industry even more complex," says Michael Regier, senior vice president of legal and corporate affairs, general counsel and compliance officer at VHA. "Demand for really bright, capable, talented leaders has never been greater, and the competition for executive talent could mean that the price prevailing in the market may go up."
Hospitals and health systems will need to offer a compensation package sufficient to recruit and retain these leaders. Non-profit hospitals have the additional challenge of assuring that executive compensation does not exceed fair market value, because as tax-exempt organizations they are regulated by the Internal Revenue Service, which has specific regulations applicable to executive compensation. Mr. Regier explains strategies non-profit hospitals can use to ensure compliance with compensation regulations.
Enforcement risks
If the IRS determines a non-profit hospital leader's compensation is excessive or unreasonable, it may impose excise taxes known as "intermediate sanctions" against the executive, the employer organization or the employer's board members who reviewed and approved the compensation package. This risk to non-profit board members "raises the bar for engagement of board members on executive compensation oversight," Mr. Regier says.
Even so, non-profit hospital boards have an important tool at their disposal that can reduce this risk. By establishing the rebuttable presumption of reasonableness provided under IRS regulations, non-profit hospitals can shift the burden to the IRS to prove the compensation arrangement is unreasonable — which in practice often effectively prevents these sanctions. The rebuttable presumption can be invoked when the executive compensation arrangement is approved by the non-profit hospital's board (or a board committee) after reviewing relevant market comparability data.
Governance practices
Mr. Regier notes that a handful of leading practices have emerged that can both guide non-profit hospital board decisions and reduce board members' risk of facing enforcement sanctions.
1. Compensation philosophy. Mr. Regier suggests the hospital board or its compensation committee adopt a written "compensation philosophy that lays out at a very high level an approach that is taken by the board for the purposes of recruiting and retaining leaders and for compensating [them]." The committee usually forms a philosophy that aligns with the organization's mission as a non-profit, its community service objectives and its other long-term goals. "Typically non-profit hospitals' compensation philosophy will have some explicit tie to how it is serving its mission in the community or be structured in a way to advance that mission," Mr. Regier says.
One way some non-profit hospitals aim to assure their leaders' compensation is not excessive is to include a limit of executive pay in their philosophy. "For example, [the committee] might choose to target base salaries for executives at the 70th percentile of the market," Mr. Regier says. However, the compensation philosophy does not mean non-profit hospital leaders should be underpaid. The hospital should still use data from comparable organizations as a benchmark for fair pay.
2. Comparison data. Non-profit hospitals need to base compensation on market data for comparable positions in similar organizations and similar circumstances. "The best practice is for the board or compensation committee to directly engage [a] compensation consultant to help define the relevant comparator group — what companies, industries, geographic markets are comparable," Mr. Regier says. Other factors can significantly affect the market data to be evaluated and relied on by the board, including the scope of the recruitment (national vs. regional) and the hospital's operating performance (financially stable vs. financially struggling).
Learn more about VHA.
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Hospitals and health systems will need to offer a compensation package sufficient to recruit and retain these leaders. Non-profit hospitals have the additional challenge of assuring that executive compensation does not exceed fair market value, because as tax-exempt organizations they are regulated by the Internal Revenue Service, which has specific regulations applicable to executive compensation. Mr. Regier explains strategies non-profit hospitals can use to ensure compliance with compensation regulations.
Enforcement risks
If the IRS determines a non-profit hospital leader's compensation is excessive or unreasonable, it may impose excise taxes known as "intermediate sanctions" against the executive, the employer organization or the employer's board members who reviewed and approved the compensation package. This risk to non-profit board members "raises the bar for engagement of board members on executive compensation oversight," Mr. Regier says.
Even so, non-profit hospital boards have an important tool at their disposal that can reduce this risk. By establishing the rebuttable presumption of reasonableness provided under IRS regulations, non-profit hospitals can shift the burden to the IRS to prove the compensation arrangement is unreasonable — which in practice often effectively prevents these sanctions. The rebuttable presumption can be invoked when the executive compensation arrangement is approved by the non-profit hospital's board (or a board committee) after reviewing relevant market comparability data.
Governance practices
Mr. Regier notes that a handful of leading practices have emerged that can both guide non-profit hospital board decisions and reduce board members' risk of facing enforcement sanctions.
1. Compensation philosophy. Mr. Regier suggests the hospital board or its compensation committee adopt a written "compensation philosophy that lays out at a very high level an approach that is taken by the board for the purposes of recruiting and retaining leaders and for compensating [them]." The committee usually forms a philosophy that aligns with the organization's mission as a non-profit, its community service objectives and its other long-term goals. "Typically non-profit hospitals' compensation philosophy will have some explicit tie to how it is serving its mission in the community or be structured in a way to advance that mission," Mr. Regier says.
One way some non-profit hospitals aim to assure their leaders' compensation is not excessive is to include a limit of executive pay in their philosophy. "For example, [the committee] might choose to target base salaries for executives at the 70th percentile of the market," Mr. Regier says. However, the compensation philosophy does not mean non-profit hospital leaders should be underpaid. The hospital should still use data from comparable organizations as a benchmark for fair pay.
2. Comparison data. Non-profit hospitals need to base compensation on market data for comparable positions in similar organizations and similar circumstances. "The best practice is for the board or compensation committee to directly engage [a] compensation consultant to help define the relevant comparator group — what companies, industries, geographic markets are comparable," Mr. Regier says. Other factors can significantly affect the market data to be evaluated and relied on by the board, including the scope of the recruitment (national vs. regional) and the hospital's operating performance (financially stable vs. financially struggling).
Learn more about VHA.
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