SullivanCotter Hires James Roth as Employee Compensation Practice Leader
June 14, 2016
MINNEAPOLIS- (BUSINESS WIRE) - SullivanCotter, one of the nation’s leading independent compensation, benefits and human resources management consulting firms, announces the hire of James Roth as Managing Principal and Employee Compensation Practice Leader.
With over 25 years of experience in human resources management and consulting, James is a recognized leader in the field, specializing in the design, implementation and communication of total rewards strategies in industries undergoing disruptive transformation. His expertise includes establishing compensation, benefits and career development programs for employees across every level of the organization, creating integrated career frameworks and workforce planning models, and designing incentive programs and performance measures aligned with business strategy and organizational culture.
“As the health care industry continues its rapid transformation, hospitals and health systems nationwide are going through unprecedented upheaval. James is a proven and globally-respected leader in developing solutions to attract, engage and reward employees. His extensive experience working with large and operationally complex organizations undergoing major change coupled with our deep insight into the health care industry is a tremendous combination. It marks huge step forward in helping our clients address the increasingly diverse challenges they are facing,” said Ted Chien, President and CEO, SullivanCotter.
As the firm’s Employee Compensation Practice Leader, James will play a vital role in advising clients on essential elements of compensation philosophy and strategy development. He will also lead the expansion of the firm’s employee compensation consulting services, spearhead the development of total rewards strategies and solutions, and work internally with a team of research experts to enhance SullivanCotter’s industry-leading survey suite and benchmarking data.
Prior to joining the firm, James was a Senior Partner and the Global Rewards Practice Leader for Mercer, responsible for the development of client solutions with a globally diverse team. His experience also includes operational responsibilities as the Vice President of Human Resources at Service Experts, Inc. in Nashville, TN.
James received his undergraduate degree in Human Resource Management from Birmingham-Southern College and completed graduate coursework in Industrial/Organizational Psychology from the University of Alabama.
'How Trustees Can Improve Alignment by Overseeing Physician Compensation', Trustee Magazine
Relationships between health systems and physicians have undergone significant change in recent years as health care continues its rapid transformation into a value-based system focused more on quality, patient satisfaction and cost effectiveness. As organizations adapt to these new payment and care delivery models, physician compensation alignment strategies have expanded to include a broad continuum of independent and combined approaches from clinically integrated networks and joint ventures to professional service agreements and full employment.
As clinical alignment strategies proliferate, Trustees need to understand the rules and arrangements of physician compensation so health systems can better integrate and the risks of compliance be reduced.
This article, published in AHA’s Trustee magazine, offers guidance to trustees who are overseeing physician compensation arrangements so they can confront governance challenges, improve alignment and mitigate financial and reputational risk to their organizations.
'Value-Based Physician Compensation: A Link To Performance Improvement', hfm Magazine
Transitioning to Value-Based Compensation
As organizations look for ways to adapt to new payment and care delivery models, aligning physician compensation in a way that supports these efforts remains a challenge.
In a recent issue of Healthcare Financial Management Association's hfm magazine, Mayo Clinic Health System (MCHS) shares the initial results of its journey to effectively engage and align providers while meeting the organization's strategic goals to achieve integrated, value-based patient care.
With the implementation of innovative new provider performance management technology, developed in cooperation with SullivanCotter, MCHS now uses a centralized, automated system for managing and reporting provider data. Through transparent online performance and compensation analytics, the organization has been able to demonstrate how even small incentives for quality outcomes can reinforce changes aimed at better care delivery.
SullivanCotter Hires Kevin Wilson as Physician Services Practice Leader
February 4, 2016
MINNEAPOLIS--(BUSINESS WIRE)--SullivanCotter, one of the nation’s leading independent compensation, benefits and human resources management consulting firms, announces the hire of Kevin Wilson as Physician Services Practice Leader and Managing Principal.
A recognized leader in the health care consulting industry for more than 20 years, Kevin has a strong track record of providing strategic direction and management solutions to a diverse variety of health care clients. “Kevin is committed to advancing the relationship between organizations and their physicians, and has an extensive background helping health care organizations nationwide enhance performance, improve outcomes and achieve strategic alignment. Our clients continue to look for ways to stay competitive as the health care industry adapts to new payment and care delivery models, and Kevin’s expertise will serve them well as they navigate this transition from volume to value,” said Ted Chien, President and CEO, SullivanCotter.
In his role as the firm’s new Physician Services Practice Leader, Kevin will play an integral part in advising an increasingly diverse client base on a host of strategic and operational challenges. With a strong focus in both the design and implementation of physician compensation programs, he will also assist clients in service valuation, facilitating fair market value compliance evaluations, developing strategies to promote hospital and physician integration, and incorporating value-based payments into their distribution models.
Prior to joining the firm, Kevin was a Managing Director with Navigant Consulting. As a key leader in Navigant’s Physician Enterprise Solutions practice, he led a number of important national and regional client engagements with provider networks ranging from 100 to 2000 full time employees.
Kevin holds a Master of Business Administration from the J. Mack Robinson College of Business at Georgia State University in Atlanta, GA. He is also a Certified Valuation Analyst from the National Association of Certified Valuators and Analysts.
SullivanCotter Opens Participation for 2016 Health Care Compensation Surveys
January 20, 2016
MINNEAPOLIS--(BUSINESS WIRE)--SullivanCotter (SullivanCotter), a human resources and total compensation consulting firm specializing in the health care industry, has opened its 2016 health care compensation survey suite for participation.
The following surveys are now open for participation, and continue to provide critical benchmarking information to hospitals, health systems and medical groups nationwide:For over 23 years, SullivanCotter has provided the most comprehensive total compensation data, analysis and reporting to a wide variety of health care organizations, equipping them with the intelligence and insights needed to help attract, manage and retain top talent while satisfying regulatory requirements in today’s evolving market.
- Manager and Executive Compensation in Hospitals and Health Systems Survey
- Physician Compensation and Productivity Survey
- Medical Group Compensation and Productivity Survey
- Benefits Practices in Hospitals and Health Systems Survey
- Health Care Staff Compensation Survey
- Endowment and Foundation Investment Staff Compensation Survey
Additionally, three new surveys have been introduced for 2016 due to emerging needs for unique market data:
- For-Profit Health Care Executive Compensation Survey focuses exclusively on the data needs of for-profit health care organizations, and provides essential information on various types of equity-based compensation.
- Physician Executive Compensation Survey shares detailed total compensation data on physicians in C-Suite, service line and other key executive positions.
- Medical Group Executive Compensation Survey provides vital total compensation data on key executive positions collected from both independent medical groups and those owned by health systems.
“By providing for-profit health care organizations with equity-based compensation data and focusing on pay practices for physician and medical group leadership positions, these new surveys will provide our participants with access to the data and insights they require to confidently manage the compensation-decision making process,” says Chris Brandt, Director of Surveys, SullivanCotter.
Participants receive substantial discounts on the full survey reports, early access to electronic survey results, the opportunity to attend exclusive webinars and a dedicated team on hand to assist with questions.
To participate in or learn more about any of our surveys, please visit our website at www.sullivancotter.com/surveys360 or contact us by phone at 888.739.7039.
Aligning Pay With Performance in Endowment Incentive Plans
Incentive compensation plans in endowment investment offices are designed to fulfill a number of important objectives—the most significant of which is to ensure the alignment of pay with investment staff performance. As investment returns are published and closely evaluated by stakeholders, the media and other constituents, it is essential for boards and management to establish an appropriate correlation between pay and performance and to ensure that the design of the incentive program is both successful and defensible. Endowments should regularly assess the programs in place to determine whether incentive pay and investment performance properly align with the organization’s objectives, appropriately reflect the changing marketplace, and successfully deliver both competitive and reasonable compensation to investment staff.
Understanding Market Practices
While the prevalence of incentive compensation arrangements in endowment investment offices has steadied over the past decade, it remains high. In the Endowment and Foundation Investment Staff Compensation Survey, SullivanCotter conducts an annual assessment of key investment staff positions among leading colleges and universities, private foundations and other not-for-profit organizations. The 2015 report found that 98% of organizations with assets under management of greater than $1 billion offer incentive compensation to investment staff. For the Chief Investment Officer (CIO), incentive pay represents an average of 43% of total cash compensation.
98% of organizations with assets under management of greater than $1 billion offer incentive compensation to investment staff
1 The term “endowment investment office” for the purpose of this article is defined as the investment team or group managing the endowment of a university, foundation or other not-for-profit organization.
Other key findings from the survey indicate that incentive compensation is largely based on investment performance relative to the organization’s policy portfolio benchmark, with 88% of organizations having reported this. On average, this represents 71% of the overall incentive award for the CIO. Measurement is typically done on a relative basis because it gauges the performance of actively managed funds that are expected to see a return greater than that of the market. Endowment investment staff seek to outperform the market, whether that means higher returns in a bull market or fewer losses in a bear market.
Absolute return measures, such as measuring the total portfolio return without regard to any external benchmarks, are only used in 21% of incentive plans and represent a minority weighting in determining the total incentive award. Absolute return alone does little to explain other key factors that influence how well an endowment performs: where the funds are currently invested, the board-mandated risk profile, and the investment policy and objectives of the endowment as a whole. Peer group measures, where an organization’s returns are compared to a group of specific peer organizations, have fallen out of favor over the last decade and continue to decrease in prevalence. On average, 37% of organizations currently have a peer group measure in place, and this is often weighted no more than 25% of the overall award. Although this approach provides a secondary metric to evaluate investment performance, it too evaluates absolute performance without consideration of the endowment’s specific investment policy portfolio benchmark and objectives.
A comparison of published investment returns to a CIO’s total cash compensation is not a good indication of whether or not an organization is rewarding for performance. For example, one organization may report lower published investment returns because its policy objective is to maintain stable growth in the portfolio, yet its funds are significant in value and managed by a seasoned and high performing CIO. In the case of negative investment returns, CIOs may earn performancebased incentive awards even when the overall endowment fund does not yield positive returns as a result of market conditions. In this circumstance, the CIO may be rewarded for decisions to help preserve capital, protecting the endowment from greater loss. Additionally, 48% of investment offices required some percentage of the incentive award to be deferred. The amount truly earned in a given performance period cannot be discerned from publicly available documents, as payout amounts reported may reflect partial earnings from the current year as well as awards that had previously been deferred.
Assessing plan effectiveness
By regularly assessing your endowment’s incentive compensation plan, your organization can ensure that investment staff pay is properly aligned with performance. The following best practices are key assessment factors to consider in the incentive compensation decision-making process:
- Consistency with the compensation philosophy. Review the plan design in light of the organization’s compensation philosophy of how competitive to be and with whom. For example, if the organization intends to compensate staff at the median of the market with target levels of performance, a review of the plan design and current compensation levels will indicate whether the existing program is aligned with the stated philosophy.
- Appropriate peer group definition. The peer organizations against which compensation levels and pay practices are compared is critical. Recent scrutiny by the IRS and other regulators has been focused on peer group composition, and aspirational peer groups (those that represent a desired future state, such as endowments with significantly larger assets under management) are difficult to defend. It is important to ensure that peers reflect the organization’s current size, portfolio strategy and complexity, and not what the organization expects or hopes to look like in 10 years.
- Alignment with investment objectives. The metrics used and the period of time over which performance is measured should reflect the organization’s investment objectives. For this reason, less than 10% of organizations measure performance over a one-year period. Most plans (82%) measure performance over a three-year period to balance a longer term time horizon with the reality of line-of sight, investment staff tenure and the ease with which new hires can be incorporated into the plan.
- Mitigation of risk. How awards are interpolated (or not), capped and set relative to one another are important considerations for the mitigation of risk. For example, placing too much pay at risk can place a significant amount of pressure on the participants to deliver expected outcomes. This pressure may consciously or unconsciously affect decision-making.
- Effective investment performance measures. An effective incentive plan will have measures that staff can directly affect, such as performance relative to the policy benchmark. Incorporation of metrics over which investment staff may not have control or influence, such as absolute return or peer group measures, may lead to unintended behavioral consequences and affect the competitiveness of the plan.
- Evaluation of performance in multiple contexts. Incorporating the measurement and reward of individual contributions or the ability to qualitatively evaluate performance on both the overall organizational and individual level is an effective way to ensure that performance is evaluated and rewarded in multiple contexts. These contributions may include the successful leadership of staff in a particularly challenging economic environment, completion of an asset allocation study, or major rebalancing effort. This can provide a reference to not only what gets done but also to how.
- The use of credible benchmarking data. Quantitative plans based predominantly on investment metrics with a capped incentive opportunity have a greater chance of passing the test for reasonableness. Utilizing credible survey data is key in knowing where to set these caps. Custom peer groups can be helpful, but should represent a robust and appropriately broad sampling of the relevant talent market. In addition, multiple survey sources should be utilized whenever possible.
Process is Important
Aligning pay with performance for endowment investment staff and ensuring that the correlation is defensible requires a process of due diligence through board and management oversight and good governance of the compensation decision-making process. A regular assessment of incentive programs as well as a strong partnership between the Investment and/or compensation committee, management, and a qualified independent consultant is critical to the overall success and reasonableness of incentive compensation design.
One-Third of Early Adopters Have More Than 10% of Provider Compensation Tied to Quality
November 16, 2015
MINNEAPOLIS--(BUSINESS WIRE)--As the health care industry continues to shift its focus from volume to value, physician and advanced practice clinician compensation arrangements are following suit. Aligning provider pay with performance remains an ongoing challenge, and requires unique insight into quality performance measures and value-based incentive plan design. The Provider Performance Incentive Survey from Sullivan, Cotter, and Associates, Inc. (SullivanCotter) is the first of its kind as it focuses exclusively on non-productivity measures, and is a comprehensive source of data on emerging performance trends and incentive design practices.
In the 2014 survey, information was collected from a hand-selected group of over 30 large multi-specialty medical groups and health systems who are ahead of the curve in incorporating quality measures into their provider incentive plans. These organizations reported on more than 20 specialties and provided details on over 350 different performance measures. The results showed that 33% of these organizations have more than 10% of compensation associated with value- and quality-based performance measures.
“Value-based compensation and payment arrangements continue to evolve as the focus on rewarding value over volume is increasing. In the next five years, we expect approximately 80% of organizations to have more than 10% of physician compensation tied to quality measures, a large percentage of which will be ‘at risk’. Understanding these upward trends in value-based incentive measures are key to aligning provider pay and performance,” said Brad Vaudrey, Managing Principal, SullivanCotter.
68% of the organizations surveyed reported that they have quality incentives tied to compensation as a core component for all specialties, whereas 32% indicated that quality measures are currently only associated with select specialties. Additionally, 58% have incorporated quality metrics into their advanced practice clinician incentive plans as well.
Primary care specialties continue to see an increasing percentage of their total cash compensation attributed to quality and value measures, which averaged 6% in 2014. These compensation arrangements are split evenly between ‘at-risk’ pay, bonus pay, or a combination of the two. Organizations reported that primary care specialties such as in Internal Medicine and Family Medicine, at 94% and 90% respectively, are among those with the greatest prevalence of quality measures integrated into their compensation plans. The most commonly reported measures within these specialties relate to patient experience and patient access. Other top measures reported consist of preventative/chronic health issues including diabetes, heart disease, and mental health, tobacco cessation counseling, and readmission rates (unexpected return for previously performed services).
The 2015 Provider Performance Incentive Survey is now open for wider participation, and includes detailed performance data collection organized by specialty. Performance measures are collected based on the individual physician, as well as the department or clinical team, and are reported by weight, percentage of pay at risk, market utilization, frequency of use and more.
The deadline to participate is December 18, 2015. Survey participants will receive complimentary electronic copies of the survey report and data tables, released in February 2016.
For more information on SullivanCotter’s surveys, please visit our website at www.sullivancotter.com/surveys360 or contact us by phone at 888.739.7039.
SullivanCotter Releases Results from the 2015 Manager and Executive Compensation in Hospitals and Health Systems Survey
October 5, 2015
MINNEAPOLIS--(BUSINESS WIRE)--SullivanCotter, a human resources and total compensation consulting firm, recently released results from the 2015 Manager and Executive Compensation in Hospitals and Health Systems Survey. Now in its 23rdyear, the survey provides critical benchmarking data on compensation trends and pay practices, and is the largest and most comprehensive of its kind for hospitals and health systems nationwide. Information was collected from over 1,700 organizations comprising more than 400 health systems and 1,300 hospitals, and includes data for nearly 27,300 executives and managers.
While changes in base salary are generally consistent with last year’s overall change, total cash compensation (TCC) has increased at a higher level. Median TCC saw an overall increase of 6.9% for top executive positions. This is higher in health systems at 7.4%, which is up from 1.8% in the 2014 findings. While the prevalence of annual incentives has remained the same, the number of organizations paying incentive awards and paying at target levels increased this year. “Health systems continue to embrace performance-based pay. This year, 28% more reported hitting their annual incentive targets, and these payouts contribute to the overall increase in total cash compensation,” explains Tom Pavlik, Managing Principal, SullivanCotter.An analysis of the data indicates that median base salaries rose 3.1% overall for executives at hospitals and health systems. Health system jobs saw a slightly higher median increase at 3.6%, while hospital jobs more moderately increased by 2.6%. “Although overall growth remains consistent with last year, we are seeing some variation based on the size and type of organization. Large systems with over $1 billion in revenue and large hospitals with $300 million or more in revenue saw median base salaries increase at a faster rate than their smaller counterparts,” said David Dethmers, Manager of Information, General Industry Surveys, SullivanCotter. These increases were both above average at 3.6% and 3.0% respectively.
In addition, the complexity of executive roles at the system level is increasing. “As health care organizations continue to consolidate and integrate in an increasingly competitive health care environment, an executive’s scope of responsibility and span of control is expanding. These changes are impacting the way in which executives are compensated,” said Kathy Hastings, Managing Director, Executive Compensation Practice Leader, SullivanCotter.
For more information on SullivanCotter’s surveys, please visit our website at www.sullivancotter.com/surveys360 or contact us by phone at 888.739.7039.
SullivanCotter Releases Data from the 2015 Physician Compensation and Productivity Survey
September 9, 2015
MINNEAPOLIS--(BUSINESS WIRE)--SullivanCotter (SullivanCotter), a human resources and total compensation consulting firm specializing in the health care industry, announced the results of its annual Physician Compensation and Productivity Survey.
This year’s findings indicate a continued increase in the prevalence of quality-based incentives, which typically include metrics regarding clinical processes, patient experience and access. Nearly half (45%) of the organizations surveyed reported the use of quality measures in their physician compensation models. This represents a 13% increase in prevalence over the past two years. On average, staff physicians received $18,500 in quality incentives, which comprises 6% of their total cash compensation.The survey report addresses key physician compensation practices and trends from 560 organizations on nearly 115,000 individual physicians and advanced practice clinicians. This makes it the largest physician compensation dataset in the market.
“As reimbursement changes, organizational goals and priorities continue to shift. More physician pay related to quality metrics is at risk. We’re currently seeing a steady increase in pay-for-performance compensation models as the focus on value-based incentives continues,” says Kim Mobley, Managing Principal at SullivanCotter.
Additionally, the trend towards health system and large medical group employment of physicians continues. Nearly three-quarters of survey participants reported an increase in their employed physician workforce in the previous 12 months, and 68% plan on increasing their physician workforce in the upcoming year. The average actual and projected percentage increase to their physician staffing is 14% and 11%, respectively.
“In the wake of declining reimbursements and a constantly changing health care industry, physicians are seeking greater job security and stability. We continue to see an increase in the number of physicians employed directly by hospitals and health systems,” says Tim Strok, Team Leader, Physician Compensation Surveys at SullivanCotter.
Although the overall median increase in total cash compensation (TCC) for all specialties is modest at 1.8%, primary care specialties are seeing increases that outpace their specialist colleagues. When comparing staff physicians reported in both the 2014 and 2015 surveys, primary care physicians experienced a median TCC increase of 3.4%, while medical and surgical specialists had median TCC increases of 2.5% and 2.3%.
For more information on SullivanCotter’s surveys, please visit our website at www.sullivancotter.com/surveys360 or contact us by phone at 888.739.7039.
Dave Hesselink to Address The Healthcare Roundtable for Employed Physician Services
Consulting Principal Dave Hesselink will discuss evolving physician compensation models, industry trends and provide insights on value-based compensation design.
For more information about The Healthcare Roundtable, please refer to the THR website.
SullivanCotter featured in annual analysis of trends in executive compensation by Modern Healthcare
This year's article, entitled 'Going Up: Surge in exec comp driven by pay-for-performance bonuses', examines the increases in total compensation for hospital executives. Author Michael Sandler discusses the increases in pay-for-performance bonuses, as well as the continued focus on aligning pay with quality goals and metrics.
Findings Released from SullivanCotter’s 2015 Medical Group Compensation and Productivity Survey
July 22, 2015
MINNEAPOLIS--(BUSINESS WIRE)--SullivanCotter (SullivanCotter), a human resources and total compensation consulting firm specializing in the health care industry, released findings from its annual Medical Group Compensation and Productivity Survey, which addresses key pay practices and trends unique to medical groups. The survey provides critical compensation and productivity data from 260 organizations on more than 89,000 individual physician and advanced practice clinicians, making it the largest medical group dataset in the market. Additionally, the number of specialties surveyed has risen from 240 in the 2014 survey to 273.
Orthopedic surgery subspecialties and neurosurgery are among the highest paid overall, and certain pediatric specialties have seen some of the most notable increases over the past year.The new findings indicate that while productivity remains flat, all specialties continue to see an overall average increase in total cash compensation (TCC) of 2.2%. At 2.7%, medical specialties experienced a slightly higher than average increase, followed by surgical specialties at 2.4%. The average increase for all primary care specialties is 1.9%. “Although the demand for primary care specialties remains strong, the increases they’re seeing in compensation are still within the range of other specialties,” said Sara Loos, Team Leader, Physician Compensation Association Surveys at SullivanCotter.
“Compensation continues to increase for various reasons, including physician supply and demand, increase in performance-based compensation payments and the cost of living. However, because overall production remains flat, groups with work RVU production-based compensation plans are going to be impacted,” explained Brad Vaudrey, Physician Alignment Practice Leader at SullivanCotter. For all physician specialties, the average change in TCC per work RVU is an increase of 3.9%. Surgical specialties have seen the largest change increasing by 6%, with primary care and medical specialties following at 3.1% and 3%, respectively.
“While productivity-based compensation plans are still dominant, we continue to see a shift towards quality-based incentives and pay-for-performance models,” said Ted Chien, CEO and President of SullivanCotter. For organizations with quality or financial incentive components in place, 71% are using patient satisfaction measures, and 58% are using clinical outcomes. In primary care, where this trend is most prominent, 53% of organizations surveyed are using a quality incentive component, up from 36% last year. On average, 7% of compensation is tied to value-based measures.
For more information on SullivanCotter’s surveys, please visit our website at www.sullivancotter.com/surveys360 or contact us by phone at 888.739.7039.
Aligning Executive Compensation with the New Health Care Paradigm: What the Board Needs to Know
Strong health care leadership has never been more important – or more demanding – than it is today. Reform-era chief executives must combine competencies in leadership, strategy development and execution to steer their hospitals and health systems through unprecedented transformational change. The thoughtful and meticulous construction of performance-based incentive compensation programs, overseen by knowledgeable and engaged health care governing boards and their compensation committees, are also critical to success.
This three-part Monograph series, published by the AHA's Center for Healthcare Governance, offers guidance on proactively considering best practices in executive pay, including the changing role of incentive compensation, good governance practices to mitigate risk, and choosing appropriate peer comparison data to support the compensation decision-making process.
SullivanCotter Opens Participation in the 2015 Advanced Practice Clinician Compensation and Pay Practices Survey
SullivanCotter has opened participation for the 2015 Advanced Practice Clinician and Pay Practices Survey. As changes in health care delivery continue to accelerate the demand for advanced practice clinicians (APCs), the survey is a source of valuable insight into APC compensation levels, trends and pay practices.
Revisiting Executive Incentive Compensation: A New Challenge
SullivanCotter’s Kathy Hastings and Maureen Cotter, along with Mary K. Totten, recommend a review of executive incentive compensation plans to focus executives’ attention on their organizations’ most vital priorities and initiatives.
As health care organizations revise their business strategies to address the ongoing transformation of care delivery and payment, health care boards also need to reassess the structure and measures of performance in their executive incentive compensation plans.
Effective Physician Compensation in the Movement from Volume to Value
As the health care industry undergoes transformational change to deliver better value to customers, board members and executives face uncertainty around the degree and pace of change. The pressure to simultaneously improve the health of populations, enhance the patient experience, and reduce the total cost of care has spurred fundamental change in the funding and delivery of health care.
SullivanCotter’s Timothy J. Cotter and Mark Ryberg analyze not only the emerging trends but also describe the process necessary to make this transition a successful one.
Peer Group Selection in Foundations, Charities and Other Not-for-Profit Organizations
Compensation insight: Reasonable executive compensation
Foundations, charities and other not-for-profit organizations face unique pressures from the labor market, regulators, donors and other stakeholders when it comes to executive compensation. Establishing an appropriate peer group for compensation comparisons is essential.
The committee must take the necessary steps to (1) define the criteria for peer group selection; (2) identify the right data sources that will provide comparable comparisons; and (3) ensure the recommended compensation is competitive and reasonable. This Compensation Insight will take a closer look at each of these steps.
Peer group Selection
Peer group selection starts with defining the criteria. A board-designated committee should discuss the organizational characteristics that influence the scope and complexity of the positions that are being benchmarked and determine how the proposed peer group organizations are aligned with those characteristics. Careful consideration should be given to organizations that are proposed but do not align with size, scope, talent or other defining characteristics. Once the committee reaches consensus on the peer group, data can be collected and analyzed for review and discussion as a committee agenda item.
Defining executive peer group selection criteria
When developing a custom peer group for executives, committees should consider the following criteria:
- Operating Model. The operating model influences the scope and complexity of executive roles. For example, a private grantmaking foundation will have different executive staffing needs than a community foundation. A charity may have multiple chapters or affiliates, or it may be a national organization with regional offices.
- Size. Executive compensation levels are often correlated to the size of an organization. For foundations, size is defined by assets, while public charities define size by revenue and other factors, such as the number of employees. Standard practice is to include organizations that range from one-half to two times the size of your organization, although there may be appropriate circumstances in which that range is expanded. Ideally, the median size of the peer group, however measured, approximates your organization’s size.
- Talent Market. The talent market can influence position comparability, particularly when specialized education or experience is required. For example, research institutes can find comparable positions in higher education. Development positions can also be found in higher education, social welfare charities or health care organizations.
- Geographic Location. An organization’s location often influences the level of executive compensation. The cost of labor can vary from one place to another and executive pay in or near large, metropolitan areas is often higher (attributable to higher cost of living).
- Profit Status. While the regulations define comparable organizations as both taxable (typically for-profit) and tax-exempt (not-for-profit), the use of similar organizations is often the most defensible. However, there are circumstances when comparable positions can only be found in general industry. For example, a large, global charity may not have sufficient peers to benchmark its head of development, but the sales and marketing positions in taxable organizations may require similar skill sets and, therefore, provide strong comparability.
Customizing a peer group for unique positions
Some positions have a unique talent market that differs from the rest of the executive team. In these cases, it may be necessary to further customize a peer group to ensure comparability. Examples of such positions are chief investment officer and head of development.
Determining a position-specific peer group starts with evaluating whether the talent market, scope and complexity of a position are different from the rest of the organization. If so, some factors to consider include the following:
- Investment Executives. The top investment executive position warrants a customized peer group largely based on the organization’s assets under management, which is very different from total assets. Peer group criteria should also consider peer investment objectives, the type of funds being managed (endowment, pension or other type), the complexity of the portfolio and the staffing model used.
- Development Executives. The top development executive position warrants a customized peer group largely based on the funds the individual is responsible for raising, which is very different from the organization’s revenue. Peer group criteria should also consider where funds are sourced and the degree of complexity associated with securing those funds.
Challenges in peer group development
One of the challenges with developing an appropriate peer group is finding sufficient data for similar organizations. Generally, a minimum of 15 peer organizations will provide a sufficient sample size. However, an organization could consider adding other types of tax-exempt organizations of comparable size and geographic location (e.g., private foundations, public charities, associations). For example, a large museum in New York might recruit talent from a New York-based foundation (or vice versa), and an arts or cultural institution may recruit from academia. In any case, the rationale for expanding the diversity of the peer group should be carefully documented.
Data Sources
Peer group data illuminate market practices, including competitive levels of compensation and benefits pay practices related to supplemental executive benefits and variable pay. Diversity in the types of tax-exempt organizations requires consideration of a broad range of organizational characteristics when developing peer groups for compensation comparisons. In addition, some positions may require review of the pay practices from multiple peer groups to evaluate comparability from all relevant perspectives. Peer group data can be compiled from published surveys, a custom survey conducted on the organization’s behalf by a third party or the IRS Form 990.2 For many organizations, published surveys provide sufficient and reliable data on executive compensation practices among comparable organizations. For others, published surveys may not fully reflect a unique operating model or talent market for particular positions. Additionally, most surveys only report cash compensation data and exclude the value of other elements, such as health, welfare and retirement benefits that must be considered when evaluating total compensation for purposes of reasonableness. In these cases, it may be more appropriate to gather data through a custom survey of compensation practices among peers or from IRS Form 990. However, interpreting Form 990 can be challenging because it often includes one-time taxable compensation events and accruals that may upwardly skew the total compensation data reported.
Reasonable compensation
Tax-exempt organizations must ensure that their executive compensation programs are reasonable.3 According to Internal Revenue Code Section 4958, if a 501(c)(3) or (c)(4) organization (excluding private foundations that are subject to different regulations under Internal Revenue Code Section 4941) pays unreasonable compensation to executives, those executives and the individuals who approved their compensation may find themselves subject to excise taxes. However, compensation is presumed to be reasonable if the organization meets the following three requirements for the “rebuttable presumption of reasonableness” before the compensation is paid:
- The compensation is approved by an authorized board or committee (such as the compensation committee) that is entirely composed of independent individuals.
- The board or committee relies on appropriate comparability data.
- The board or committee contemporaneously documents the basis for its determination that the compensation is reasonable.
Appropriate comparability data for purposes of establishing the rebuttable presumption of reasonableness under federal tax law comes from appropriate peer group comparisons. According to the regulations, an appropriate peer group is one that represents similar organizations with like positions. Even those organizations that are not 501(c)(3) and (c)(4) organizations (such as private foundations) often voluntarily adhere to these three requirements in making and documenting compensation decisions in order to demonstrate good governance.
Good governance
The committee should reevaluate the data sources and the peer group regularly to ensure their continued appropriateness and document the rationale underlying any changes. By including this on the annual agenda, organizations can ensure that committee members have an opportunity to take part in the evaluation.
The committee’s minutes should articulate the review and approval process regarding the peer group, including the selection criteria used, the rationale underlying those criteria and all third-party opinions. The committee should thoroughly review those minutes to ensure that they constitute a complete and accurate record. Remember, any IRS or state attorney general audit is likely to happen well after the decisions have been made, the committee memberships changed and the memories faded.
Conclusion
The committee should reevaluate the data sources and the peer group regularly to ensure their continued appropriateness and document the rationale underlying any changes. By including this on the annual agenda, organizations can ensure that committee members have an opportunity to take part in the evaluation. The committee’s minutes should articulate the review and approval process regarding the peer group, including the selection criteria used, the rationale underlying those criteria and all third-party opinions. The committee should thoroughly review those minutes to ensure that they constitute a complete and accurate record. Remember, any IRS or state attorney general audit is likely to happen well after the decisions have been made, the committee memberships changed and the memories faded.
1. We have used “committee” to refer to the committee of the board of trustees or directors that has the responsibility for making decisions regarding executive compensation (or to the whole board if it has the responsibility).
2. IRS Form 990 is the annual information return for tax-exempt organizations, which includes disclosure of compensation and benefits. Private foundations file a similar Form 990-PF. References to “Form 990” are intended to encompass both versions.
3. This discussion is intended only as a high-level summary of very complex tax rules relating to reasonable compensation in tax-exempt organizations.
Transforming Executive Incentive Compensation
In the American Hospital Association’s Center for Healthcare Governance article "Transforming Executive Incentive Compensation," Managing Principal Jose A. Pagoaga outlines how health care governing boards can reexamine the structure and metrics of their organization’s executive incentive compensation plans to ensure that they address current market conditions and are aligned with current business strategies and goals.
Has your organization transformed their executive incentive plans to meet changing business needs?
Simple and Strategic: The Next Generation of Executive Benefits
This article, featured in the December 2014 issue of Becker’s Hospital Review magazine, provides insight into executive benefits trends that address the changing needs of the hospitals and health care systems.
SullivanCotter’s 2014 Manager and Executive Compensation Survey Highlights
Now in its 22nd year, the survey provides data to help health care industry leaders meet the challenges of regulatory compliance and performance-driven executive compensation.