More recently, stakeholders, attorneys general, government agencies and lawmakers have focused on executive compensation in both of these worlds, which has resulted in an ever-increasing number of shareholder proposals regarding executive compensation (e.g., "say on pay"), investigations by attorneys general into pay practices, as well as efforts by the Internal Revenue Service and the Securities and Exchange Commission to develop rules that increase the flow of information to the public while requiring organizations to be more transparent in their disclosures about executive compensation.
As a result of this "convergence" of expectations within boards of both for-profit and nonprofit entities, it has become more and more important for hospital boards and committees
- to have an understanding of the compensation arrangements they oversee and the implications of these arrangements to their stakeholders
- to understand the recent disclosure and governance requirements imposed on public companies
- to be able to intelligently review and address the new compensation and governance disclosures in the revised Form 990.
More alike than different
Proxy statement compensation disclosures require a comprehensive review of the compensation philosophy, a discussion of the compensatory elements, and the decisions made regarding compensation, for each of the company's "named executive officers," in the "Compensation Discussion & Analysis" of the proxy statement. Since the committee that oversees executive compensation must review and discuss the CD&A with management in order to recommend to the board that the CD&A be included in the proxy statement, the committee needs to have a solid understanding of what the company pays its executives, why it provides each item of compensation, and be able to provide the rationale to support their decisions during the year.
In contrast, the new Form 990 requires "yes" or "no" responses to a series of questions that get to whether the organization has a process in place which requires that independent directors make compensation decisions on officers or key employees, using comparability data to assist in the decision-making process. The organization also must describe the process in detail on a separate schedule to the form.
While not requiring the depth of discussion that the CD&A entails, the new Form 990 requires that the committee understand the process by which decisions are made (and implicit in this requirement, what the compensation decisions were and why). This depth of knowledge will assist the committee members in responding to any inquiries regarding compensation that they may need to address (such as from reporters). This level of detail regarding process is new to Form 990.
The proxy statement must disclose detailed compensation information on each of the named executive officers (in general, the chief executive officer, chief financial officer, and the three highest-paid executive officers). This information covers a rolling three-year period, and includes every element of compensation provided or available to the officer. This information is disclosed in a number of tables, accompanied by detailed footnotes and relevant explanatory sections that relate to the items of compensation being disclosed in a particular table.
In the current version of Form 990, only three "buckets" of compensation are required: "Compensation Paid," "Contributions to Employee Benefit Plans," and "Expense Account & Other Allowances." These do not require explanatory footnotes or sections, although organizations have provided them as they deemed necessary.
In the new Form 990, these three categories of compensation have been significantly expanded. The information that must now be disclosed includes:
- Whether any current or former trustees, directors, officers, key employees or highly compensated employees are provided one or more of a number of listed "perquisites"
- The design of any incentive plan(s)
- Base salary for identified individuals (see first bullet)
- The amount of bonus or incentive compensation
- Whether a deferred compensation arrangement is in place and how much was provided to the individual
- What other compensation or benefits were provided
At this juncture the question can be asked: If someone in management is completing the form, is the implied level of requisite understanding of the executive compensation program and governance process really necessary?
Both the short and the long answers are "yes." First, the new Form 990 asks whether the board has reviewed the completed form: To answer in the affirmative, the committee needs to know that the responses on the compensation areas are correct. Second, stakeholders of the organization expect that the board members responsible for executive compensation oversight are making informed decisions (see the process questions discussion, above) and are familiar with each compensation element and how they interrelate. To meet this level of expectation, the committee, in theory, should be able to respond to the governance and other non-quantifiable questions presented in the Form 990 and be able to obtain the appropriate amounts from the organization to complete quantifiable questions.
The new Form 990 compensation disclosures require significantly more process and quantifiable information than was previously required. As a result, the new Form 990 moves the organization and the committee overseeing executive compensation to a level of responsibility, knowledge and ownership that is more akin to that of publicly-traded companies than ever before.
What can you do?
As a board member responsible for overseeing executive compensation decisions, you can:
- Require an education session that provides an overview of the new Form 990 and the specific compensation issues that must be addressed
- Review the organization's current compensation program and its elements, the compensation philosophy and the governance process around decision-making, and identify any issues that need to be addressed (for completing the form or otherwise)
- Understand the rationale for each compensation element, test against market practices and current organizational strategy and compensation philosophy, and confirm the ongoing appropriateness of the element or change as necessary
- Request management to provide a "mock-up" of the new Form 990's compensation items to test whether any "red face" items would occur
Jim Otto is a senior consultant and leader of Hay Group's Southeast Region Healthcare practice. Eric Turzak is a Senior Consultant in Hay Group's Executive Compensation practice. They may be reached at james.otto@haygroup.com and eric.turzak@haygroup.com, respectively.
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