Pay Loses Its Perk

In new era of transparency, perquisites and deferred compensation continue to fall out of favor at not-for-profit organizations

Under the weight of public scrutiny and a turbulent period in the financial lives of tax-exempt associations, many top executives at healthcare-related associations took home less money in 2009 than they did the year before.

According to the 10^th annual Modern Healthcare survey of publicly filed tax forms for nearly five dozen industry associations, average total compensation for CEOs fell 5.6% from the prior year, even though organizations’ revenue increased 12% in the 2009 tax year.

Transparency appeared to be an issue driving pay, as associations continued too curb many perks such as auto and housing allowances and country club memberships now that they are forced to disclose them on public filings in the second full year of the revamped Form 990 tax disclosure.

One organization on the Modern Healthcare list that did not disclose such information was the Health Industry Group Purchasing Association, or HIGPA, which has been pushing the transparency-challenged healthcare group-purchasing industry to open up even while it declines to disclose basic compensation information that the 56 other organizations on the list do.

Of the 50 executives for whom information from 2008 and 2009 was available, average total compensation fell to $971,274 the year before.

The analysis, which is the first to be able to use two years’ worth of comparable data from the IRS’ recently revamped Form 990 tax disclosures, shows that the changes in compensation came primarily in two areas: perquisites and deferred compensation.

Average base compensation rose 5%, and average bonuses in 2008 rose by 13%.  However, those gains were more that offset by the 35% average drop in perks listed under the category of “other compensation” and a 36% drop in deferred compensation payments.  The cost of tax-exempt benefits that the associations provided to the executives rose 14% during the year.

For the second straight year, the top pay on the list went to Billy Tauzin, former president and CEO of the Pharmaceutical Research and Manufacturers Association.  Tauzin earned total compensation of $4.6 million, up 3% from 2008.  In all, nine executives on the list earned more than $1 million.

The magazine annually surveys pay at heath-care-industry membership associations and advocacy organizations, which had budgets ranging from the American Health Quality Association’s $1.4 million in revenue to the Blue Cross and Blue Shield Association’s $420 million.  The average was $40 million.

On average, at the 53 associations for which 2009 tax year data was available, organizational revenue increased by 12%.  However, the average fell to 6.4% when one statistical outlier was removed-America’s Health Insurance Plans, which had a 165% increase in revenue, to $184.7 million from $69.7 million the year before.

Karen Ignagni, president and CEO of AHIP, received a 4.7% cut in total compensation in 2009, driven primarily by her 29% drop in perks as payment.  Her $500,000 bonus in 2009 was the same as the year before.

However, such detailed information was not available for all of the not-for-profits.

Several of the organizations on the list used an apparent loophole in the disclosure rules to limit how much information is published, building on a trend in the growth of outsourcing of management for associations.

HIGPA is one of several associations on the list that use association management companies to handle the day-to-day aspects to management, including compensation of all employees.  But unlike the other organizations, HIGPA does not disclose what the outside firm, Chicago’s SmithBucklin, pays President Curtis Rooney.

HIGPA reported only that $330,750 of the $1.1 million it paid to SmithBucklin went to pay for “management”.  HIGPA had $2.1 million in total revenue in 2009.

The instructions that accompanied the Form 990 for 2009 say that any current officer’s salary “can be reportable” on a related form called Schedule L if the employee is paid by the outside firm.  HIGPA did not include a Schedule L.

Mike Nikolich, senior vice president and chief marketing officer for SmithBucklin, says the association management company business model is fundamentally different from how most not-for-profits operate.  But he says the decision not to discussion not to disclose compensation information should not hinder regulators’ ability to make sure the benefits of tax exemption are not inuring, or going to the benefit of private individuals.

“HIGPA is fully audited.  They undergo a very rigid audit process.  Secondly, we (SmithBucklin) go through a rigorous auditing process,” Nikolich says.

Modern Healthcare interviewed experts including an industry attorney and three association-industry insiders who all say HIGPA’s arrangement appeared likely to attract attention.

Chris Condeluci – an attorney with Washington law firm Venable and a former tax and benefits counsel to the Senate Finance Committee – says HIGPA officials ought to know such secrecy opens up the organization to scrutiny.

“It certainly makes them a target for criticism,” Condeluci says.  “I know that outsourcing the management responsibilities of an association is a growing practice a result of people trying to get around the rules?  I don’t know.”

Other associations that outsource management approach the issue deifferntltly.  The Association of Community Cancer Centers, for example, uses and organization called ( c ) Management Inc., but it also discloses that the association’s CEO Christian Downs earned tot al compensation of approximately $170,930 in 2009 as part of the firm’s $3.4 million management contract.

Physician Hospitals of America also employs a management company, but under former CEO Molly Sandvig it followed a practice of disclosing compensation information on its tax forms like any other not-for-profit.

Sandvig left the organization in 2010, and John Richardson was appointed her successor in April 2011.  The following month, PHA hired SmithBucklin to take over its outsourced management.

American College of Healthcare Executives President and CEO Thomas Dolan, who has served as the past chairman of the multi-industry group the American Society of Association Executives, says many organizations decide to use the most-restrictive rules that apply to the various types of charity for the sake of appearances.

“We want to set a good example,” Dolan says.  “The federal government is going to scrutinize all non’-profits, whether they’re ( c ) 6’s or ( c ) 3’s.”

The IRS rules governing 501 ( c )3 organizations are generally seen as more restrictive than those for the similar 501( c )6, but experts say IRS officials have made it clear that they consider the 501( c )3 rules to be best practices for most tax-exempt entities.

Paul Dorf, managing director of compensation firm Compensation Resources, Inc. in Upper Saddle River, N.J., says he urges his clients to disregard the various “pockets of regulation” that apply to direct forms of tax-exempt entities and instead follow the 501( c )3 rules – particularly as they relate to the need for air-tight compensation comparisons and internal discussion of pay philosophy.

“I think that some of the organizations sort of think, ‘Well, we don’t have to worry about those things,’” Dorf says.  “The reality is, those are best practices, and if you follow them you are going to be much better off.”

Jim Moniz – President of the Braintree, Mass.-based Northeast Wealth Management, which advises not-for-profits on executive compensation issues-says all the scrutiny of executive pay from the public and government has caused concern and changed the practices on boards of not-for-profits.

The formal analysis of appropriateness of pay used to be done by the board, he says, but today some tax-exempts are finding that their donors or members are asking the questions.

That also has led to far more detailed analyses of the pay, including checking to make sure that the organizations listed as “comparable” on a compensation committee’s report are in fact of similar size and purpose.

Where there’s a new CEO, “there’s a greater question as to why we are spending this much money on this person over someone else,” Moniz says.

Particularly challenging, Moniz says, is when the public sees a huge bump in pay during an outgoing not-for-profit executive’s last year in office. Typically, the bump is from the payout of deferred compensation.

Consider the case of Marc Smith, the former CEO of the Missouri Hospital Association.
In tax year 2008, Smith earned total compensation of $878,189.  The next year, when he retired, his reported compensation jumped 86% to $1.6 million.

However, a closer inspection shows that Smith’s base compensation rose only 5% in that time, to $461,000 from $439,400 the year before.

Association spokesman David Dillon says the big difference was Smith’s retention bonus.  Smith retired in January 2010 and received eight years’ retention pay, which totaled $928,000.

The largest bonus on the Modern Healthcare list went to Tauzin, a former Louisiana legislator who served five years as CEO of PhRMA before leaving the job in 2010.

In 2009, Tauzin’s $2.1 million base pay was supplemented with a $2.3 million performance bonus.  His total compensation of $4.6 million in 2009 was just 3.3% more than his take-home pay of $4.5 million the year before.

However, Tauin’s had been the head of a comparatively large organization.  PhRMA reported revenue of $350.5 million in 2009 (compared with just over $250 million in 2008 and 2007), which meant he received 1.3% of the group’s revenue stream that year.

On average, executives on the Modern Healthcare list took home 8.4% of their organizations’ total revenue as compensation-a figure that did not surprise Moniz.

“Certainly if it is below 10%, I don’t see it as a problem because fundamentally you have salaries and contracts when you’re recruited,” he says.  “I would look at all of them that are higher than 10%.”

Jim Nelson, a managing principal with executive compensation firm Sullivan Cotter, says the 8.4% figure is likely driven by the smaller-revenue organizations on the list, which needs advocacy skills just as much as better-funded groups.

“If you are a smaller organization and have a legislature to deal with, you still need a sophisticated individual,” Nelson says.  “They face the same funding ad legislative challenges, even though they’re in smaller associations and organizations.”

The highest such take-home ratio on the list belonged to Kenneth Raske, president and CEO of the Greater New York Hospital Association, whose total compensation of $2.1 million in 2009 equaled more than 40% of the organization’s $5.2 million in revenue.

However, association spokespeople have noted in the past that Raske’s compensation is also based on his management of several related organizations whose finances are not reflected on the association’s tax forms, including several for-profit subsidiaries that together account for roughly $100 million in revenue.