Up and down

When CEOs consider the results of the Modern Healthcare annual association executive compensation survey, which finds total compensation for top executives grew rapidly in 2008, they might want to keep one number in mind: 65%.

That's the percentage of Americans who hold an unfavorable opinion of U.S. corporate bosses, as reported by a recent Bloomberg National Poll. For comparison, that's within the margin of error of the percentage of Americans holding members of Congress in disregard, according to the same poll.

So it is perhaps not difficult to predict how many Americans, including association members, would view the news that the top executives at 52 not-for-profit associations related to the healthcare industry received average increases of more than 20% in their total compensation packages.

This, during a recessionary year when revenue at those same organizations was statistically flat, according to the results of the survey.

View the complete association executive compensation chart

But a more detailed look at the results, made possible by the first year's worth of new data on the greatly enhanced tax-disclosure forms—the Internal Revenue Service's Form 990—shows that executives and their boards might not be as tone-deaf to public perceptions of their salaries as would appear from the results of the survey.

Although total compensation did increase, average base salaries actually decreased by 9% during fiscal 2008—the most recent year of data available—leaving many experts to conclude that changes in the tax forms and the new ways that compensation is accounted for have led to many of the apparent fluctuations in compensation seen in the forms.

“The board members live in the community, and you can't help but be impacted by the perception of executive pay,” says Jim Nelson, a managing principal in the Minneapolis office of executive compensation firm Sullivan, Cotter & Associates. “The issues continue to be transparency, full disclosure, simple disclosure of pay and the public perception impact on pay.”

The results of the ninth annual Modern Healthcare association executive compensation survey might at first seem to show that total compensation just for the 2008 tax year rose at a rate more than double the previous year, 23% in 2008 compared with 10% in 2007.

Average total compensation among the top executives at the 52 associations whose tax forms were inspected by the magazine rose to $921,644 from $730,282 the year before. Several of the executives saw large percentage increases in their total compensation packages, though some of those were attributable to accounting changes or comparisons with partial-year salaries.

Industry experts noted that although such not-for-profit associations are viewed by the public as charities because of their tax-exempt status, board members typically base compensation rates on the salaries in comparable industries. In the case of this group of industries, the most commonly cited comparables were hospital C-suites and lobbying industries, both of which are well-compensated areas for executives.

Eleven of the 52 executives for which 2008 data figures were reported on the Modern Healthcare list earned more than $1 million in total compensation, including six who earned more than $2 million, three who earned more than $3 million and one who earned more than $4 million.

The top earner on the list was a new addition to the annual survey: Billy Tauzin, president and CEO of the Pharmaceutical Research and Manufacturers of America, who had just under $4.5 million in total compensation. Tauzin also was among the largest percentage increases in total compensation, 117%, in fiscal 2008. Tauzin has announced plans to step down in June.

For those executives who received deferred compensation in 2008, it constituted an average of 11% of their total compensation and in some cases was far more. The biggest percentage went to Marie Senioris of the National Center for Healthcare Leadership, whose $485,000 compensation was inflated by 41% because of deferred compensation of $200,000 that she'll receive at a later date.

Tauzin, Scott Serota of the Blue Cross and Blue Shield Association, and Richard Umbdenstock of the American Hospital Association all saw their total compensation figures as reported on tax forms increase by one-third or more through deferred compensation set-asides. Umbdenstock earned $2.08 million in total compensation that year, while Serota earned $3.99 million and Tauzin earned $4.48 million.

But using the new tax forms, observers can see that Tauzin received only a 4% base wage increase, and Umbdenstock received a 7% salary increase.

Serota, meanwhile, saw his base pay decline by 46% in 2008 in the same year that his total compensation rose by 53%, thanks to the fact that his base salary of $876,000 was dwarfed by his deferred compensation of $1.3 million. But he also received $1.5 million in performance bonuses and other incentives.

The swiftest gainer on the list was a name much in the news recently: Donald Berwick, president and CEO of the Institute for Healthcare Improvement, who last month officially became President Barack Obama's nominee to head the CMS.

Berwick's total compensation as reported on the IHI's Form 990 grew to $2.36 million in 2008 from $764,000 the year before—a 208% increase year-over-year.

However, the Cambridge, Mass.-based IHI issued a one-page fact sheet along with its tax forms explaining that one-time events led to reporting of total compensation for Berwick that “is significantly larger than the actual compensation related strictly to 2009 activities.”

Berwick had to report as taxable wages his contributions in a 7-year-old retirement plan that vested in 2009 because of accounting rules, even though it was reported on prior Form 990s, IHI Chief Financial Officer Amy Hosford-Swan says. And secondly, since the IRS required all taxable wages recorded in 2009 be disclosed on the tax forms, this amount showed up as income again even though it was reported previously, she says.

“As a result, there was seven years of retirement benefits that was reported in one chunk,” IHI spokesman Jonathan Small says. “This will never happen again. It was a one-time occurrence for him.”

Of the $2.36 million in total compensation for Berwick reported on the most recent tax form, $1.4 million came from this irregular reporting of deferred compensation and retirement benefits. Of the remainder, Berwick received about $474,248 in base compensation, $147,000 in bonuses, $300,262 in the Management Team Flexible Benefit Plan, and $26,241 in other taxable benefits.

That's a 3% decrease in base compensation from the $490,006 Berwick received the year before.

Experts say anomalies like Berwick's meteoric rise in total compensation are likely common in this year's batch of tax forms. Although regulators greatly enhanced the amount of information reported on the forms in an effort to improve transparency, the redesigns ironically diminished the ability of outside observers to make accurate year-to-year comparisons between 2007 and 2008.

That left observers offering an explanation they've been repeating for more than a year already: The data will be better next year.

So has the greater transparency of the IRS Form 990 led to smaller salaries, as evidenced in the drop in base salaries, or not?

“I would say it's too early to predict the impact, because the 2008's are just becoming visible,” says Linda Lampkin, research director at the ERI Economic Research Institute, Redmond, Wash.

For example, the disconnect between the rise in total compensation and the drop in base compensation as reported on the forms could be attributable to enhanced reporting requirements and changes in regulations, as was seen at the IHI.

Michael Rosenbaum, a partner with Drinker Biddle & Reath in Chicago, says it's difficult to tell whether the 9% decline in base salaries reflected a true decrease, or if deferred compensation that had previously been included as salary in prior tax years was now being moved into its own category, thereby creating the appearance of a decrease in base compensation.

However, in general, Rosenbaum says his clients in the not-for-profit association world commonly reported at least flat, if not negative, salary growth for top executives in the 2008 and 2009 tax years, driven by the economy.

“In the last year, organizations are being very careful to limit compensation increases to whatever they've given to their rank-and-file employees,” Rosenbaum says. “A lot of organizations didn't give raises, some of them cut compensation. … In organizations that did that, I did not see my clients raising compensation for the executive team.”

Still, with the economy finally showing signs of a thaw, observers say the pressure is going to ratchet up quickly on executive compensation, as organizations weigh the merits of continuing to keep pay flat while their highly skilled executives feel the pull toward private industry again.

Professionals for Nonprofits, an East Coast recruitment firm that does recruiting work for the not-for-profit sector, reported in its three annual surveys of executives in New York, New Jersey and Washington that between 27% and 37% expected salaries to remain flat in 2010, while only 2% to 5% expected salary declines. The rest expected to see raises in 2010, the survey authors found.

Nelson of Sullivan, Cotter notes a shift in how some associations are assigning raises and performance bonuses.

Most healthcare associations have based compensation decisions on achievement of goals such as passing legislation or preventing unwanted laws, growing association membership, and member satisfaction and retention, he says.

However, some are placing more emphasis on revenue growth in the organization.

“Associations are getting back to some of the basics. Association incentive plans will include financial criteria,” Nelson says. “Financial performance of the organization is coming back as a bigger part of the incentive plan.”

At first blush, however, the latest figures appear to present a significant disconnect between organizational revenue and salary at the not-for-profit associations.

Organizational revenue shrank by 0.3% between the 2007 and 2008 fiscal years, even though total compensation grew by the aforementioned 23%.

On average, about 8.2% of the organizations' revenue went toward compensating the highest-paid person in the associations, a figure that did not surprise Lampkin of ERI, given the similar measures seen in the world of legislative lobbying.

“In these kinds of advocacy and lobbying (organizations), I would say that's a reasonable percentage,” she says.