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 multiindustry 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 in Upper Saddle River, N.J., says he urges his clients to disregard the various “pockets of regulation” that apply to discreet 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, Tauzin 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 need 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 and 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.