To pay or not to pay: Some not-for-profit systems give board members big pay

In 2015, Sally Smith made $3.9 million as CEO of Buffalo Wild Wings, the investor-owned restaurant chain that is a mecca of hot wings, beer, sports and heartburn.

Smith also sits on the board of Allina Health, a hospital system headquartered in Minneapolis, as is Buffalo Wild Wings, colloquially known as “B-Dubs.” It's an interesting juxtaposition for Smith: providing guidance to a $3.8 billion health system dedicated to improving everyone's health while running a company built on bar food and booze.

The not-for-profit Allina paid Smith $14,000 for her board duties in 2013, the most recent data available in public filings. While it's less than a half percent of her annual corporate compensation, it's enough to buy plenty of hot wing dinners.

Allina cumulatively paid $173,128 to 14 board members in 2013. The individual amounts differ. Directors can earn more if they lead certain board committees.

Allina, which began paying its board members in the early 2000s, says the compensation is necessary to keep its strong board governance in place during “these complex and challenging times for the healthcare industry.”

Most not-for-profit hospitals and healthcare organizations do not compensate board directors or trustees. In fact, it's still rare. Only 7% of not-for-profit board members were paid in 2013 or 2014, according to a Modern Healthcare analysis. But over the past two decades, especially in the years since the Affordable Care Act passed, there has been a gradual movement toward paying board members at national or regional hospital systems, integrated provider-payer organizations and insurers because of their expanding geographies and responsibilities.

Compensation experts say the practice will become more common as board members take on the task of providing strategic direction to gargantuan not-for-profit systems whose growth through consolidation increasingly makes them resemble publicly traded companies.

“These organizations have become vastly more complicated than they were in the past,” said David Bjork, a compensation consultant and senior vice president at Integrated Healthcare Strategies. “The minute they start recruiting people from out of town, they get into the issue of should we or should we not pay board members.”

The movement to offer monetary compensation to not-for-profit hospital system board members has been controversial from the start. Many community members—the employers, physicians and patients who are primary stakeholders—view hospitals primarily as tax-exempt charitable institutions providing a community service, not Fortune 500 companies.

“This particular institution you're sitting on doesn't pay taxes. It doesn't have shareholders,” said Dr. Michael Jellinek, CEO of Lahey Health Community Network in Burlington, Mass. “You are sitting in a role where you are representing the public.”

Boards have traditionally been composed of a wide array of business and community leaders who serve not with the expectation of getting paid—many are already affluent—but who serve as a way to give back to the area's primary healing hub, which also usually is the largest employer.

For instance, well-known private equity titan Henry Kravis is a board trustee at Mount Sinai Health System in New York City. Venture capitalist Joel Cutler serves on the board at Beth Israel Deaconess Medical Center in Boston. Both are unpaid. Hollywood bigwigs Steven Spielberg and Barbra Streisand are board members at Cedars-Sinai Health System in Los Angeles, but neither receive compensation.

In fact, many marquee names bring in their own money to academic medical centers and other acclaimed institutions. Billionaire investor Carl Icahn, an unpaid trustee member at New York's Mount Sinai, donated $200 million, which led to his name being attached to the system's medical school. Spielberg has his own children's research center at Cedars-Sinai.

At smaller independent hospitals or systems in other areas of the country, boards usually include bankers, lawyers, doctors, academics and even religious leaders. The vast majority remain unpaid. With a few exceptions, the pay given to board members at not-for-profit healthcare organizations isn't very high—especially by the standards now prevalent in corporate America.

At Allina, for instance, board members are paid from $10,000 to $19,000 a year. System leaders view the payments as a small incentive for the board members' time and travel. There are a few outliers. Kaiser Permanente, the giant health insurer and network of hospitals and physicians, pays many of its non-employee board directors more than $200,000 a year.

Modern Healthcare analyzed Form 990s filed with the Internal Revenue Service during 2013 and 2014 for more than 2,700 not-for-profit hospitals and healthcare organizations. The analysis looked only at trustees and directors who earned less than $150,000, which was used as a cutoff to exclude those on the staff of an organization. However, because of incomplete IRS data, some executives and other high-ranking employees appear in the analysis.

Of the nearly 26,000 board members included in the analysis, more than 93% didn't receive a dime. Another 2.5% of board directors made $3,000 or less. That compares to the Governance Institute's 2015 survey, which found 11% of independent board members at not-for-profit hospitals are compensated, and more than 60% of that total were paid less than $5,000.

Compensation experts said the results mirror what they've seen on the ground: The preponderance of tax-exempt healthcare organizations still don't compensate their boards. But many—especially large, multistate hospital systems that are no longer just extensions of their local community—are testing the waters.

“When you start to look at the emergence of these very, very large integrated delivery networks and very large Catholic healthcare systems, we're seeing a substantial increase in a number of them that are compensating (board members), planning to compensate or are reviewing their practices,” said Ron Seifert, a vice president with executive headhunting firm Korn Ferry Hay Group.

The largest provider systems will pay from $15,000 to $50,000 per board member, based on Seifert's most recent experiences. As systems acquire more hospitals and doctor groups expand their geographic footprint and embark on managed-care contracting and accepting risk-based payments, they are seeking experienced attorneys and business leaders who can provide the right perspective even if they live outside the system's community headquarters, he said.

There are few legal restrictions on paying not-for-profit board members. The IRS recommends any compensation be justifiable from the lens of independent third parties and helpful to an organization's cause. Mark Madden, a senior vice president at executive search firm B.E. Smith, agreed that any organization has to “have the data to back it up.”

Yet the practice has been publicly condemned in some cases. Former Massachusetts Attorney General Martha Coakley distributed a report in 2011 that excoriated not-for-profit organizations that compensated their trustees, taking particular aim at health insurers.

“Nonprofit charitable organizations operate for the exclusive benefit of the public, and the vast majority of directors view voluntary service as a primary means of giving back to the greater community the value of their skills and experience,” Coakley wrote. “Compensating directors is contrary to this spirit and diverts resources otherwise focused on achieving the charitable mission of the organization.”

Nearly all stand-alone hospitals and smaller systems adhere to that mantra, according to the analysis. “Your role on a nonprofit board is to represent the best interests of the community,” said Lahey Health's Jellinek. He wrote an article in the April issue of JAMA that said trustees should push health systems toward risk-based contracting and population health management and away from fee-for-service payments, even though that hurts the system's financial picture in the short term. He also prefers trustees remain unpaid.

Not-for-profit organizations that paid their independent board members the most were health insurers or multistate systems that also provide health insurance. For example, J. Robert Baum made $134,719 in 2013 as board chair of Highmark, the Blue Cross and Blue Shield affiliate and provider system in Pittsburgh. Glen Bergert, a director of Delta Dental of California, earned $134,113. Pay for board members at Scan Health Plan, an insurer based in Long Beach, Calif., ranged from $47,000 to $114,000.

Non-employee board members at Kaiser, headquartered in Oakland, Calif., were among the highest paid in the not-for-profit healthcare sector. Kaiser doled out

$2.5 million to 12 top directors in 2013. Judith Johansen, a lawyer and former president of Marylhurst University, made the most with $231,370.

Dr. Christine Cassel made $189,000 as a Kaiser board member in 2013, but she resigned in 2014 after ProPublica, an investigative journalism not-for-profit, raised concerns about potential conflicts of interest with her role as CEO of the National Quality Forum, which establishes hospital performance standards. Cassel has since left the NQF to join the leadership team at Kaiser's new medical school.

Kaiser spokesman John Nelson said in a statement that Kaiser's board directors are paid less than those at most large for-profit healthcare companies, and their roles are larger in scope than traditional not-for-profit hospital board members.

“We compensate our board directors in order to attract and retain highly qualified individuals that can help our organization achieve its mission,” according to Kaiser's statement. “Because of the organization's size and complexity, our board members are required to have a very high level of skill and experience, to exercise their oversight and fiduciary responsibilities, and must commit substantial time to the affairs of our hospital and health plan organization.”

Although more systems are adopting Kaiser's model of integrating providers and insurance capabilities, compensation experts said Kaiser's board compensation policies remain an outlier. The executive and board compensation programs at Kaiser and other not-for-profit insurers “are more aligned with the for-profit health plans than with other not-for-profit healthcare organizations,” Bjork said.

Indeed, most systems that do pay board members offer packages starting at $3,000 and usually pay no more than $30,000, according to the analysis. Carilion Clinic, a $1.5 billion not-for-profit health system in Roanoke, Va., paid 13 board members a combined total of $153,468 in 2013, or about $12,000 per director. In a statement, CEO Nancy Howell Agee defended the compensation as “truly nominal” considering how much time board members invest.

“As the largest private employer (in the state) west of Richmond, Va., Carilion Clinic must have a committed and engaged community board,” she said. “Compensating board members is one way to ensure that we have their attention on important matters. It also enables us to attract the best minds in our community.”

But if more healthcare organizations continue to write checks to board members—and larger ones at that—there likely will be growing public dissent, or at least demands to explain how the compensation furthers the system's goals when that money could be routed elsewhere.

“Twenty-five years ago, the whole idea of compensation for board members in a not-for-profit hospital was pretty much nonexistent,” Madden said. “But this has changed.”

Data research by Art Golab