Form 990 and Proxy Statement Disclosures: Are These Worlds Growing Closer?
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.
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