Are You Getting Paid Too Much?

As I read constantly about the executive compensation levels we're seeing at companies that are insolvent, I'm reminded of Clint Eastwood's final words to the bad guys in his Dirty Harry movies.

Are you, as a top executive at a nonprofit, or a key employee of the same, getting paid too much? Well are ya, punk?

The IRS wants to know. But how much is too much?

My colleagues and I have been chatting off and on about the new Form 990 that the IRS has been working on since about 2006, and the study they've conducted on community benefit and executive compensation at nonprofit institutions, including hospitals.

To determine a baseline from which legislation and rules can be crafted, presumably, the IRS surveyed a sample of about 500 hospitals. Well, if you haven't heard, the results are in.

There are lots of moving parts, as you probably already know, and it's tough to read the tea leaves on how legislators might interpret the report and craft new regulations. But that doesn't mean the report isn't interesting reading.

One of the most interesting pieces of the recently released study is the community benefit portion, which lawmakers are likely to use as a basis for starting to measure how much hospitals give back to their community in return for their tax breaks. I've written about that extensively though, here and here. And we haven't seen much movement from Congress on quantifying what level of community benefit hospitals should seek to deliver, other than the occasional missive from crusading Sen. Charles Grassley, whose party carries about as much political clout right now as the financial services industry. And I think we can all agree that given the severity of the economic downturn, Congress has bigger fish to fry right now.

But it's not community benefit I'm curious about right now, it's the executive compensation portion of the report, which perhaps should be your biggest concern regarding your institution's relationship to the IRS. Meanwhile, Grassley's leveled his sights on executive compensation this week again (see story in "editor's picks" below). But enough fearmongering.

What got my attention in the final report was surprisingly good news for those of you who occupy the C-suite. Like the community benefit "nonstandard," the burden of proof on excessive executive compensation among nonprofit leaders lies with the IRS, at least unless and until lawmakers step in to provide more detailed guidance. Currently, under the "rebuttable presumption procedure," the IRS looks into whether such compensation might be excessive by determining the institution's policies and practices used to establish executive compensation. Generally, if you comply with the rebuttable presumption, including comparability data and independent personnel to review and establish executive compensation amounts, you should be safe, for now at least.

But given the negative attention being paid to compensation at the banks and other financials, maybe you should be worried. Executive compensation committees and the consultants they employ at many big for-profit companies seem to have "stacked the deck" in the executives' favor. Executive compensation consultants depend on these companies to hire them for other more lucrative contracts, so it behooves them to find ways to approve whatever compensation the CEO and board wants to pay. And a rising tide of high-level executive salaries has lifted all boats, so to speak, making high executive compensation easily justifiable. Just find another company or two that pays its chiefs a huge amount. These same firms provide executive compensation advice to nonprofits too.

But your organization is not a Fortune 500 company. Far from it. Compared to the obscene executive compensation numbers you'll find at the myriad failing and bailed-out financial institutions, the salary levels of executives running even the biggest and most successful nonprofit hospitals and systems are peanuts. So even if you are an outlier on nonprofit executive compensation, before you go and cut salaries willy nilly, here are some findings on executive compensation from the report. You be the judge as to whether executive compensation will continue to be something lawmakers will likely scrutinize. The following comes from the executive summary of the report, nearly verbatim:

According to the IRS, nearly all hospitals in the study reported complying with important elements of the rebuttable presumption procedure available to establish executive compensation. The results did not vary materially by demographic. The examinations confirmed widespread use by the examined hospitals of comparability data and independent personnel to review and establish executive compensation amounts.

Some facts:

• The average and median total compensation amounts reported as paid to the top management official by respondents to the questionnaire were $490,000 and $377,000, respectively. By community type, the largest amounts were reported by high population and other urban and suburban hospitals while critical access hospitals reported the smallest amounts paid. Average and median total compensation paid increased with revenue size.
• Hospitals were selected for examination based on high compensation amounts paid taking into account the size and circumstances of the hospital. The average and median total compensation amounts reported by the group of 20 examined hospitals were $1.4 million and $1.3 million, respectively.
• Although many of the compensation amounts reported may appear high to some, nearly all examined amounts were upheld as established pursuant to the rebuttable presumption process and within the range of reasonable compensation.

So there. The IRS doesn't appear concerned, absent any new standards lawmakers say they should apply, but given the populist backlash against high executive compensation at failing financial companies, legislators seem more ready to take action than ever. Connecticut Sen. Christopher Dodd, he of the sweetheart Countrywide mortgage deal, even inserted executive pay limits for companies that have accepted government help in the financial crisis. Granted, that's a totally different animal, but as they say down here in the South, their dander's up.

I wouldn't be surprised if at some point—after our legislators take care of preventing the end of the world as we know it—they don't start paying attention to the salaries you make as well.

So do you feel lucky? Well do ya, punk?