Governance
CEO Compensation:10 Steps
By Sullivan, Cotter Inc. and McDermott Will & Emery, LLP
Based on recent local, state and federal actions, we recommend not-for- profit boards take the following steps:
1. Rely on tally sheets to support executive compensation decision-making. Tally sheets present the cost to the organization of each element of the executive compensation package. These sheets should include estimates of potential significant future costs such as severance, Supplemental Executive Retirement Plans (SERPs) and maximum payouts under incentive programs.
2. Identify and address any undisclosed executive compensation arrangements. Specifically, you should address arrangements that have not been communicated to the board or that have not been formally approved. These types of arrangements have the potential to be unreasonable or cause embarrassment to the organization if made public. Carefully review provisions of existing employment agreements to ensure complete understanding of current and future promises to the executive.
3. Provide appropriate disclosure to the full board regarding executive compensation program design and decisions. The organization is well-served if all board members understand the components and value of the compensation program, especially highly visible and costly arrangements that may have implications for the organization’s image.
4. Review potential “image” issues related to executive compensation. Assess the business justification for special or highly visible program components (e.g., split-dollar life insurance, loans, housing allowances, private club memberships, first-class travel, spouse travel and expenses for meetings at resort locations), and understand the associated risks (i.e., public and regulatory scrutiny, tax compliance questions).
5. Review high-cost program components in terms of their anticipated benefit to the organization. Specifically, SERPs, retention awards, long-term incentive programs, forgivable loans and severance are compensations that may have significant cost but may no longer support their intended objectives.
6. Enhance the committee’s independence. Avoid appointing members who have (or are perceived to have) financial conflicts or close relationships with executives and limit the involvement of senior executives to committee staff roles with appropriate recusal procedures.
7. Evaluate the independence of the compensation consultant. Approach with caution the use of firms that provide other significant services to the organization or its affiliates. The committee should directly retain its consultants/advisers and evaluate whether they have, or are perceived to have, major conflicts of relationship. Fully disclose products and services in which the consultant has a financial interest.
8. Review procedures and practices related to executive expense reimbursement payments. Ensure compliance with established financial control systems, current tax regulations and Form 990 requirements. Areas of focus include appropriate income reporting of the personal value of cell phone and computer usage, personal use of employer-provided automobiles, tax gross-ups and spouse/personal travel.
9. Prepare to respond proactively to media questions regarding executive compensation by:
- Preparing comprehensive public relations and communication strategies
- Developing appropriate supporting materials (e.g., talking points, community benefit outcomes, description of oversight process, relevant Form 990 responses from peer organizations)
- Identifying and preparing a designated spokesperson (not the CEO or other key executives) for this role.
10. Ensure the necessary program documentation is in place. Include:
- A committee charter
- A compensation philosophy that identifies peer groups for market comparison purposes, the organization’s target market position, and the use of any supplemental benefits and perquisites
- Competitive assessment reports
- Policies and procedures, especially those related to conflict of interest and expense reimbursement
- Minutes of committee deliberations and decisions.
Sullivan, Cotter and Associates Inc. is an executive and physician compensation firm with offices in Atlanta, Boston, Chicago, Dallas, Denver, Detroit, New York, Parsippany, N.J., San Francisco and Westport, Conn. To learn more, go to www.sullivancotter.com. Mcdermott Will & Emery, LLP, is a law firm with offices in Boston, Chicago, Los Angeles, Miami, New York and Washington. For more information, go to tabethaadams@sullivancotter.net.
This article is reprinted, with permission, from Top 10 Activities for the Board Compensation Committees of Not-for-Profit Hospitals and Health Systems, © 2007, Sullivan, Cotter and Associates Inc. and McDermott Will & Emery, LLP.