Tim Cotter prefers to stay rooted in the data, specifically the Internal Revenue Service Form 990s, when assisting hospital systems as they weigh how much to pay their board members.
Some surveys have looked at governance payment practices, but there is very little data on nonprofit organizations overall and "almost no data" regarding nonprofit hospital systems, says Cotter, managing director of Sullivan, Cotter and Associates in Chicago.
Recently, Cotter's firm conducted an analysis for a nonprofit hospital system with more than $1 billion in revenue. By sifting through 990s, the firm identified 34 similarly large nonprofit systems who had listed their board pay, Cotter says. "We used that as a basis for making a decision about what would be reasonable compensation."
Using appropriate data is one of the federal tax agency's requirements in its guidance for reasonableness when nonprofit organizations calculate pay for highly-placed leaders such as trustees [for more on IRS requirements, see The Board Compensation Debate]. For a compensation review body, the challenge is finding that payment sweet spot, an amount that's sufficient to acknowledge the work involved without approaching figures more reminiscent of for-profit board pay, according to health care and governance consultants. The compensation body also must determine if it wants to tie specific requirements to pay and consider broader community considerations, such as whether they're prepared to defend the amounts publicly.
"That's what I tell my clients," says Chicago-based governance consultant Jamie Orlikoff. "If you're not comfortable doing that, then something is wrong. That means you have not meaningfully justified compensation to yourself, or it means you are paying too much and you know it."
Income vs. Excess
While hospital systems might hire an outside consultant to conduct this analysis, they could pull the 990 data themselves, looking at similarly sized organizations, Cotter said. To comply with IRS rules, it's also important that an arm's length entity be involved in the process, such as a group of respected community members or former trustees who would not be directly impacted by any pay decision, he says.
Board pay is still relatively new, so offering any pay likely provides a nonprofit system an edge in jockeying for talented prospects, says James Gauss, chair of the board services practice at the executive search firm Witt/Kieffer. Sufficient data is out there to calculate a typical range based on a hospital system's revenue and other elements, he says. "As with executive pay, you don't want to be in the 90th percentile or above."
At this point, when systems do pay, the typical annual range is $40,000 to $75,000, and sometimes lower, Gauss says. "A $20,000 number for a community hospital, where most of the members are not hopping on airplanes to get to meetings, is not an insignificant number."
Dropping much below that amount, though, begs the question: "Is it worth it?" says Gauss, given the potential risks in everything from community perception to attracting IRS scrutiny.
Paul Levy, a board director at ISO New England Inc., echoed a similar perspective. He earns $101,700 annually, according to the 2012 990 for the region's nonprofit electrical and power system operator. He has also served on other nonprofit organizations for no pay, he says.
The ISO compensation "is enough to get your attention and to give you a sense of fiduciary responsibility," says Levy, former CEO of Boston's Beth Israel Deaconess Medical Center. Board members sometimes travel some distance to provide specific expertise and there are some exclusions regarding other boards they can serve on to prevent potential conflicts, Levy says.
But if that annual figure was significantly lower, say $25,000, Levy would prefer to be paid nothing. "For the level of effort I put into that board, I would feel like I was being underpaid, and so I would feel resentful unless I put it in my category of philanthropic activities," he says.
"My view of the world is the meter is either on or off," Levy says. "You either get paid your market rate or you donate your time or effort."
Levy also points out that he's met plenty of people through the years, who would donate any money back to the hospital system. That's why the compensation review body also needs to establish related rules, Cotter says. Can trustees opt to waive pay entirely? Alternatively, can they direct it to a charity of their choice?
Consider as well if the board payment should be linked with new or expanded governance stipulations, says Cotter, a proponent of incorporating meeting attendance. "I want to be demonstrating that we're paying it to those who are showing up."
Orlikoff agrees. "Compensation without accountability will get you nothing," he says. Requirements might include a specific number of hours of board meeting attendance, committee service minimums, participation in the annual retreat and continuing education requirements, among others, he says.
Such stipulations must have teeth, outlined in advance so the trustees know that, "if you are not performing, we will terminate you,'" Orlikoff says.
As discussions about board compensation continue, some new adherents are taking a conservative approach, watching the market forces evolve, Gauss says. He recently worked with one health organization that settled on paying its trustees $10,000 annually. "They saw it as a starting point, and are probably going to move it up over time," he says.
For more perspectives on paying trustees, read The Board Compensation Debate.
Charlotte Huff is a health and business writer in Fort Worth, Texas.