In anticipation of a new reporting requirement in early 2014 for Massachusetts charities, the state Attorney General’s Office yesterday released a report taking aim at CEO compensation – particularly severance payments – at some of the state’s largest nonprofit organizations.
“Massachusetts is unique in that many of our largest employers are not-for-profit organizations. These organizations must compete with national for-profit companies for CEO talent while also staying true to their charitable mission. To continue to make sure this balance is met, we believe there must be greater transparency in fully reporting the amount of compensation and the way it is set,” Attorney General Martha Coakley said in a press release accompanying the report on Thursday.
Salaries for the chief executives of 25 of the largest nonprofits in the Bay State ranged from $487,000 to $8.8 million for the years compiled, 2009 and 2011. The 25 organizations that participated in the survey, however, were not your typical charities but mostly colleges, universities, hospitals and healthcare systems. Among them were Harvard University, Brandeis University, Northeastern University, Dana-Farber Cancer Institute, Massachusetts General Hospital, Brigham and Women’s/Faulkner Hospitals, and Partners HealthCare System.
The 92-page report, “Massachusetts Public Charities CEO Compensation Review,” makes several suggestions to analyze what might be considered “reasonable compensation” of executives:
- Consideration of compensation packages and rates of increase offered to non-executive segments of the workforce;
- Analysis of the relative magnitude of the CEO’s total compensation package in relation to that of the non-executive workforce; and,
- Consideration of the level of public support the organization enjoys in the form of exemption from taxes, including property tax, corporate excise tax, sales tax.
The AG’s office plans to introduce expanded annual reporting requirements on executive compensation in early 2014. The new requirement was included in draft form in the report and will be part of filings the office collects and posts on its website.
The Internal Revenue Service (IRS) Form 990 is filed with the IRS and a copy submitted to the Public Charities Division of the AG’s office. Reporting of compensation data on the 990’s Schedule J reporting, however, is “somewhat limited and generally delayed by more than a year” so the division has proposed a new schedule EC, to the state’s reporting form, the Form PC. The new schedule would require additional and earlier reporting on executive compensation for the state’s charities. “Based on the fact that compensation for given calendar year determined within months of the close of the calendar year, charities are able to report publicly on compensation earlier than the Form 990 currently requires,” the report stated.
Michael Weekes, president and CEO of Providers’ Council, the state’s largest human services membership association and the state affiliate of the National Council of Nonprofits, said clear and stringent federal and state guidelines and regulations already exist regarding executive pay that ensure transparency and help to advance the public’s interest. “Quite frankly, the greatest challenge for those of us working in the human service sector, the largest segment of nonprofits, is advocating for government policies and contracts that help raise the compensation of our lowest-paid workers,” he said.
It’s important to exercise caution before adding layers of reporting, “especially in areas where nonprofits are frankly the envy of other sectors,” said Rick Jakious, CEO of the Massachusetts Nonprofit Network, whose members are primarily small and medium organizations. “Most nonprofits here feel like we’re an incredibly transparent sector already, as it relates to executive compensation. The amounts and process are clearly laid out” in the IRS Form 990 and state’s annual reporting procedures, he said.
The report takes a detailed look at different types of compensation reported in the Schedule EC responses, such as cash compensation, retirement and other deferred compensation, other forms of compensation and benefits, and contingent and contractual benefits. The report noted severance payments to chief executives, particularly in cases where an executive was terminated without cause but still was entitled to payment of two or three times their cash compensation.
For instance, the report noted a 2011 letter to Blue Cross and Blue Shield of Massachusetts about payments to outgoing CEO Cleve Killingsworth. That year, Killingsworth was paid $8.8 million, $6 million of which was severance classified as “other reportable compensation” in addition to $1.6 million in base compensation. “Even if these types of provisions remain commonplace in this region, the division believes that they are unwarranted to potentially damaging to charitable organizations that allow them in CEO contracts,” the report stated. The division “sincerely hopes that organizations whose CEO contracts include severance provisions like these will seriously consider eliminating such provisions in the future. They are unwarranted and potentially damaging to the charitable organization that allows them in CEO contracts.”
The report also examined the process by which boards set compensation for chief executives. “Exclusive and sustained focus on executive-suite compensation and benefits packages that may lead to loss of perspective on what is ‘reasonable’ and over time contribute to the escalation of CEO compensation packages at public charities,” according to the report.
Housing and housing allowances, common among colleges and universities, were targeted as well. The IRS process of reasonable compensation alone may not assure reasonable compensation that there are additional considerations that should be included, according to the report. “While this approach may be consistent with section 4958 from a comparability standpoint, the division encourages colleges and universities to consider whether it is truly necessary and the best use of charitable resources to provide a housing allowance on top of what is likely already a healthy salary,” the report noted.