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CEO Pay Ratios in FQHCs – Silly But Interesting


One of the silliest statistics that pundits obsess over is the “CEO Pay Ratio” — the percentage by which the pay of the Chief Executive Officer exceeds that of the average employee of the company (others use the lowest paid employee).  It’s silly primarily because so much of that statistic is a function of the size and organization style of the company rather than the actual amount of compensation.  A big organization requires more levels of management, hence there will be more “increments,” each of which will increase the ratio.  A “flat” organization will have fewer “increments” than a more hierarchical structure.  It’s just math, and there’s nothing “moral” or “immoral” about it.

Just for fun, I looked up the “latest news” which comes from an AFL-CIO study about the evils of executive compensation and indicates that the CEO pay ratio is about 331:1.  Of course to get that kind of statistic you have to only use very very large companies, in this case the S&P 500.  No doubt, that’s a big number.  A lot of it comes from these being really big companies.  Some of it might come from some folks being really greedy.  However… to paint a picture of all CEOs from the practices of the largest 500 of the more than 7 million establishments in the United States is frankly ridiculous.  Nevertheless, we can cherry pick statistics and rally up support for ludicrous legislation (such as the New York initiative to limit the compensation of any employee of a not-for-profit to $100,000) .

How do FQHC’s fare in this dance of the absurd?  Actually, quite well, and probably something the industry should use to help support its claims of fiscal responsibility.  Of the more than 500 FQHCs for which appropriate data was available, the average ratio of CEO pay to the earnings of the average employee was just over 4.0:1 (the median at 3.7:1).  The average employee earned about $37,800, with the average CEO coming in at just over $154,000.

Generally speaking, we expect larger organizations to pay more, an effect that appears most clearly in management and executive compensation.  In the FQHC industry, size impacts pay across the board as well.  While average annual wages are about $37,800 overall, employees at the smallest health centers earn about $34,700 on average, while average pay at the largest health centers is just short of $46,400.  Reflecting the fact that most FQHCs follow a similar business model, the middle 50% range of average earnings is only about 33% wide — from $32,300 to $43,000.

As one might expect, ratios also increase as organization size increases… however, nowhere near the dramatic levels reported in the media.  In the smallest category (less than $2.5 million), the ratio is about 2.6:1.  Among the largest FQHCs, those of more than $100 million in revenue, the ratio of CEO pay to average salary is only 6.7:1.  Of course, average earnings at these larger organizations are also much higher than the smaller organizations, with the middle 50% ranging from $37,800 to more than $57,100.

The bottom line is something that we have tried to point out for nearly 25 years — yes, there are greedy people on Wall Street, and yes, there are executives out there who probably earn a lot more than they are worth — but projecting these cherry-picked excesses onto all executives nationwide in every industry is not only silly, but counter-productive.  FQHCs and other not-for-profits need to be managed by highly-skilled individuals in order to effectively deliver their services.  It is fundamentally bad business to fail to hire the best possible staff to achieve a mission, and imposing artificial strictures like the “pay ratio” are exactly the kind of bad business practices that make not-for-profits behave in an artificially cheap way.

“Not-for-profit” is a tax status… not a state of mind.

For more information on Merces 2014 study of the compensation practices of more than 1,100 FQHCs nationwide, contact Ed Ura at ebura@mercesconsulting.com.