The Joy of Having a Compensation Committee
Just got off the phone with the CEO of a long-time client; we were talking about the implementation of a “best practice” governance program to help guide the FQHC’s Board toward making credible decisions on CEO compensation. While everything that’s part of a best practice program is essential and valuable in its own right, we spent a good bit of time talking about the Compensation Committee, and how crucial it is to getting things done.
It’s always gratifying to hear that your work is appreciated, but to hear something along the lines of “you don’t know how much better I sleep at night knowing that there are people with the specific responsibility of managing my pay rather than it being a free for all” is really a treat. It’s also a good way to see how important it is that someone with actual experience in a setting is the one giving you advice on how to do things. In a vacuum, its easy to imagine how a full FQHC Board of Directors, completely educated in the appropriate way to manage executive compensation, can have a well-reasoned, structured conversation that leads to an obvious recommendation for pay for the upcoming year. Plenty of textbooks tell you it’ll work, and I’ve heard several people give presentations about it. However, the day after I sat in on an actual meeting several years back with this Board, to help them come up with a CEO salary for the next year, I went back to all of my articles and white papers and started editing. After two more meetings with different Boards, I scrapped all of the language that said a committee was “preferable” and changed the words to “necessary.”
If you don’t know this already, here’s why you MUST have a compensation committee of some sort within your FQHC Board:
1) You’re not going to successfully teach every Board member best practice (or even any practice) executive compensation techniques. You can try, but it isn’t going to happen. Many Boards can’t get always get a quorum for a meeting, let alone extensive training. This means you’re going to have a group of people with different levels of knowledge trying to come to consensus. Sure, that happens with the Board every day, but when we’re talking about compensation, the problem is multiplied. In many cases we’re talking about numbers far beyond what some Board members can even imagine earning — I can train them enough so that they understand what they need to do, but without that training, it’s a free for all. Get a small group that’s representative of the overall Board, get them trained to the point that they’re confident, and the rest of the Board will learn to trust them and will generally follow their lead.
2) No matter how “ready” you think everyone will be for the discussion, starting with a wide open question “what should we pay our CEO next year” is a recipe for disaster. It will be long, it will be tedious, you won’t get agreement. One member will start a long discussion with a statement like this.. “well, I know those goals seemed to make sense last year when we set them, but I think they were too easy, so we need to look at something different.” Another will say “the county didn’t give raises last year so why should our health center?” Someone else will just say “that’s too much money.” Everyone will bring their own experience to the table, and you’ll be voting on fifteen different resolutions. Solve this problem in a simple way… have the discussions at the committee level. Give every Board member a chance to submit their thoughts, let the Committee sift through them, anticipate the arguments and come up with an answer. The first thing the Board should see at the salary discussion is “the Committee recommends a salary of $XXX for next year.”
3) A committee report is the best form of contemporaneous documentation you’ll ever have. For those who aren’t into in-depth reading of the IRS Code Section 4958 regulations on private inurement and excess benefit transactions, one of the key elements of establishing a rebuttable presumption of reasonableness is that there is contemporaneous documentation of the discussions and the data relied upon. You aren’t going to get that after two hours of wide-ranging debate. A committee can look at the data, draw its conclusions on performance and make a recommendation in the context of a report that can be entered into the minutes and provide you with what you need.
4) A compensation committee will reduce overall decision making time. Probably one meeting, one presentation to the Board and an hour of discussion. This summer I worked with a full Board trying to make a decision — three meetings of at least two hours each, couldn’t reach agreement on a number, and they finally agreed the solution was to have a committee hold a meeting and come up with a recommendation. That’s not uncommon — and is one of the reasons why many frustrated FQHC CEOs don’t have their performance review or pay adjustment made until several months after the end of the fiscal year…
As with any element of best practice compensation, there are dozens of additional reasons why you should have a compensation committee. Can’t forget the simple one that there is a box on the 990 to check indicating that you use one. It’s not there for fun — it’s an indicator that you’re doing things right.