FQHCs Show Little to No Improvement in CEO Compensation Governance Practices

Posted July 29, 2014

The Form 990 is the one document containing what people normally think of as “confidential” information that you produce that anyone, from anywhere, can access with minimal effort. Your employees can see it, as well as those who provide you with funding or other resources, along with reporters drawing a blank on a story idea an hour before the publishing deadline. It is your organization’s opportunity to show the world how you do business. As a not-for-profit organization, it gives you the chance to show your stakeholders how you take care of their interests, and their money. It is also the opportunity to show your organization as one that is really not in control of itself.

So what do the most recent Form 990s tell us about FQHCs, and how they govern CEO compensation? Unfortunately, they do not paint a very pretty picture:

Only slightly more than one in ten FQHCs have a significant number of the elements of a “best practice” CEO compensation management program in place.
Just over half of FQHCs display the characteristics of “good governance.”
About 40% of FQHCs do not appear to use any type of competitive data to determine appropriate compensation for their CEOs.
The compensation of the CEO is not approved by the Board of Directors (or an appropriate committee) at an astonishing 20% of FQHCs.

These are some of the significant findings on CEO compensation governance practices from Merces Consulting Group’s recently completed study of the most recent Form 990 filings of more than 1,000 FQHCs. Despite publicity in the media, and warnings from government agencies such as the Bureau of Primary Health about the need to improve transparency, there has been almost no change in the methods that FQHCs use to govern CEO compensation since Merces’ 2012 study.

When it comes to compensation governance, there is little doubt that larger organizations tend to at least claim to govern well:

Compensation committees are more prevalent in the largest health centers, although it is only at about $20 million in revenue that even a third of the organizations have a committee dedicated to human resources and compensation issues.
Larger health centers are much more likely to use compensation surveys or studies. Roughly three-quarters of health centers with revenues in excess of $30 million use compensation studies. About half of the remainder do, although only about a third of the smallest health centers study the competitive market.
More than a quarter of health centers with budgets less than $10 million do not have CEO compensation approved by the Board. While there is improvement as organization size goes up, more than 15% of the largest health centers ($50 million and above) do not have Board-approved CEO compensation.
The use of independent outside advisors is another characteristic of large health centers. About half of the largest health centers ($50 million and up) reported using an Independent Compensation Consultant (ICC); 20% of health centers with $20 to $50 million in revenue consult an ICC; and fewer than 5% of health centers under $20 million seek independent outside advice.

The Form 990 is a relatively simple document to complete when it comes to compensation questions, and one of the most telling questions it asks speaks right at the issue of whether CEO compensation will be defensible if challenged by the IRS (or the local reporter). Simply, Part VI, question 15(a) asks:

“Did the process for determining the compensation of [the organization’s CEO] include a review and approval by independent persons, comparability data, and contemporaneous substantiation of the deliberation and decision.”

Regular readers of this blog may recognize that this is the test for establishing the “rebuttable presumption of reasonableness.” While more than 90% of health centers with revenues of $5 million and above at least claim to be able to establish the rebuttable presumption, nearly 30% of the smaller health centers answered “no,” inviting a challenge to their compensation practices.

The problem with claiming that your organization follows the standards to establish the rebuttable presumption, or course, is that you have to actually show you really follow the procedure. Unfortunately, of the more than 900 FQHCs that answered “yes” to question 15(a), nearly 40% did not report that they actually use comparability data, meaning at best, fewer than half of the FQHCs in the study could even establish that they have met ONE of the three criteria.

Does all this mean that the industry will be facing a barrage of IRS inquiries? Of course not. The truth is, compensation for the vast majority of FQHC CEOs does not reach levels that would be considered “unreasonable” by the IRS. However, it paints a picture of an industry where Boards do not appear to be in control, and even the most basic principles are not applied correctly and consistently. In this situation — appearance is much more important than substance. In a poor rural community, pay with six digits before the decimal point is going to look excessive, and if the document that discloses that pay does not show the rationale for it, people, including the organization’s employees, are going to be upset and attention will be drawn away from the mission.

Merces’ 2014 Census of Form 990s includes information on more than 1,040 FQHCs, based on data collected in the summer of 2014 from the most recent Form 990 on file at Guidestar. Information on compensation practices, including data on compensation levels for more than 2,300 FQHC senior executives, will be released in the coming days. For more information on FQHC executive compensation, contact Ed Ura, Merces’ President and Senior Consultant, at ebura@mercesconsulting.com, or by phone at 248-507-4670.