Author: ERI

2013 Health Care Benefits Benchmarking Survey Released

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Changes to federal health care law and rising medical costs have many organizations reviewing existing and future benefits offerings. The Health Care Benefits Benchmarking Survey provides a timely and accurate measurement of health care plan costs that can serve as a valuable reference when considering plan changes and cost-saving strategies. The report features sections on general benefits practices, general features of medical coverage, and co-payment requirements, as well as prescription drug plans, dental benefits, vision benefits, and more. Data are presented by organization sector, industry group, organization size (number of employees), and geographic region.

Employers, particularly small businesses, are continuing to implement less costly health care options because of rising medical costs. Rather than offering changes in traditional plans, many employers are moving to High Deductible Health Plans (HDHP) coupled with a Health Savings Account (HSA).

Other employers are just reducing benefit levels overall by increasing employee contributions, deductibles, co-payments, coinsurance, and out-of-pocket maximums. Cost management strategies such as disease management, health promotions, and wellness programs are also being used by many employers to counter increasing costs. Benchmarking health plan costs and practices with other employers in the external marketplace is the first step in evaluating the effectiveness of current benefits strategies or potential changes.

The annual Health Care Benefits Benchmarking Survey assists employers in making competitive decisions about their offerings. Participation for the sixth edition of the survey was solicited from US employers in the public, private, and nonprofit sectors, as well as government entities. The survey is available online for $289 via http://salary-surveys.erieri.com. For more information, contact ERI Salary Surveys at [email protected].

Executive Compensation: Cross Border Say On Pay

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On March 3, the referendum for say-on-pay votes in Switzerland passed. Unlike the US non-binding, say-on-pay vote enacted in 2011, the shareholders in Switzerland will now have a binding vote, which essentially allows them to accept or reject the compensation recommendation of its current executive management team as well as prohibit sign-on bonuses and non-statutory severance for new hires and exiting executives respectively. For the referendum vote to be enacted, it needed 50% of the vote plus one vote. The result was actually 68% “for” the say-on-pay vote.

Legislation like say on pay is typically enacted as a result of socio-economic events.  In addition to slowed economic growth in Switzerland, the highest paid CEOs in Europe are at Swiss companies.  Further, the highest paid CEOs at Swiss companies are not Swiss nationals but, rather, nationals from other countries like the US, Austria, and Belgium, as noted below:

  • Credit Suisse CEO Brady Dougan is from the US
  • ABB ’s Joe Hogan is from the US
  • Novartis’s Joe Jimenez is from the US
  • Roche’s Severin Schwan is from Austria
  • Nestle’s Paul Bulcke is from Belgium

To shed further light on and to balance the optics of CEOs being “overpaid,” human resources leaders should look at the systemic reasons for how these pay packages are formulated.  A recent paper issued in September 2012 suggests that key determinants of executive compensation packages include the composition of the board and trading on global exchanges requiring organizations to compete in US markets. After reading this paper, you may agree that risk tolerance, executive home country nationality, business structure, and board governance are the drivers of executive pay and justify some of the pay levels.

Business leaders are disappointed with the outcome in Switzerland and believe it will prevent them from attracting new talent to key executive positions as well as hinder new investment in Switzerland as a place to set up operations.  Currently, the Netherlands is the only other European country that also has a binding say-on-pay vote. Although the United Kingdom and Germany have had advisory say-on-pay vote legislation in place since 2002 and 2009 respectively, both countries will likely have a vote on similar legislation for a binding vote due to pressure from shareholder activists groups.  The US has managed to delay the enactment of similar legislations, yet has generally followed suit.  Will the US say-on-pay vote become binding in the future?

For more US, Canadian, and European executive compensation data, visit www.erieri.com.

A Few More Changes for 2012 Form 990

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Yes, the IRS did complete its major revision of the Form 990 in 2008 (for returns filed in 2009 and later), but each year there are some revisions and clarifications.  A chart summarizing the significant changes to the Form 990, Form 990-EZ, schedules, and instructions for tax year 2012 was published recently by the IRS.

Most of the changes are small, but all reflect areas of concern to the IRS in its enforcement efforts.  The IRS has continued to refine and clarify the regulations for hospitals and organizations that give foreign grants.  The form itself was changed to eliminate the section covering the reconciliation between audited financials and the numbers reported on the Form 990, which has required some other changes throughout the form. So, all organizations should review the changes before filing their 2012 returns.

A few changes that all organizations should note are listed below:

  • DO NOT put SSNs and home addresses on the form.

The IRS does not want private information (like Social Security Numbers for individuals and tax preparers and home addresses for board members) listed on these forms, as the forms are public documents.  If this private information is included on the form, the IRS must include it when asked for a copy of the filed document – no redactions are allowed.  So again, the IRS is emphasizing that such information is not required and should be kept off the form.  The form will end up on the web, available to all.

  • DO report compensation for organization executives that actually are employed by management companies.

Some organizations have contracts with for-profit management companies to administer their programs and staff, so compensation levels for the individual positions were often not listed, just a total for the management contract.  More detailed reporting is now required on compensation, even if the executives are paid by the management company.

  • DO report hours worked per week from related organizations as well as hours worked for the reporting organization in part VII.

Again, the IRS is interested in getting a better picture of the relationship between related organizations and how employees working for these related organizations allocate hours and payroll costs.

One final point that was actually a clarification in the instructions last year, but is worth emphasizing again, is the reporting of compensation in Part VII of the form.

  • DO NOT check too many boxes in Column (c) when selecting Position for the listed employees.

Only one is usually the right answer – unless the person was both an officer and director/trustee of the organization, then those two boxes can be checked.  Otherwise, check only the relevant one.

As the Annual Report of the Exempt Organization Division states on page 22:

“The IRS uses the Form 990 responses to select returns for examination, so a complete and accurate return is in your best interest.”

So, it continues to be important to pay attention to the information filed on Form 990 and any changes to those requirements.

Stock Ownership Guideline for Apple CEO

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According to the recent drop in stock price and slowed growth, Apple stakeholders looked to improve pay-for-performance alignment by establishing stock ownership guidelines for the CEO and non-employee directors. Tim Cook, the CEO of Apple, will be required to own 10X his base salary in Apple stock over a 5-year period, and the directors will be required to own shares equal to 5X the value of their retainer (which range from $50K to $250K). Shares must be owned directly and acquired through open market purchases or upon the vesting of stock awards. (Note: Stock owned by immediate family members is also considered.)

Tim Cook’s base salary is currently set to $1.4M, so the ownership guideline would essentially be $14M worth of Apple stock.  Reviewing the compensation tables disclosed in Proxies, Compensation Discussion and Analysis (CD&A), and Form 4s, let’s evaluate this guideline further.

  • Per the CD&A, Apple does not offer Option Awards, only Stock Awards which are delivered via Restricted Stock Units (RSUs).  Tim Cook did not receive any RSUs in 2012.
  • In the Option Exercises and Stock Vested – 2012 Table, Tim Cook had 237,500 shares vest as part of RSUs stock awards. Disclosed was the estimated realized value of $139,653,875 for this, reflecting vesting of a 2008 award where 100% of 200,000 RSUs vested and a 2010 award where 50% of 75,000 RSUs (e.g. 37,500) vested.  Subsequent to this vest, he filed two Form 4s on March 12 and March 27, 2012, where all 237,500 shares were sold at stock prices ranging from $545 to $606.
  • From the Outstanding Equity Awards section in the 2012 Year-End Table, it is disclosed that Tim Cook has 125,000 RSUs that cliff vest 100% on September 21, 2014; he was also awarded 1,000,000 RSUs when he was promoted to CEO, and this award has a 10-year graded vesting schedule (50% on August 24, 2016, and 50% on August 24, 2021).
  • From the Security Ownership of Certain Beneficial Owners and Management Disclosure, Tim Cook owns 13,817 shares of common stock as of the fiscal year end September 29, 2012.  Subsequently, on February 4, 2013, he also filed a Form 4 acquiring 41 shares at $387.16, bringing his total stock ownership to 13,858.

Given the timeline of events, it appears the shareholders required a response to reassure them of Tim Cook and the non-employee directors’ commitment to the long-term growth of the company.  Based on this review, Tim Cook has achieved about 42.5% (e.g. $4.9M) of the ownership guideline, taking the 13,858 shares he directly owns and valuing them at the latest stock price of $430. In 18 months, when the 125,000 RSUs vest and modeling a worst case scenario with $215 stock price, he will have achieved over 200% of the stock ownership guideline in less than 3 years.

For more information, analytics, and tools related to executive compensation, visit www.erieri.com.

New York State Limits Nonprofit Executive Pay to $199,000

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Even if the IRS doesn’t think nonprofit executives are paid too much, New York State has a strong opinion on what they should be paid if they are receiving state funds.  In May 2012, Governor Cuomo issued an Executive Order capping the amount that New York State will pay nonprofit executives at $199,000.  In January, after some revisions and clarifications, the Executive Order was signed and is now scheduled to take effect on April 1, 2013 (read more here).

In addition to the salary cap, there is also a requirement that at least 75 percent of every public dollar go to services and not to administration, a figure that will go up to 85 percent by 2015 (see The New York Times for more details and the entire text here). 

A summary of the regulatory requirements follow:

  • State funds cannot be used to pay a nonprofit executive any amount of compensation in excess of $199,000 (this cap will be reviewed annually).
  • Alternative funding sources can be used to pay an executive more than $199,000, but the additional amount must be justified by following these steps:
    1. Providing evidence that the pay level is at the 75th percentile or less of compensation according to a compensation survey “identified, provided, or recognized by the applicable State funding source(s),” and
    2. Setting compensation based on appropriate comparable data and approved by the Board (or equivalent body) that includes two independent members.

Which Nonprofits Should Be Concerned?

An organization is covered by the Executive Order if it meets the following criteria:

  • Received more than $500,000 in state funds, averaged over the prior two years, and
  • Received at least 30% of its prior year funding from in-state revenues (defined as state funds, state-authorized payments, payments authorized by county and local governments, and revenues derived from or in connection with activities inside New York State, including contributions by out-of-state individuals or entities for in-state activities.

A “Covered Executive” is any director, trustee, managing partner, or officer of a nonprofit and any employee with compensation of $199,000 or more. Also covered are executives of related organizations that conduct administrative or program services for the nonprofit.

The cap applies to “total compensation,” defined as any reportable payments (salary, bonus, etc.) or benefits (direct or indirect).  There are two exclusions: (1) the value of any benefits that are provided to all employees and (2) any compensation paid for an executive providing program services outside of managerial/policy-making duties.

Waivers allowing higher payments may be available but they are limited to the one reporting period and require approval from the NYS funding source. That approval is based on the nonprofit’s use of comparable data and an acceptable process for setting the compensation level.

Nonprofits that do not provide the appropriate justifications for any additional amount risk losing their state funding if they pay executives more than $199.000.

Pay More — IF

A covered organization can still pay above the $199,000 cap, without applying for a waiver and with non-State sources, only if the following requirements are met:

  • The compensation is below the 75th percentile for executives of comparable providers of the same size and in the same sector and geographic area, as established by a recognized compensation survey;
  • Compensation is approved by the provider’s board of directors or governing body, including at least two independent directors, relying on comparability data; and
  • The above requirements are substantiated with sufficiently detailed contemporaneous documentation.

The documentation required by New York State appears similar to what the IRS requires for salary determination, obviously what nonprofits should be doing already. ERI’s Nonprofit Compensation Assessor, already used by NYS’s Charity Bureau, can provide the data and analysis for the required justification.

Last Month to Participate in 2013 Salary Surveys

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Take advantage of the participant discounts on our compensation and benefits surveys by submitting your organization’s data prior to March 31. ERI Salary Surveys has extended its catalog of traditional surveys to include more than 125 industry and job function surveys covering the U.S. and Canada. Each salary survey reports up to three sources of employer-provided data per job title: data derived from participants, digitized public records, and ERI’s Assessor Series databases.
Participants receive a 50% discount on the purchase of the survey results and a free copy of the Executive Summary. ERI Assessor subscribers are encouraged to participate in any applicable survey to receive the results for free (PDF version). Survey questionnaires may be accessed through the Platform Library. Participant discounts do not apply to Assessor subscriptions.

 

PARTICIPATE & SAVE!

 

COMPENSATION SURVEYS (US & Canada)

Compensation data are reported as annual base salary, incentive/variable pay, and total direct compensation shown in means, medians, and percentiles. A job description, a graph with a trend line and data points, and the Selected Characteristics of the Occupation (optional) are also included for each benchmark position.

Participation for all compensation surveys closes March 31. Results will be published in August 2013.

Choose from popular combined industry titles such as the All Manufacturing Salary Survey and All Health Care Salary Survey. Industry-specific surveys (nearly 100 total) include the Consulting Salary Survey, the Retail Salary Survey, and the Transportation and Distribution Salary Survey. ERI Salary Surveys also publishes approximately 20 job function surveys, including the following: Engineering and Scientific Professional Salary Survey, Top Management and Executive Salary Survey, Physicians Salary Survey, and Human Resources Salary Survey.

Surveys are available with national or statewide results.

Nonprofits have the option of choosing from specific sectors (30 in all) — such as the Mental Health Services Salary Survey, the Public Education Salary Survey, and the Human Services Salary Surveys — and/or participate in the All Nonprofits Salary Survey.

Nonprofit surveys are available with national or statewide results.

Our Canadian salary survey collection has grown due to increased participation and interest. Our newest offering is the All Construction Salary Survey. Other popular titles are the All Energy and Mining Salary Survey, the Food and Beverage Manufacturing Salary Survey, and the Oil, Gas and Upstream Services Salary Survey.
All of our Canadian salary surveys show national results.

BENEFITS SURVEY (US Only)
Benefits in Nonprofit Organizations
This survey includes information on medical, prescription, and dental costs, and also provides data on life/disability benefits, retirement plan practices, paid leave, and other benefits such as executive perquisites. Data provided in this survey give nonprofit organizations an inexpensive resource to compare current benefit offerings to those of other nonprofit organizations throughout the U.S. Data are reported by organization scope, activity area, geographic region, and organization size. Nonprofit organizations have the opportunity to participate in this survey through March 31. The full report will be available July 2013.

For more information about ERI Salary Surveys, contact us at [email protected] or 877-210-6563.

IRS Plans for Nonprofits in 2013: It’s All About the Form 990

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The latest report on the activities and plans for the Exempt Organizations (EO) division of the Tax Exempt and Government Entities section of the IRS makes it clear that what’s reported on the Form 990 matters:

“The IRS uses the Form 990 responses to select returns for examination, so a complete and accurate return is in your best interest.”

EO Director Lois Lerner outlines accomplishments in Fiscal Year (FY) 2012 and provides a work plan for FY 2013 in the 24-page report.  A complete summary is available in ERI’s White Paper, “2012 Annual Nonprofit Report.” Some highlights include the following:

  • The level of monitoring returns in FY 2012 decreased slightly, and the number of the EO staff continued to decrease in FY 2012.
  • Form 990 responses on governance issues will be reviewed. Initial research by the EO found that compliance was associated with organizations that reported (1) a written mission statement; (2) use of comparability data for compensation decisions; (3) controls in place to protect charitable assets; and (4) review of Form 990 by entire board before filing. The characteristic associated with noncompliance was the concentration of control of an organization in one or a small number of individuals.

Nonprofits should be aware that the EO will focus on certain areas in FY 2013, and taking the following actions will help them avoid examinations or compliance checks:

  • Once you file, keep filing. Following up on organizations that file in one year and then fail to file the next is now a part of the ongoing efforts of the EO.
  • Pay employment taxes. The EO now checks employment and compensation data reported on Form 990 with employment taxes paid by the organization, as reported to other divisions of the IRS.
  • Prepare for scrutiny if your organization has foreign activities. The EO is particularly looking at those with limited charitable activity and excessive compensation.
  • Know what to file if you are part of a group. The EO is researching the relationship between the central organizations and their affiliates to ensure EO has the right information and that affiliates are not dropped.  Questionnaires have been sent to 2,000 central organizations, and the data will inform the approach to reporting correctly.
  • File the right form and only one – 990, 990-EZ, 990-PF, or 990-N.  The EO will be looking to see that organizations filed the correct form and only the correct form each year.
  • Report expenses correctly. The EO will look closely at organizations with one or more of the following:
    • Relatively high fundraising costs and low charitable activity.
    • High fundraising costs with little income from fundraising.
    • High annual gross receipts and very low total compensation.
    • Taxable unrelated business income reported, but no Form 990-T.

The message from the EO is that organizations must be careful in completing their returns because the data are used to select returns for examinations, now more than ever before.

Pay For Performance: Will It Work for Doctor Pay?

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One of the nation’s large hospital systems is about to try an experiment in pay for performance (P4P) – that is, linking pay for doctors to how well they reduce costs, increase patient satisfaction, and improve the quality of care. The Health and Hospitals Corporation, which runs New York City’s 11 public hospitals, will soon change the way it determines bonuses for the more than 3,300 doctors at the New York University School of Medicine, the Mount Sinai School of Medicine, and the Physician Affiliate Group of New York. These doctors will receive no increases for the next three years (they are salaried) but instead will be given bonuses if they meet goals such as improving the coordination of care and reducing the average length of stay. Hospital officials and the union that represents these doctors are still finalizing the details, but it looks like this experiment will be implemented within a few months.

This new approach to health care raises lots of questions, both large (Are doctors’ practices the cause of the huge and growing health care costs in the U.S.?) and small (How much influence does one doctor have over an indicator – for example, reducing time in the emergency room – when that time may actually depend on the actions of other hospital staff members?). And what evidence is there that this P4P approach works? Many health care experts are in this debate – read more here and here – but there are many compensation experts with lots of experience with P4P in areas other than health care that should also weigh into the discussion.

The impetus for the New York plan appears to be an attempt to incorporate provisions of the impending U.S. health care reform legislation (Obamacare) that include rewards for hospitals that tie pay to a list of quality metrics. Achieving many of these same performance measures that are proposed for the NYC doctors will be a part of the hospitals’ compliance with national health care reforms, designed to bring down costs and provide incentives for improved medical care.

Clearly this is an important proposal, which may influence how health care is delivered in the U.S. P4P is not a new concept to compensation professionals – it has been used in many industries and sectors. Now is the time for a review of the lessons learned in implementing P4P in various situations to see how they apply to health care and hospital doctors.

Data Submission Period Continues for Salary & Benefits Surveys: 50% Discount on Results

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Looking to benchmark salaries and benefits in 2013? Looking for a great deal on data? Consider participating in our traditional compensation and benefits surveys. By submitting your organization’s data, you become eligible for a half-off discount on the survey results.  Participants also receive a free Executive Summary. ERI Salary Surveys has a wide variety of industry and job function compensation surveys to choose from, as well as two benefits surveys.

Benefits Surveys (U.S. only)

The survey focuses on employer-provided employee health care benefits.  The report serves as a valuable reference for considering plans, changes, and strategies for effective benefits management.  Data are reported by organization sector, industry group, geographic region, and organization size.  Participation in this survey closes February 15, and the report will be available April 2013.

This survey includes information on medical, prescription, and dental costs, and also provides data on life/disability benefits, retirement plan practices, paid leave, and other benefits such as executive perquisites.  Data provided in this survey give nonprofit organizations an inexpensive resource to compare current benefit offerings to those of other nonprofit organizations throughout the U.S.  Data are reported by organization scope, activity area, geographic region, and organization size.  Nonprofit organizations have the opportunity to participate in this survey through March 31.  The full report will be available July 2013.

Compensation Surveys (U.S. & Canada)

Each salary survey reports up to three sources of employer-provided data per job title: data derived from participants, digitized public records, and ERI Economic Research Institute’s Assessor Series databases. Compensation data are reported as annual base salary, incentive/variable pay, and total direct compensation shown in means, medians, and percentiles. A job description, a graph with a trend line and data points, and the Selected Characteristics of the Occupation (optional) are also included for each benchmark position.

Participation for all compensation surveys closes March 31. Results will be published in August 2013.

Choose from popular combined industry titles such as the All Manufacturing Salary Survey and All Health Care Salary Survey. Industry-specific surveys (nearly 100 total) include the Consulting Salary Survey, the Retail Salary Survey, and the Transportation and Distribution Salary Survey. ERI Salary Surveys also publishes approximately 20 job function surveys, including the following: Engineering and Scientific Professional Salary Survey, Top Management and Executive Salary Survey, Physicians Salary Survey, and Human Resources Salary Survey.

Surveys are available with national or statewide results.

Nonprofits have the option of choosing from specific sectors (30 in all) — such as the Mental Health Services Salary Survey, the Public Education Salary Survey, and the Human Services Salary Surveys — and/or participate in the All Nonprofits Salary Survey.

Surveys are available with national or statewide results.

Our Canadian salary survey collection has grown due to increased participation and interest. Our newest offering is the All Construction Salary Survey. Other popular titles are the All Energy and Mining Salary Survey, the Food and Beverage Manufacturing Salary Survey and the Oil, Gas and Upstream Services Salary Survey.

All of our Canadian salary surveys show national results.

Assessor Series subscribers are encouraged to participate in any applicable survey to receive the results for free (PDF version). Survey questionnaires may be accessed through the Platform Library. Survey participants do not receive a discount on Assessor subscriptions.

For more information about ERI Salary Surveys, contact us at [email protected] or 877-210-6563.

Are Boards Required to Maximize Tax Deduction When Deciding a CEO’s Compensation?

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In a recent case, Freedman vs. Adams, a shareholder filed a claim alleging the Board paid out $130M in discretionary bonuses without consideration to maximizing tax deduction, according to IRC 162(m), specifically referring to a provision that deems performance-based compensation qualifies for a full deduction in the compensation expense.

Let’s review the rule and see its application in an example.

Essentially, the IRC 162(m) rule denies tax deduction for any annual compensation exceeding $1 million paid to the “covered” executives, who are the CEO and the three most highly compensated executives as of the last day of the company’s tax year. Prior to 2007, the CFO position was covered; however, under the current rule, the CFO is not considered a covered employee.

Most companies have replaced discretionary bonus plans, yet they disclose in their filings retaining right to have discretion in adjusting these payouts in the event that the intended results of a compensation plan are not achieved or are unexpected (e.g., windfall or punitive).  If a discretionary payment is made beyond the cap of an IRC 162(m) compliant incentive plan, then that discretionary portion is not tax deductible and is disclosed in the bonus column of the Summary Compensation Table.

Here is an example applying this rule.

A covered employee receives a $900,000 base salary and a $600,000 discretionary bonus.  Also included in the compensation package are a $1.5 million performance-based cash incentive and a $3 million dollar payout for nonqualified stock option tied to achieving a market based performance condition , 10% total shareholder return (TSR).

According to IRC 162(m), the $1 million deduction cap would apply to the base salary and the discretionary bonus. Only $1 million would be deductible and the extra $500,000 would not be deductible.  The $1.5 million performance bonus and the $3 million earnings on the non-qualified stock options do qualify for the tax deduction, so the company will report a total of $5.5 million tax deduction ($1M allowable plus $4.5M performance-based compensation).

For more information about these executive compensation data, regulations, research, and related analysis, contact ERI. See www.executiveloyalty.org for more infomation on this case and other topics regarding executive compensation law.