Author: ERI

Equity Compensation and Long-Term Focus

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Research assistance provided by Ben Croudace, ERI Subscriber Services Associate

With the advent of Say-On-Pay and the prolonged sluggish economy, one might think that business executives are risk averse and look to retain stock price levels for shareholders as opposed to attempting to increase them. One reason for this type of business leadership approach could be attributed to shareholder activism that advocates for more focus on long-term results, curbing excessive risk taking and the resultant Stock Ownership Policies (SOPs).

SOPs have been around since the 1990s; however, they are more prevalent today. The key elements of a SOP are:

  1. A defined level of ownership of all shares applicable that executives have to maintain during their tenure in the role.  This may be expressed as the following:
    • a multiple of the executive’s base salary (most commonly used)
    • maintain a percentage of all shares acquired
    • a fixed number of shares as the target threshold
    • a combination of definitions (e.g., base salary multiple and a specific number of shares)
  2. Contain a provision which indicates the amount of time required to achieve the specific ownership level.
  3. A defined retention or a holding period, in which an executive must hold the shares.

Executives look to equity compensation as a vehicle for wealth accumulation, and there are a number of programs or ways in which executives may achieve the requirements of SOPs. The types of equity that can be counted toward the ownership threshold include common stock (vested or unvested/restricted), stock options (vested, unvested, exercised, or unexercised), stock in deferred compensation accounts, stock in 401(k) plans, employee stock purchase plan (ESPP), stock in trusts, stock owned by immediate family members, and stock acquired through open market purchase.

The Microsoft Corporation recently disclosed an SOP in its proxy. The stated business objectives indicated that executives have a personal financial stake to promote a long-term management focus and to align with shareholder interests.   The board has discretion to waive compliance of this SOP if it creates severe hardship or prevents a covered officer from complying with a court order.  Those employees required to comply with this SOP are the executive officers and specific executives who participate in the Executive Incentive Plan.  The types of equity that count toward meeting the guideline are shares acquired in open market, vested stock awards, exercised stock options, stock from an employee stock purchase plan, shares held by the spouse or dependent children of the officer, shares held in trust, and shares held in a 401(k) plan.  The ownership guidelines were defined as a multiple of the executive’s base pay (as of the end of fiscal year) and the average daily closing share price of the 12 months ending on June 30.  Each officer is required to retain 50% of all net shares (post tax) vested on or after October 1, 2007, until minimum share ownership requirements are met.  If promoted to a position with higher requirements, the higher standard will apply.  The base salary multiple is progressive depending on the role of the executive as noted below:

  • CEO and Executive Chairman – 10x base pay
  • Division Presidents and COO – 5x base pay
  • Other Covered Officers – 3x base pay

As a result, based on this SOP and the disclosure in the Beneficial Ownership table (as of 9/2/2011), we calculated some values to demonstrate how this policy could be evaluated. Below is a summary based on a stock price of $25.80 on September 2, 2011:

Last Name

 # of Shares Owned

Base Salary

$ Value Shares Owned

Base Salary Multiple
Ballmer

   333,252,990

   $682,500

$8,597,927,142

12,597.70
Turner

          163,044

$732,500

$4,206,535

     5.74
Sinofsky

       1,109,619

$649,167

$28,628,170

          44.10
DelBene

          120,895

$603,333

$3,119,091

            5.17
Klein

           83,503

$525,000

$2,154,377

           4.10

We have examined some reasons why companies use SOP and have explained a best practice SOP and how it could be potentially evaluated.  As a parting thought, it is worth reviewing a few excerpts on the other side of this topic from business guru, Warren Buffet, who has been quoted as saying the following regarding SOPs:

… stock options as “a royalty on the passage of time.”   Source

…a manager can do nothing and stock prices will still rise.   Source

…stock options are more often wildly capricious in their distribution of rewards, inefficient as motivators and inordinately expensive for shareholders.    Source

Including equity in compensation programs requires evaluating their appropriate use as well as intended impact. The goal of achieving alignment of interests between business leaders and shareholders has come to the fore in the current regulatory and economic times.  SOPs can be part of a comprehensive solution that helps organizations achieve this alignment.  Boards and Compensation Committees should monitor and evaluate the effectiveness of such policies as part of their overall program, as well as “fine tune” them along the way.

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

More Nonprofits Are Taking Over Health Functions for Cities

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As state and local governments struggle with budget gaps, there are an increasing number of agencies deciding to contract out services previously provided by public employees to the nonprofit sector.

A recent article in the Detroit News reported the impending changeover of the management and operation of the city’s Health and Wellness Promotion programs (including substance abuse treatment, HIV testing, immunizations, and food safety) to a new nonprofit. The move was mandated by an agreement with the state to cut the city’s budget.

Until this change, Detroit was the only remaining city-run health department in Michigan. But this is not just a Michigan phenomenon. Detroit is reported to be the fifth major city to shift health department functions to nonprofits. The cities of New York, New Orleans, Philadelphia, and Chicago have already made the change to providing these services through “public health institutes.” There are actually 37 of these public health institutes across the U.S., but the shift to nonprofit services in Detroit is unique because of the broad scope of the transfer.

With this changeover in Detroit, about 200 contractors and 100 city workers will be laid off. The new nonprofit will employ 190, including 70 former health department employees. While Detroit officials say the nonprofit will be better able to secure grants and provide services to residents, city union representatives are skeptical, along with some city council members. The city will maintain some staff to allow continued enforcement of regulations and a few other programs, such as declaring a health threat, if necessary. The city also will continue with some programs such as vital records and helping to find housing for people with HIV.

Will this transfer bring greater efficiency to the provision of these services? This is a discussion that has been ongoing for decades, and interested parties, such as good government advocates and public sector labor unions, will continue the research.

One essential component of this calculation is wage costs, as the major component of the costs of these services is labor. What should the executive director be paid? What should the outreach staff be paid? Elected officials need real compensation data to determine market salary levels for the new public health institutes to ensure that taxpayer and client resources are used efficiently and effectively. ERI’s Nonprofit Comparable Assessor and Salary Assessor can be used to determine salaries that will attract and retain employees, reflecting the market rates for jobs moved from the public to the nonprofit sector.

What Is “Fair” Compensation?

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Compensation professionals are tasked with balancing two sides of the same “fairness” coin. One side is objective fairness – whether an outside observer would view a specific salary determination or overall compensation program as fair. The other side is perceived fairness – whether individual employees view their compensation as fair.

A balanced coin can stand on edge.

However, objective fairness and perceived fairness are independent of each other. Regardless of an organization’s efforts to establish and maintain objectively fair compensation practices, employees’ perceptions of their own salaries (or the underlying procedures for determining salaries) may tip the balance of a sound compensation program.

At What Cost?

A variety of negative factors have been linked to employee perceptions of unfairness. These factors are generically referred to as Counterproductive Work Behaviors. The behaviors are marked by undesirable outcomes such as litigation, absenteeism, turnover, withdrawal, theft, and in extreme cases, workplace violence, among others.

To avoid or reduce the occurrence of Counterproductive Work Behaviors, compensation professionals should ensure that decisions conform to the following standards:

  • prepared by a neutral party based on criteria set forth prior to when the decision was made;
  • based on compensation data compiled by quality data providers;
  • subject to review when an employee voices a concern; and
  • in line with common standards and ethics.

Communicating Compensation Decisions

Transparency in compensation is a hot topic. Traditionally, open conversations regarding compensation and salary data are considered taboo. Nevertheless, employees today have more resources to research what they earn in comparison to others in their organization, industry, and labor market. Not all of the resources, however, provide valid or reputable data. This produces a challenge for compensation professionals working to affect change in perceived fairness.

 

What Do Defined Contribution and Medical Benefits Have in Common?

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Prior to 2008, when the term Defined Contribution (DC) plan was mentioned, one automatically thought of 401K-, 403b-, and 457-type plans in which both the employee AND employer contribute to a retirement benefit plan and “share” in the risk of the final benefit realized by the employee.  These plans required the employee to actively manage the risk and performance of his/her retirement account(s) and be more engaged in retirement planning.

Today, the Defined Contribution concept is being applied to the design of medical health care benefits due to the impending 2014 changes put in place by the Patient Protection and Affordable Care Act.  Fundamentally the same principal (with a health care DC plan), companies allocate a fixed dollar amount to each employee to purchase a medical health benefit plan that suits his/her needs.  Essentially, employees use the money to buy insurance, which requires shopping around to get the best value and being more involved in health care choices.  This DC plan design takes consumerism in health care benefits practices to the next level by further engaging employees in managing their medical health benefits.

For the employer and total rewards professionals, this DC medical health benefit plan design may, on the surface, appear to help with cost containment issues that have plagued medical health benefit plans.  Yet, it raises a key question:  How does this translate to total remuneration practices?

A key practice that organizations will have to define is how to allocate the fixed dollar amount.  The basis of the allocation should be a bona-fide employment-based business practice like job category, pay grade, part-time or full-time status, tenure, geography, etc.

Below is an example of an allocation grid for DC medical health benefits based on pay level. The allocation is regressive as pay levels increase.  (Note, the information in this grid is not based on any specific benchmark and is for illustrative purposes only.)

Yearly Allocation for Employee Only Benefit
Pay Level

 Less than 24K

 Less than 36K

 Less than 48K

 Less than 72K

 Greater than 72K
% Allocation

100%

90%

80%

70%

60%
$ Allocation     $4,200     $3,780     $3,360     $2,940     $2,520

Depending on a company’s culture, business objectives, and talent management approach, the DC allocation grid will have a different design and should be a cohesive part of its total rewards value proposition.  The combination of shared risk, consumerism, and employee engagement is generally expected to drive improvements in medical health benefit costs and service quality, since the need to shop around should foster some “healthy” competition.

The Outlook for Nonprofit Executive Pay Increases

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The Chronicle of Philanthropy’s annual report of executive salaries for the largest U.S. charities reported that increases of 2.5% to 3.5% were expected for nonprofit top executives in 2012 and in 2013, although some might fare better. Expected cuts in federal and state spending would also affect nonprofit budgets, as many receive a larger proportion of their budgets from government contracts and grants than from private donations or payments for services.

Another report, the 2012 GuideStar Nonprofit Compensation Report, confirms that the compensation of 41% of incumbent CEOs remained static or declined from 2008 to 2009 and concluded that the effect of the downturn in the economy lasted into 2010. In fact, from 2009 to 2010, the proportion of chief executives who received no pay increase was, again, around 40%. The median increase in salaries for nonprofit CEOs was 1.6% in 2010, according to GuideStar’s analysis of data reported on Forms 990. Before the 2008 recession, annual increases tended to be 4% to 5%.

When the recession hit in 2008, many charities froze executive salaries or even had pay cuts. But now, some are reporting that competition for top nonprofit talent may be requiring salary increases to meet market rates. Some charities are giving raises to top executives, even as they phase out annual raises for all staff members. But nonprofit salaries tend respond quickly to the variations in revenues which are common in the sector – if a contract or grant is not renewed, and fundraising efforts cannot make up the shortfall, then salary freezes and even cuts may be an option. But that is clearly not a long-term solution.

Of course, there is the ever-present problem of “average” or “median” increases. The market rate for a position is dependent on the industry (think subsector in the nonprofit world) and the size of the organization (level of revenues or assets, where appropriate). Since the sources of revenues and the demand for services vary among types of organizations, looking at median or average increases may not be particularly relevant for a specific organization.

ERI’s Nonprofit Comparables Assessor allows you to analyze what is really comparable. You select the job title, the type and size of organization, and even geographic location, and the software accesses ERI’s database of Form 990 compensation data for the relevant organization and provides an estimate of the market pay for that position. This customized analysis provides the information needed to determine the reasonableness of a given salary. In fact, this is the software used by the IRS to check on executive salary levels.

Is Nonprofit Executive Pay Too High?

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Earlier this month, the Chronicle of Philanthropy released its annual report of executive salaries in the largest U.S. charities with the headline “Executive Pay Increased by Median of 3.8% in 2011, Chronicle Survey Finds.” Bloomberg News picked up the story and covered the report with the headline “Nonprofit CEO Pay Topping $1 Million Rises with Scrutiny.”  This is an indication that the mainstream media finds high pay more interesting than moderate median increases.

The Chronicle’s analysis of the 2011 data concluded that the median pay of $429,512 for nonprofit executives of the nation’s largest nonprofit organizations had increased about 3.8 % from 2010 to 2011, slightly more than the 3% inflation rate for the year.  This median increase was compiled from 132 large nonprofit organizations.

However, the survey also noted that the review of a much larger 2010 data set (for 282 organizations), revealed that 20 chief executives passed the threshold of $1 million in pay in 2010, compared with 15 in 2009.  More organizations provided 2010 data for the survey, and Form 990 data were also available. There is about a two-year year lag for Form 990 to be released, in most cases, because of the timing of filing deadlines, extensions, and form processing.

In general, what makes the headlines is the list of high-end salaries for leaders of nonprofit organizations.  The report also noted that, in some cases, there are people paid even more than the CEO, for example, a surgeon at a large hospital or a football coach.

Are these salaries unreasonable compensation?  As usual, it is impossible to draw a conclusion until comparable data are reviewed. Key factors in what organizations should and have to pay are always size and type of organization.  The IRS says that comparable data should reflect executives with similar responsibilities in similar organizations.  Sometimes, that may include data from for-profit companies, of which salaries may be higher due to the labor market for executives where nonprofit organizations also seek the same talent.

Setting the “right” nonprofit compensation requires data from the relevant comparables – those from a similar industry, size, and geography. Such data is provided in easy-to-use software by ERI that collects all the Form 990 compensation data.  Download a free demonstration version of the Nonprofit Comparables Assessor to see if executives receiving $1m salaries are in line with the market for their skills.

Participation Opens for 2013 Salary & Benefits Surveys

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Early Bird Rate: 75% off results with participation before 2013.

The participation window for ERI Salary Surveys opens October 1, 2012, and continues through March 31, 2013. As an early bird incentive, we are offering a 75% discount applied to the purchase of the results for those who participate in any of our U.S. or Canadian compensation and benefits surveys before the end of 2012. For the remainder of the collection period, participants will receive a 50% discount. Without participation, our surveys range in price from $489 to $689. Not only do you save money by participating, but your organiza­tion’s data also add to the validity of the survey results. Data may be submitted through our online questionnaire or by downloading an Excel version of the questionnaire and returning it via email. We also accept hardcopy versions of the questionnaire sent by fax or mail.

ERI Assessor Series subscribers are encouraged to participate in any of our applicable industry or job function surveys to receive a PDF version of the results for free. There is no limit to the number of surveys subscribers may participate in; however, data must be submitted through the online questionnaire via the Platform Li­brary. Unlike Assessor Series data, which are updated quarterly, ERI Salary Surveys publishes static yearly reports that can be put on the shelf or stored electronically, indefinitely.

Participate & Save!

Survey Price       

with participation

before Jan. 1, 2013

with participation

Jan. 1, 2013 – March 31, 2013

with participation

ERI Assessor Series Subscribers

$489

$122.25

$244.50

FREE

$689

$172.25

$344.50

FREE

Updated 2013 Titles

To better serve our customers in matching industries and job functions, ERI Salary Surveys has updated the titles of select surveys. The following is a partial list of the updated titles for our 2013 collection. View the full listing of available surveys, more than 125 in all, online.

Aerospace and Defense Legal, Regulatory and Governmental Affairs
Animal Health, Veterinary and Services Logistics and Supply Chain
Assisted Living and Long-term Care Medical Device Manufacturing
Broadcast Networks Oil and Gas Exploration and Extraction
Call Centers, Contact and Customer Service Research and Development
Conservation and Protection Entities Savings Institutions
Downstream Refining and Oil Based Production Skilled, Design and Technical Support
Electric Utilities and Renewable Energy Transportation and Distribution
Electronics Manufacturing Trucking, Warehousing and Distribution
Engineering and Environmental Services Upstream Oil and Gas Field Services
Food Service Utility Services
Health Care Providers Waste, Refuse and Recycling
Laboratory Services

More Canadian Salary Surveys

Our Canadian salary survey collection has grown due to increased participation and interest. Our newest offering for 2012 is the All Energy and Mining Salary Survey. Other popular titles are 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. Canadian participation for 2013 is also open, with the same time frames and discounts on the purchase price as our U.S. surveys (see pricing table above). For the current collection period, ERI Salary Surveys will also be accepting submissions for a new Canadian survey, the All Construction Salary Survey, to be released August 2013.

Benefits Surveys

ERI Salary Surveys also conducts two benefits surveys, the Health Care Benefits Benchmarking Survey and Benefits in Nonprofit Organizations.  The Health Care Benefits Benchmarking Surveyfocuses 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 is reported by organization sector, industry group, geographic region, and organization size.  Participation in this survey closes January 31, 2013, and the report will be available April 2013.

The Benefits in Nonprofit Organizations 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 gives nonprofit organizations an inexpensive resource to compare current benefit offerings to those of other nonprofit organizations throughout the U.S.  Data is reported by organization scope, activity area, geographic region, and organization size.  Nonprofit organizations have the opportunity to participate in this survey through March 31, 2013.  The full report will be available July 2013.

Early bird and regular participation rates apply to our benefits surveys as well! For more information, or to get started with participation, visit the Participate & Save! tab via http://salary-surveys.erieri.com.

2012 Compensation Surveys Released

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ERI Salary Surveys has released its 2012 collection of compensation surveys for the United States and Canada. These are true salary surveys, reporting participant data gathered during the pres­ent and prior year (October 2011 – April 2012), complemented by two additional sections of data for comparison purposes. The result is up to three survey sources per benchmark job.

Surveys typically include more than 100 benchmark jobs, from support staff to executive positions. In addition to market-based pay data – annual salary, incentive/variable pay, and total direct annual compensation shown in means, medians, and percentiles – each benchmark position includes a job description, a graph with a trend line and data points, and the Selected Characteristics of the Occupation (SCOs).

Surveys range in price from $489 to $689. All 2012 US surveys are available with national or statewide results. The reports are deliv­ered as a PDF or hardcopy document (with an additional printing and shipping charge applied). For more information and a full list of surveys, please visit our survey page or contact us by phone at (877) 210-6563 or by email at [email protected].

Who Provides Public Services and What Should They Be Paid?

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According to a new GAO report, more states are using expenditures to third-party nongovernmental entities to meet federal spending requirements on such programs as food assistance, employment assistance, and family stabilization assistance – from 3 states in fiscal year 2007 to 13 states in fiscal year 2011.  GAO also asked about future plans, and a total of 17 states indicated that they would be using this option in the near future.  So which organizations will receive this money to provide the services?

Contracting out government services is certainly nothing new. There is a long established practice of contracting out government services in many states, such as Medicaid-financed services to the developmentally disabled, typically to nonprofits.  But there are also many for-profit contractors, especially in construction and computer services.

In several states (New York, Massachusetts, and Illinois), there has been an increasing concern about the compensation of executives at nonprofit organizations that receive these government contracts.  In fact, New York State established a task force to investigate executive compensation at nonprofit organizations that receive taxpayer subsidies from the state.  Some states (including New Jersey, New Hampshire, and Vermont) have discussed setting salary limits for executives at nonprofits that receive state contracts.  This one-size-fits-all approach does not take into account what is reasonable pay for “similar jobs in similar organizations in similar locations,” the criteria used by IRS to determine reasonable compensation (see IRS Form 990 instructions).

A recent analysis of changes in nonprofit employment reported that nonprofit jobs are concentrated in services like health, education, and social assistance, all of which are growth areas for the economy.  For-profit employment growth has actually outpaced that of nonprofits, which is particularly evident in health care services.  Since for-profit companies are now offering services traditionally provided by nonprofits, states have more options in awarding contracts.

As a result, not all government contracts go to nonprofit organizations that report executive compensation on their 990s.  As state and local governments continue to reduce their employment levels, contracting out will continue to grow, and recipients of these contracts will increasingly be a mix of for-profits and nonprofits.  Some have suggested that the compensation of executives at for-profit companies working under state contracts in all areas of government should meet some standard of reasonableness.

Pennsylvania currently requires an analysis of executive compensation as part of the application for state funds.  Before a state grant is given by the Pennsylvania Department of Transportation, documentation of comparative executive salaries is required to ensure that the compensation is not excessive.  ERI’s Executive Compensation Assessor is used to create an analysis that is submitted as part of the grant application to document that executive salaries are justified by comparable data.

Such an analysis of comparable salary data before the contracts are awarded could ensure that tax dollars are spent to provide services and not for excessive executive compensation, regardless of the sector.

Nonprofits Grow but Face Competition from For-Profits

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Some interesting trends are uncovered in the most recent Nonprofit Economic Data Bulletin #39 from the Johns Hopkins Center for Civil Society Studies.  Entitled Holding the Fort: Nonprofit Employment During a Decade of Turmoil, authors Salamon, Sokolowski, and Geller use data collected as part of the Unemployment Insurance program to track trends in nonprofit employment.

While there are caveats about what is included and how entities are categorized, the authors paint an interesting picture of changes in nonprofit employment in the U.S. from 2000 to 2010. Read the whole report for the details.

A quick overview follows:

  • Nonprofit employment totaled nearly 10.7 million in 2010, about 10% of U.S. private employment.
  • The nonprofit sector is the third largest among U.S. industries, behind retail trade and manufacturing.
  • 57% of all nonprofit jobs are in health care; 15% are in educational services; 13% are in social assistance (e.g., individual and family services, community food services, housing services, vocational rehabilitation and child day care).
  • From 2000 to 2010, nonprofit employment grew at an average of 2.1% per year, while the for-profit sector lost jobs an average annual rate of -0.6%.

So why is overall nonprofit employment growing so much faster than overall for-profit employment?  The authors conclude that the major reason is the concentration of nonprofit employment in the service fields (e.g., health, education, and social assistance) that have experienced continued growth.  But interestingly, within these service fields, especially where nonprofits are concentrated, the growth in for-profit employment has actually outpaced nonprofit employment.  For example, a significant amount of health care services are increasingly provided by for-profits.

This means that nonprofits are facing much more competition from for-profits that are moving into services traditionally provided by nonprofits.  What does this mean for the quality of services?  Will there be a significant change in costs for taxpayers, clients, and customers?  Will wages paid to workers providing these services vary by sector or become more uniform across sectors?

Stay tuned, as the academics will analyze the data in a few years. In the meantime, ERI will be collecting data, defining the labor market, and documenting the impact of these structural changes in employment for the practitioners who are tasked with setting appropriate wage levels.  Check out the Nonprofit Comparables Assessor for nonprofit executive salaries and the Salary Assessor for the rest!