Author: ERI

New ERI White Paper: For-profit Filings in US and Canada

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In “Overview of Publicly Traded Financial and Compensation Disclosures in North America,” ERI Researcher Rick Pemmant examines the governing authorities directing disclosures in the United States and Canada, the actual requirements imposed on publicly traded organizations, and where the data is made available to the public.

Pemmant highlights financial information found in several Securities and Exchange Commission (SEC) forms, such as the filing Form 10-K, as well as executive compensation data reported in the Summary Compensation Table and Compensation Discussion and Analysis sections of the Annual Proxy Statement.

Additionally, Pemmant covers filing regulations through provincial and territorial securities commissions in Canada, and the country’s pending formation of a federal agency through the Canadian Securities Act.

Complimentary ERI Research White Papers are available for download via www.erieri.com.

Payless Shoes Fits the ERI Executive Compensation Index

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ERI Economic Research Institute’s Executive Compensation Index for the first half of 2011 indicated that restricted stock awards increased 27.8%, and bonuses and non-equity incentives increased 32%, while base salaries and stock option awards were relatively constant for the year. These results aligned with the bearish market, conservative spending, and shareholder activism against excessive risk compensation practices that were prevalent for the time period covered, which continue to spill over to current conditions.

Reviewing recent proxy statements, we identified Collective Brands Inc., most popularly known for Payless store brand, as an excellent example that demonstrated these trends. Based on the below Summary Compensation Table, between 2008 and 2009, the company’s CEO, Matthew E. Rubel, received a 55.0% increase in non-equity incentives from $1,166,996 to $1,808,835. In 2010, his non-equity incentive compensation had climbed another 31.8% to $2,383,853.  While Rubel’s stock award compensation decreased 67.8% in 2009 from its 2008 value of $1,436,369, by 2010, it had risen to $1,954,613 — a net increase of 36.1%. Also, his base salary had a net change of only 3.5%, similar to the index trend.

On the business side under Rubel’s leadership in 2010, Collective Brands improved free cash flow, expanded operations in non-U.S. locations, and continued to successfully leverage its hybrid business model of store franchises, store ownership, and wholesale licensing. Further review of its stock price performance, we see some volatility in the stock, which can be expected with implementing business expansion strategy largely focused on international markets. Over a 24-month period, the stock price fluctuated from $9 to $26; at the time of the annual meeting, it was $15, then at year-end 2010, it was $21.

Collective Brands executive compensation recommendation garnered an 88.3% favorable Say on Pay vote from its shareholders at its recent annual meeting held on May 26, 2011. When anything less than a 70% favorable vote is considered a failed vote, 88.3% favorable vote is a commendable accomplishment. It appears Collective Brands success can be attributed to having rebalanced their executive compensation programs to improve transparency while also demonstrating pay-for-performance alignment.

Senator Grassley Requests Examination of Public Charity Definition

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At the Senate Finance Committee Hearing, “Tax Reform Options: Incentives for Charitable Giving” on October 18, 2011, the ability for individual taxpayers to deduct charitable contributions was the major focus, as the search for additional sources of tax revenue and discussion of tax reform are getting serious in these tight economic times.

Over the years, there have been various proposals for changing the current system, as legislators try to balance the cost in lost tax revenue with the adverse impact of a change on giving to charities. The Joint Committee on Taxation prepared a paper outlining the current system and its history and discussing the potential impact of various proposals (expanding the charitable deduction to all taxpayers with a 1% floor; adding a floor but converting the tax deduction to a credit; capping itemized deductions, etc.). This is a must read for charities that receive a large proportion of their revenue from individual donors.

Iowa Senator Chuck Grassley, while supporting the current system of deductions at the hearing, also requested that the committee examine the types of organizations that benefit from the incentives for charitable giving, regardless of how the incentive is structured. His concern was that the deduction for donations of cash and publicly traded securities to public charities is now limited to 50% of adjusted gross income and 30% for other non-cash donations. These percentages drop to 30% and 20% if the donations are to a private foundation. So if an organization changes its status, donors will be able to increase their tax savings.

While this may sound obscure, Grassley’s research shows that since tax-exemption rules were significantly changed in 1969, there has been an explosion in asset-accumulating public charities that are not subject to pay-out requirements or the other private foundation rules, such as restrictions on self-dealing and excise taxes on investment income. He has included examples of subsidies provided to donors, in his October 17, 2011, letter to the Treasury and IRS. He states that this charitable loophole results in a big subsidy from taxpayers to a few already rich individuals and very little money for charities.

The discussion of the costs and benefits of the charitable deduction is not a new one, but Grassley’s call to examine what he calls “the increasingly blurred line between public charities and private foundations” adds another dimension to the ongoing debate. The need for federal revenue is clearly a major factor in driving tax reform, but it is certainly unclear what any reform might include at this time, and how it might impact charitable giving.

ERI Survey Shows 2012 U.S. Salary Increases of 2.8% Planned

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While the strength of the U.S. economy remains uncertain, companies are still budgeting for some salary increases, according to the recently released ERI Economic Research Institute’s 2011 Salary Increase Survey. According to the survey, last year’s increase in salary budgets averaged only 2.2%, and 2.8% is budgeted for the coming year. Thus the trend of modest increases in salary and incentive budgets in recent years continues.

The salary increase received by any individual employee, in any specific job, and in any specific industry, may be very different from the average, however. Increases tend to be more and more based on what people do and the industry of their employers. In general, individuals who earn less are seeing lower increases, while more skilled and higher earning individuals within certain job groups receive more. As usual, there is no recession for key skills and talent.

ERI Economic Research Institute has been providing estimates of salary structure, budget, and merit increases since 1987. ERI uses this data in its Assessor Series® compensation survey software, which creates reports and analyses used by subscribers to set pay for more than 10 million employees. While other salary increase reports are based on information from a limited number of organizations on what they are projecting to pay (for example, traditional surveys ask what increases are projected for January 2012), ERI collects data throughout the year from its subscribers, allowing a continuously updated and detailed report that tracks trends much more precisely.

The 2011 ERI Salary Increase Report also details pay increases by broad job functions and here is where the differences begin to emerge.

The 2011 ERI Salary Increase Survey provides information on what increases were paid last year and what is expected for the coming year by industry, broad job function, individual job title, and geography. Get more information and order at www.erieri.com or call 800-627-3697.  ERI Assessor Series subscribers can access this ERI Salary Increase Report for free.

Pay for Charity Board Members Under Fire

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In Massachusetts, paying charity board members could actually be against the law; if House Bill 3516 is passed. Massachusetts Attorney General Martha Coakley testified in September that paying directors creates an inherent conflict of interest. According to ERI’s analysis of compensation reported on Form 990s, the overwhelming majority of nonprofits do not pay their directors, but expect them to serve without pay because of their commitment to the mission of the organization.

The legislation in Massachusetts was proposed when a study completed by the Attorney General’s office found that the state’s four largest health insurers — Blue Cross Blue Shield of Massachusetts, Harvard Pilgrim Health Plan, Tufts Health Plan and Fallon Health Plan — all paid their directors.  They were asked to justify the payments, but the AG did not find their rationales convincing. Since the introduction of the bill, Blue Cross and Fallon have stopped paying their directors, but Tufts and Harvard Pilgrim have not.

Even without the legislation, charities in Massachusetts that pay their directors now have to submit an annual statement detailing the basis for payment and these will be made available to the public in an annual report.

Charity associations such as Independent Sector have long been recommending that board members serve without pay. For example, Independent Sector’s publication Principles for Good Governance and Ethical Practice includes a statement that:

Board members are generally expected to serve without compensation, other than reimbursement for expenses incurred to fulfill their board duties. A charitable organization that provides compensation to its board members should use appropriate comparability data to determine the amount to be paid, document the decision and provide full disclosure to anyone, upon request, of the amount and rationale for the compensation.

In fact, most board members give money to their charities rather than receive pay for their services. According to a recent BoardSource survey, 68 percent of nonprofit organizations have a policy requiring board members to make a personal contribution on an annual basis. Boards average 74 percent participation in giving; in the arts and cultural organizations, even more organizations require annual contributions.

So if your organization pays its board members, make sure you have good comparable data to justify those payments.

What’s Ahead for Nonprofit Executive Salary Increases? Not Too Much!

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The Chronicle of Philanthropy recently reported that planned increases for CEOs of charities and foundations will be modest again in the coming year–averaging around 3%. The median increase from 2009 to 2010 was a modest 2%. However, bad economic signs could affect those planned increases, as budgets for 2012 are getting finalized now.

The medians do not tell the whole story. The answer to what your nonprofit should pay its executives is, as usual, “It depends.” Some organizations may want to start rewarding their executives who have received no or very small raises since 2008. Other boards fear that a top performer with a stagnating salary may not stay, so increases are needed. Other organizations may be more concerned about the public perception of increasing executive salaries while unemployment is persistently high and the economy uncertain. Some are keeping salaries frozen or even decreasing them, as their funding is uncertain and asset levels are still lower than they were several years ago.

If boards do decide to increase an executive’s salary, it is more important than ever to be careful that the increase will be recognized as appropriate by clients, donors, and even state regulators. The board must be able to provide a rationale. If the charity is paying a bonus, the payment must be clearly based on goals meaningful to the organization.

Sometimes, when boards are looking for a new CEO, they may be more concerned about finding the best person, rather than the public perception of the salary. However, creating the rationale for the salary is crucial, because inevitably there will be public–and regulator–scrutiny.

The best way to set the salaries is to do what the IRS wants–look at comparable salaries for similar jobs in similar organizations. A simple way to do that is to use ERI’s Nonprofit Comparables Assessor. Select the geographic location, the type of service provided, and the revenue size, and instantly find the average salary for all of the organizations who report compensation data on their Forms 990. The free demo version of the software will provide the information needed for most charities to make a data-based decision on executive compensation that will satisfy all stakeholders.

An End to the Form 990 Revision Process – Mostly!

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Form 990 revisions started by the IRS in 2007 (incorporated in the 2008 Form 990, typically filed in 2009) are at last final! Form 990 had not been significantly revised since 1979, and both the IRS and those having to file the form and use the data were in agreement that major revisions were needed to reflect changes in the law and with the increasing size, diversity, and complexity of the tax-exempt sector. The redesign was a collaborative process with a public comment process that included more than 800 comments. These final regulations represent a milestone.

For those concerned with compensation, there were many important changes in reporting requirements, including new threshold amounts for reporting compensation and a requirement that compensation be reported on a calendar year basis, whatever the fiscal year of the organization. See all of the details in the instructions and in the Form itself here. Each year, the IRS provides a summary about all the changes from year to year. Click here for the 2010 details.

While Form 990 is done, Form 990-PF for private foundations and Form 990-EZ for smaller nonprofits remain unrevised. The IRS has said that prospects for changes in these forms are going to be done in the near future because of budget constraints.

And don’t expect the minor changes in Form 990 to end — the IRS continues to refine and address issues with all of its forms on a continuous basis, so while these major revisions are done, all filers have to read the instructions carefully each year.

New ERI White Paper – Hospital CEOs’ Incentive Plans

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ERI Economic Research Institute’s recent white paper, “Publicly-Traded U.S. Hospital Systems and 2010 Annual Incentive Performance Plans” by Malak Kazan, Senior Associate, is available for download via www.erieri.com.

“The Health Care industry continues to transform amidst regulatory changes and in response to patients’ demands,” notes Kazan.

In the report, Kazan analyzes CEO annual cash compensation for the top five publicly-traded hospital systems and reviews the corresponding incentive plan performance measures.

When was the Last Time You Adjusted Your Salary Structures for Compensation Planning?

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Get ready for 2011 merit increases and compensation planning. Historically, at this time of the year, most compensation professionals on a fiscal calendar planning cycle begin “kicking off” their communications and planning calendars. Many anticipate this year to have the highest merit increases since the 2007 financial crisis, after “tightening the belts” the past few years.

Two things will be required to have an effective compensation planning cycle for 2011: Job Evaluations and Salary Structure Adjustments. Since workers are doing more with less, their jobs have likely changed, creating new hybrid jobs. Job evaluations to re-validate core benchmark jobs serve as a foundation for determining the salary structure adjustments. Unfortunately, there are no shortcuts here. Let’s take, for example, a retail organization in West Lafayette, Indiana, named Jenny Jeans. Two benchmark jobs, Warehouse Worker and Merchandise Marker, are representative of 15% of the company’s workforce and are in the same salary grade. The Compensation Analyst conducts a job analysis doing an on-site visit and concludes these two jobs have melded together to become a hybrid job subsequent to job losses experienced at the organization and is now titled Warehouse Merchandise Specialist. The new hybrid job responsibilities are weighted 40% Merchandise Marker and 60% Warehouse Worker.

Now, we want to market-price the core benchmark jobs (Cashier, Packer, and Warehouse Merchandise Specialist) in this salary grade and determine the adjustment to this grade within Jenny Jeans’ overall salary structure. To do this you will need to have access to recent salary survey data. Once you have the external data, market-price the benchmark jobs, calculate the differential between the market data and the actual internal pay rates and determine the adjustment to the midpoint or control point of the salary grade that is aligned with overall business objective and strategy. (Note, the market data has been adjusted to the January 2, 2012, effective planning date for the merit increases.) The minimum and maximum of the grade should be adjusted keeping the current spread (unless you are considering redesigning the overall structure, which is beyond the scope of this blog).

This process will need to be repeated for each salary grade in your salary structure. If you have any questions about the tools used in these explanations, please contact ERI at 800.627.3697.

New York State to Review Nonprofit Executive Salaries

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New York Governor Andrew M. Cuomo recently announced the creation of a task force to investigate executive compensation of nonprofit organizations that receive taxpayer subsidies from the state.  An article in The New York Times triggered interest from the state, highlighting salaries at nonprofit organizations that provide Medicaid-financed services to developmentally disabled New Yorkers. Using comparable salary data from ERI Economic Research Institute, research found that the Young Adult Institute was paying the two brothers, who led the organization since the 1970s, far in excess of what other similar nonprofits paid.  In fact, Philip and Joel Levy each received close to $1 million a year at the peak of their earnings.

The Times article included a list of executives of other providers of Medicaid-financed services to developmentally disabled people who were paid more than $500,000, most considerably above the average chief executive salary for similarly-sized nonprofit groups in the state.

While there are no state rules governing executive or administrative compensation at groups that receive state subsidies, the task force will focus on auditing current compensation levels and recommending rules to ensure that money is not wasted on excessive salaries and compensation. Some states, like New Jersey, New Hampshire, and Vermont, have considered salary limits and even caps – say, $250,000 – for nonprofit contractors, but that does not take into account what is reasonable pay for similar jobs in similar organizations in similar locations.  One size does not fit all, and it is important to look at comparable data to really determine what is reasonable compensation.  That is what the IRS expects a nonprofit to do when setting executive compensation. See the IRS Form 990 instructions for more information on what IRS wants.

Doug Sauer, chief executive of the New York Council of Nonprofits, raised a valid point in response.  He suggested that the governor’s task force should also examine the compensation of executives at for-profit companies working under state contracts in other areas of government.

One nearby state – Pennsylvania – has taken an interesting approach that perhaps New York State should consider.  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.  The state actually requires the use of ERI’s Executive Compensation Assessor to create an analysis that is submitted as a part of the grant application to document that executive salaries are justified by comparable data.

Requiring the submission of comparable salary data for both nonprofit and for-profit government contractors before the contracts are awarded could help ensure that tax dollars are spent to provide services rather than enrich the executives from either sector.  Let’s see if the New York State task force comes up with such a sensible and practical recommendation!