Fewer than 10% of Federally Qualified Health Centers (FQHCs) nationwide follow best practice Chief Executive Officer (CEO) compensation governance processes, less than a quarter have an appropriate decision-making process in place for determining CEO compensation from year to year, and nearly 40% make decisions on CEO compensation without using competitive labor market information. Almost of a fifth of FQHCs do not even report that CEO compensation decisions are approved by their Boards. These are some of the most dramatic findings from Merces Consulting Group, Inc.’s (Merces) annual study of the most recently submitted IRS Form 990s from more than 1100 FQHCs nationwide.
The need for proper CEO compensation governance programs goes well beyond concerns over whether the Internal Revenue Service will determine any particular pay level to be “unreasonable.” As has been addressed several times before in this blog, the truth is that the actual levels of compensation paid in the vast majority of FQHCs are well below those paid to organizations of comparable size in other industries (non-profit and for-profit); most FQHC CEOs are paid at or about competitive levels within the industry, and very few would likely be challenged or worth the while of an IRS auditor. While some might fear “intermediate sanctions,” the real fear should be the exposure the organization has to its employees, members of the community, other social service organizations with which the FQHC may partner, and perhaps most of all, the media. The relative ease of access to Form 990 information (as evidenced by this study, which required no more than internet access and willing interns to conduct), along with the relative lack of apparent governance processes, opens the typical FQHC up to unneeded, and likely unwarranted, scrutiny.
Just over six percent (6.3%) of FQHCs report using all of the elements of the best practice model available on Schedule J — use of a compensation committee, reports from an Independent Compensation Consultant, use of compensation surveys and Board approval of compensation decisions. The likelihood of a best practice approach increases with the size of an FQHC, from less than five percent of the smallest organizations to the lower teens (11-13% for organizations with 20-50 million in annual revenue). If you want to accuse us of being self serving by including the Independent Compensation Consultant requirement, consider the fact that if you take it out, there are still only about a fifth of FQHCs with a “best practice minus” program.
Only about one-quarter (26.3%) of FQHCs reported the use of a Compensation Committee. Of much greater concern than the relatively low incidence of Compensation Committees is the fact that nearly a fifth of FQHCs (19.3%) do not include approval by the Board or compensation committee. This should raise significant questions concerning the governance of the FQHC, and could not help but have outsiders ask “who is in charge?” Are compensation decisions being made by the CEO? The Board Chair alone? This potential lack of control should be the first item addressed by any Board member who looks at their 990 and does not see this box checked.
A finding that both surprised and frightened us was that about 40% of FQHCs did not report the use of any reasonable source of competitive data in making their compensation decisions. While about 55% reported the use of compensation surveys, an astonishing 62% of the smallest FQHCs (under $5 million) did not use any data at all.
In the next few weeks, Merces will be releasing study statistics on actual compensation levels paid to more than 2,500 key staff members. The data will be analyzed overall, by FQHC size and by region. Detail on base pay and incentives, deferred compensation, as well as W-2 income and total direct compensation will be available. For transcripts of the full articles, contact me at firstname.lastname@example.org; more information will be loaded on our website at mercesconsulting.com.