One of my FQHC colleagues described the Form 990 as the ultimate public relations piece. After all, it contains a ton of information, including a lot that can make you look bad, or at least appear to look bad. Given that, in a vacuum, people tend to see what they want to see, why not make your Form 990 work for you — provide answers to everyone’s questions before they are even asked.
It seems from our research that the compensation sections (e.g., Part VII, Schedule J) of a high percentage of FQHC Form 990s aren’t filled out very well. It’s difficult to tell when the “check boxes” are checked correctly… more FQHCs seem to under-check rather than over-check. The real test is how the Schedule O supplemental explanations have been written. To be brutally honest, most aren’t written very well. They look like stock “copy and paste” text from a series of options in an auditor’s computer program. Most are uninformative. Sometimes they aren’t actually the methods that are being used to manage compensation; I once shocked a Board who had never seen a compensation survey by reading to them their Form 990 Schedule O that said that the Board annually reviewed several studies and established a competitive salary based on them. Here are some tips for making yours informative, transparent, and less likely to cause people to wonder “how did they decide how much to pay?”
- Describe your Board-approved compensation philosophy: For example, “the Board’s philosophy is to target compensation opportunities at the median of the market for comparable FQHCs and other not-for-profit health care organizations” would be descriptive of a typical philosophy.
- Explain who is responsible for collecting and analyzing information. “The Compensation Committee reviews competitive data,” or “the Board retains the services of [fill in the blank], an Independent Compensation Consultant, who provides competitive data.”
- Describe the data that is used: “Competitive information is collected from the NACHC Compensation & Benefits Survey, the Our State Primary Care Association Survey and surveys conducted by ABC Consulting Firm.” “The analysis includes data from several published surveys of FQHC compensation, as well as a review of the Form 990 submissions of 50 comparable FQHCs.”
- Explain how the data is used. For example, “the competitive data is used to establish a salary range with the midpoint set at the labor market rate,” or “the formal salary range has a minimum set at the 25th percentile and the maximum at the 75th percentile of the competitive data.”
- Describe how the CEO’s actual salary is set. Examples: “The Board determines the part of the range appropriate for the performance of the CEO,” or “the performance rating from the last year determines the percentage increase to be given to the CEO,” or “the increase, if any, for the CEO is based on their performance rating and position in the salary range.”
For most of our FQHC clients, a Schedule O description could read like this:
“The Board of Directors has established an executive compensation philosophy with compensation opportunities set at the median of the competitive labor market, described as comparable FQHCs and other not for profit health care organizations in our state and region. The Board retains the services of Merces Consulting Group, Inc, an Independent Compensation Consulting firm, who collects, analyzes and reports data on comparable organizations from a variety of published surveys, including national and state primary care associations as well as Form 990s. Each year a salary range is established with a midpoint set at the competitive market rate: the range is divided into segments appropriate for various levels of long-term performance. The Compensation Committee, consisting of disinterested Directors, completes the performance appraisal for the CEO, with input from other Board members, and determines what part of the range is appropriate for the CEO, and what increase, if any, is warranted. The Consultant’s report, the Committee’s performance review and recommendations for an increase are submitted to the full Board for approval.”
Every organization’s disclosure should reflect its processes and methodology. Whatever that is, describe it in such a way that it is clear that there is a governance process, an objective methodology, and nothing left to wonder about. Any number of people and organizations, including government agencies, grantors, the public and the media, will be looking at your 990, and what they all want to see is that decisions are made based on what is best for the organization.
If you are a Board member curious about “best practice” compensation governance, or an executive concerned with the way pay is managed in your organization, contact me at email@example.com, or review the information on our website at www.mercesconsulting.com