N.H. AG announces executive compensation report by NHCPPS

Bryan Cohen Jul. 3, 2012, 7:27am


CONCORD, N.H. (Legal Newsline) - New Hampshire Attorney General Michael Delaney announced Monday that the New Hampshire Center for Public Policy Studies has issued a report on executive compensation at the state's non-profit hospitals.

The review by the NHCPPS is meant to determine if the trustees of the state's non-profit hospitals meet their fiduciary responsibilities by setting executive compensation and to examine the variations and types of executive compensation of the hospitals.

Delaney has common law and statutory authority to protect the interest of the public in the assets committed to charitable purposes. Delaney's office commissioned the center to conduct the study in 2011.

"It is the role and responsibility of the Department of Justice, through the director of vharitable yrusts, to ensure all nonprofits, including nonprofit hospitals, carry out their fiduciary duties and direct all of the charity's resources towards accomplishing its mission," Delaney said.

The report found that most hospitals in the state follow the Internal Revenue Services' process for determining executive salaries, but it found that the hospitals do not necessarily follow the IRS process in coming up with other forms of executive compensation in bonuses, perquisites and retention and hiring agreements. Supplementary forms of compensation may constitute a significant part of an executive's pay package.

The report also found that while most hospitals have a correlation between hospital size and levels of compensation paid to the CEO, there is not a significant correlation between CEO compensation and hospital performance measures like charitable care provided, cost of care or quality of care. Because non-profit hospitals exist to provide quality healthcare and must provide charitable care and community benefit, the lack of a correlation between hospital performance measures and compensation may be an issue.

In addition, the report found that by using IRS guidelines to set compensation a log-rolling effect can be created, which will keep the industry in compliance with IRS guidelines as long as other hospitals continue to move the log forward with similar compensation levels. Hospitals must use a range of salaries when setting CEO compensation, but in practice, hospitals usually target the 75 percentile or higher when setting CEO compensation. Setting a CEO salary in this way creates an upward spiral in which executive compensation grows at a rate disproportionate to measures of relevant achievement or increases experienced by other population sectors. The report found that the salary increase continued to occur despite the economic downturn since 2008.

The review included all 23 of the state's non-profit hospitals. The hospitals have many variations in size, geographic area served, population density within the area served and types of hospitals between them. Due to the many differences, the impact of outliers was considered in drawing conclusions. The report showed that the average CEO compensation in New Hampshire was $485,664 in 2008, while the highest CEO compensation of $1,359,848 at Catholic Medical Center was close to three times the average despite the patient revenue representing only the fourth highest. The average CEO compensation for all the hospitals dropped eight percent when CMC was excluded from the calculation.

IRS guidelines state that non-profit hospitals must use appropriate data to determine reasonable compensation and do not require that performance measures be included in the deliberations. Most hospitals do report using CEO achievements as part of reviewing compensation. The report used the three performance measures of cost ranking, quality of care and charitable care provided and found no strong correlation between performance and compensation, which may mean the report's performance measures do not line up with what the hospital uses for performance metrics. It is possible that the log-rolling effect may have a stronger influence on compensation than performance.

Delaney's office drew the conclusion from the report that New Hampshire's hospitals and their boards must go beyond the minimum standards of the IRS in determining executive compensation and should move in the direction suggested by the recommendations in the report. Recommendations include using a broad set of comparisons in setting compensation and connecting that compensation with performance measures. Such consideration and board oversight can also be applied to all forms of executive compensation such as annual bonuses, hiring and retention incentive and other perquisites.

Delaney said that the findings of the report will provide a basis for public discourse regarding the executive compensation and charitable mission at New Hampshire non-profit hospitals.

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