Best Practices: Board Governance & Executive Compensation in Non-Profit Mental Hygiene Agencies

1. Best Practices: Board Governance & Executive Compensation in Non-Profit Mental Hygiene Agencies April 2010 Report New York State Commission on Quality of Care And Advocacy For Persons With Disabilities

2. Overview of Presentation • What is CQC and What Does it Do • Why Best Practices & Board Governance • Legal & Regulatory Environment • Best Practices • Overview of Survey Data • Case Example

3. The Commission on Quality of Care and Advocacy for Persons with Disabilities • Created in 1977 – Article 45 MH Law • Independent Oversight Agency • Oversight for all OPWDD, OMH, and OASAS licensed and contracted providers; and for impacted Adult Homes • Approximately 100 Employees

4. Mission Statement To improve the quality of life for persons with disabilities and protect their rights.

5. Core Activities

6. Fiscal Bureau • Charged under NYS law to review the cost effectiveness in the management, supervision, and delivery of mental hygiene services • Investigate allegations of fraud, waste, and abuse • Conduct cost effectiveness studies

7. Why Compensation? • Increased Public Scrutiny • Scandals • Questionable Compensation Arrangements • Current Economic Climate • Compensation Funded Primarily with Gov’t. Funds (e.g. Medicaid) • Need for Transparency and Accountability

8. Common Threads • Inadequate Board Oversight • Executive Self-Interest • Recent Commission Investigations • PSCH, Inc (2008) • Evelyn Douglin Center (2008)

9. PSCH, Inc. • Ex. Dir. Compensation Totaled Over $730,000 • 34% Increase Over 3 Years • Median Compensation at Similar Agencies $260,000 • Executive Director Accrued 351 Vacation Days and 400 Sick Days • Payout Due Upon Separation $673,000 Resolution – ED removed – Restitution to Agency.

10. Evelyn Douglin Center • Over an 8 Year Period The Executive DirectorReceived $143,000 in Salary Above What Was Approved By Board • The Child of The Executive Director Charged $18,000 For Gasoline. • The Agency Provided 13 Vehicles Valued at Over $500,000 to Executive Staff • Resolution – ED removed, Internal Control Improvements

11. Scope of Study • On-line Survey of 1,200 OMH and OPWDD Providers • 750 Responses • 658 Included in Analysis • 31 Site Visits

12. What is Compensation? According to the IRS: Any economic benefit provided either directly or indirectly to an individual in exchange for services rendered. • Wages • Deferred compensation plans • Pension & profit sharing plans • Health insurance premiums • Employer provided auto • Expense accounts • Low or no interest loans • Housing Allowances • Tuition

13. Legal & Regulatory Environment • Compensation Must Be “Reasonable” • New York Not-For-Profit Corporation Law • N-PCL § 202(a)(12) • Fix reasonable compensation • Commensurate with services performed • IRS Intermediate Sanctions Regulations (IRC § 4958) • The amount that would ordinarily be paid for: • Like services • By like enterprises • Under like circumstances

14. Intermediate Sanctions • Most significant event affecting Tax Exempts in over 30 years • Addressed IRS reluctance to Revoke Exempt Status • Allows IRS to impose penalty excise taxes on certain “disqualified persons” and “organization managers” engaging in “excess benefit transactions”

15. Definitions • Disqualified Person • Any person who was in a position to exercise substantial influence over an exempt organization • Officers and directors • Key Employees • Family members of disqualified persons • Substantial contributors • Organization Manager • Any officer, director, trustee, or individual with similar powers or responsibilities

16. Definitions • Excess Benefit Transaction • Any transaction in which the economic benefit provided by an applicable exempt organization directly or indirectly to a disqualified person exceeds the value of the consideration received in return for providing the benefit • Salary (bonuses, deferred compensation) • Fringe Benefits • Low or no interest loans • Sales and exchanges • Leases

17. Excise Tax • Correction of Transaction • 1st Tier Tax 25% • 2nd Tier Tax 200% • Tax on Organization Managers 10%

18. Example Executive Director of XYZ Charity, Inc. Salary $250,000 Deferred Comp. 30,000 Other Fringe Benefits 20,000 $300,000

19. Example (continued) IRS asserts value of services at $200,000 Penalty on Disqualified Person: Excess Benefit $100,000 Excise Tax 25,000 Total $125,000 * * ($300,000 - $200,000 = $100,000)

20. Example (continued) If transaction is not corrected: Return of Excess Benefit $100,000 1st Tier Tax 25,000 2nd Tier Tax 200,000 Total $325,000 Correction must be made by the earlier of the date of mailing of a notice of deficiency or the date on which the tax is assessed

21. Example (continued) Penalty on Organization Manager(s): Excise Tax $10,000 ($100,000 x 10% = $10,000)

22. Rebuttable Presumption of Reasonableness • The compensation arrangement must be approved in advance by an authorized body of organization • Members must be free of conflicts of interest • Use appropriate comparability data • Document basis for determination • Terms • Date Approved • Who voted for and against • Comparability data actually used • Must be contemporaneous

23. Best Practices • Identify all forms of compensation • Use employment contracts • Obtain appropriate comparability data • Independent board approval • Good documentation • Full disclosure

24. Best Practices • Identify all forms of compensation • Any economic benefit received • Providers routinely focus on salary alone Salary accounted for 84 % of total reported compensation

25. Best Practices • Use employment contracts • Detail compensation arrangement • Employer/employee expectations • Personnel policies 38 % of survey respondents had employment contracts

26. Best Practices • 3. Comparability data • Select appropriate data • Similar job titles • Similar size • Similar purpose • Geographic area • Avoid heavy reliance on a single comparable • Common sources of compensation data • Guidestar (www.guidestar.org) • Attorney General’s Charities Bureau (http://www.charitiesnys.com) • Trade associations • Compensation consultant 70 % of survey respondents reported using comparability data

27. Best Practices • 4. Board approval • In advance of payment • Independence • Conflict of interest policy 95 % of survey respondents said the Board approved CEO compensation

28. Best Practices • 5. Documentation • Comparability data • Deliberations • Record actual vote of each member • Date of approval 79 % of survey respondents said approval was documented in board minutes 58 % of survey respondents said the Board had a compensation committee

29. Best Practices • 6. Disclosure • IRS Form 990 • CFR • W-2

30. Survey Data

31. Executive Director Compensation (Including Benefits)

32. Statistical Results • Factors Impacting Compensation • Agency Revenue • Geographic Region • Tenure

33. Regions Evaluated } NY City Long Island Westchester, Putnam and Rockland Counties Hudson River Valley Central/Western NY NYC and Long Island } Rest of State

35. Tenure and Median Compensation 12 Yrs 11 Yrs 6 Yrs 14 Yrs 10 Yrs

36. Quartile Approach • Using quartiles simply means dividing a data set into four equal parts. 75th Percentile - 50th Percentile - 25th Percentile -

40. Case Example ABC Community Services, Inc. Employee Profile 20 Years Experience in Field 8 Years with Agency 3 Years as Executive Director Recently Completed Reorganization of Agency Improved Service Delivery Improved Financial Position MSW/MBA • Agency Located in New York City Area • Annual Revenues Totaling $17 Million

42. Case Example

43. Case Example 75th Percentile $280,400 • Potential Factors to be Considered by the Board • Agency Size • Tenure • Education/Experience • Performance/Achievements • Market Competition Median $208,300 25th Percentile $171,600

44. Case Example Compensation Package: Annual Salary $150,000 Deferred Compensation 30,000 Health & Welfare Benefits 10,000 Life Insurance 5,000 Expense Account 5,000 Total Compensation $200,000

45. Case Example Important Concepts • Include All Forms of Compensation • Use Sufficient Objective Data • Good Documentation • Comparative Data • Approval • Employment Contract • Independence

46. IRS Form 990

47. Form 990 Questions on Excess Benefit Transactions

48. Form 990 Questions on Governance Policies

49. Form 990 Questions on Compensation

50. Form 990 as a Source for Comparables • Form 990 - Part VII • Contains compensation of officers, directors, trustees, key employees, highest compensated employees, and independent contractors • Form 990 - Schedule J • Contains compensation of officers, directors, trustees, key employees, and highest compensated employees (for those which exceed $150,000) • Form 990 – Schedule O • May contain supplemental narrative on compensation