This is the accessible text file for GAO report number GAO-06-907R entitled 'Nonprofit Hospital Systems: Survey on Executive Compensation Policies and Practices' which was released on July 31, 2006. This text file was formatted by the U.S. Government Accountability Office (GAO) to be accessible to users with visual impairments, as part of a longer term project to improve GAO products' accessibility. Every attempt has been made to maintain the structural and data integrity of the original printed product. Accessibility features, such as text descriptions of tables, consecutively numbered footnotes placed at the end of the file, and the text of agency comment letters, are provided but may not exactly duplicate the presentation or format of the printed version. The portable document format (PDF) file is an exact electronic replica of the printed version. We welcome your feedback. Please E-mail your comments regarding the contents or accessibility features of this document to Webmaster@gao.gov. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. Because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. June 30, 2006: The Honorable William M. Thomas: Chairman: Committee on Ways and Means: House of Representatives: Subject: Nonprofit Hospital Systems: Survey on Executive Compensation Policies and Practices: Dear Mr. Chairman: As a part of Congress's continuing efforts to oversee the activities of the nonprofit sector, you asked us to review executive compensation issues at selected private, nonprofit hospital systems to gain an understanding of the policies and practices related to the salaries, benefits, travel, gifts, and entertainment expenses paid by these hospital systems. Our study's key questions were as follows: * What corporate governance structure do selected hospital systems report as having in place over executive compensation? * What is the basis for the compensation and benefits earned by, awarded to, or paid to the executives as reported by selected hospital systems? * What internal controls do selected hospital systems report as having in place over the approval, payment, and monitoring of executive travel and entertainment expenses, gifts, and other perquisites? In answering our study's key questions, we used the American Hospital Association's AHA Guide (2005) to identify private, nonprofit hospital systems according to the number of staffed beds reported. We developed an electronic survey to gather information from selected hospital systems and administered the survey in two phases. In the first phase, we judgmentally selected 15 hospital systems considering geographic diversity. At least 1 hospital system was selected from each of the nine geographic regions, as defined by the Census Bureau. We briefed your staff on the results of our initial survey and, at your request, selected an additional 85 hospital systems to survey. The 15 and 85 hospital systems combined were the top 100 that we identified from the AHA Guide (2005). We revised our initial survey instrument based on responses received. We analyzed the survey responses to identify unusual, incomplete, or inconsistent responses and followed up with the hospital systems to the extent possible after considering any survey comments provided. We did not seek to validate the responses provided. Our survey was not designed to draw any conclusions with respect to the adequacy or sufficiency of the policies, practices, or procedures of any individual hospital system or whether hospital systems are complying with applicable laws and regulations. Since we did not randomly sample from the entire population of private, nonprofit hospital systems, we could not generalize the results of our work to this population. We conducted our work from June 2005 through June 2006 in accordance with generally accepted government auditing standards. On June 5, 2006, we briefed your staff on the results of our work. This report transmits the briefing provided to your staff, as amended to reflect some additional observations (see Enclosure I). This report also includes a copy of the survey instrument with the number of responses to each question (see Enclosure II). Summary: We received responses from 65 of the 100 hospital systems. The hospital systems reported similarities in certain governance and compensation policies and practices. For example, hospital systems commonly reported policies and practices such as: * having an executive compensation committee or entire board with primary responsibility for approving executives' base salary, bonuses, and perquisites; * having a conflict of interest policy that covers members of the executive compensation committee and compensation consultants; and: * relying upon comparable market data of total compensation and benefits prior to making compensation determinations. With respect to perquisites and entertainment and travel expenses for their executives and the related internal control for these payments, the 65 hospital systems reported a range of practices. For example, hospital systems commonly reported that they provide for payment of automobile-related expenses as a perquisite to executives. They also commonly reported having written policies that cover business travel and entertainment expenses. However, hospital systems reported a mix of practices related to payment for other perquisites such as memberships in recreational and social clubs and audits of perquisites and entertainment expenses. As we agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. At that time, we will send copies to the Ranking Minority Member of your Committee and other interested congressional committees. We will also make copies available to others upon request. In addition, the report will be available at no charge on GAO's Web site at [Hyperlink, http://www.gao.gov]. If you have any questions about this report, please contact me at (206) 287-4809 or by e-mail at calboml@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this assignment include Kimberly Brooks (Assistant Director), Cindy Gilbert, Curtis Groves, Bret Kressin, Matt Michaels, Scott McNulty, and Terry Richardson. Sincerely yours, Signed by: Linda M. Calbom: Director: Financial Management and Assurance: Enclosures - 2: Enclosure I - Briefing on Survey Results: Nonprofit Hospital Systems: Survey on Executive Compensation Policies and Practices: Briefing Chairman, Committee on Ways and Means House of Representatives: Contents: * Objectives, Scope, and Methodology * Results in Brief: * Background: * Survey Results: Objectives, Scope, and Methodology: The Chairman of the House Ways and Means Committee asked GAO to review executive compensation issues at selected private, nonprofit hospital systems, including the policies and practices related to the salaries, benefits, travel, gifts, and entertainment expenses paid by the hospital systems. The study's key questions were as follows: What corporate governance structure do selected hospital systems report as having in place over executive compensation? What is the basis for the compensation and benefits earned by, awarded to, or paid to executives as reported by selected hospital systems? What internal controls do selected hospital systems report as having in place over the approval, payment, and monitoring of executive travel and entertainment expenses, gifts, and other perquisites? We used the American Hospital Association's AHA Guide (2005) to identify private, nonprofit hospital systems according to the number of staffed beds reported. We identified 172 systems as private, nonprofit systems within the top 200 private or nonfederal governmental hospital systems (state or local) that we identified from the guide. We developed an electronic survey to gather information from selected hospital systems and administered the survey in two phases. Although the majority of survey questions were closed-ended, hospital systems were given the opportunity at the end of the survey to provide comments about any of the questions. In the first phase, we judgmentally selected 15 hospital systems from the list of 172 considering geographic diversity. At least 1 hospital system was selected from each of the nine geographic regions as defined by the Census Bureau. We briefed your staff on the results of our initial survey and, at your request, selected an additional 85 hospital systems to survey. The 15 and 85 hospital systems combined were the top 100 from our list of 172 systems. We revised our initial survey instrument based on responses received. We also followed up with the 13 hospital systems that responded during the first phase to obtain their responses to questions that were either added or modified from the initial survey. We provided an opportunity for the two hospital systems that did not respond during the first phase to respond during the second phase; one of these two ultimately did respond. We analyzed the survey responses to identify unusual, incomplete, or inconsistent responses and followed up with the hospital systems to the extent possible after considering any survey comments provided. We did not seek to validate the responses provided. Our survey was not designed to draw any conclusions with respect to the adequacy or sufficiency of the policies, practices, or procedures of any individual hospital system or whether hospital systems are complying with applicable laws and regulations. Since we did not randomly sample from the entire population of private, nonprofit hospital systems, we could not generalize the results of our work to this population. We conducted our work between June 2005 and June 2006 in accordance with generally accepted government auditing standards. Results in Brief: We received responses from 65 of the 100 hospital systems. The hospital systems reported similarities in certain governance and compensation policies and practices. For example, hospital systems commonly reported policies and practices such as: having an executive compensation committee or entire board with primary responsibility for approving executives' base salary, bonuses, and perquisites; having a conflict of interest policy that covers members of the executive compensation committee and compensation consultants; and: relying upon comparable market data of total compensation and benefits prior to making compensation determinations. With respect to perquisites, entertainment and travel expenses and related internal control for their executives, the 65 hospital systems reported a range of practices. For example, hospital systems commonly reported that they provide for payment of automobile-related expenses as a perquisite to executives. They also commonly reported having written policies that cover business travel and entertainment expenses. However, hospital systems reported a mix of practices related to payment for other perquisites, such as memberships in recreational and social clubs and audits of perquisites and entertainment expenses. Background: The AHA Guide (2005) defines hospital systems as consisting of two or more hospitals owned, leased, sponsored, or contract-managed by a central organization, or consisting of a single, freestanding hospital that includes as members three or more owned or leased nonhospital health care organizations. Hospital systems are classified as "501(c)(3)" organizations exempt from taxation under 26 U.S.C. § 501 (a) if (1) they serve a charitable purpose, (2) no part of their net earnings goes to the benefit of any private shareholder or individual, and (3) they do not participate in political campaigns for or against candidates or carry on propaganda or lobbying as a substantial part of their activities. The Internal Revenue Code (I.R.C.) and regulations provide a framework for nonprofit organizations regarding executive compensation and the travel and entertainment expenses paid for executives. I.R.C. prohibits the payment of excessive compensation and other transactions that provide excessive economic benefit to executives (I.R.C. § 4958). Regulations encourage organizations to have executive compensation arrangements approved in advance by members of an "authorized body" of the organization (such as the board), none of whom have a conflict of interest with respect to the transaction (Treas. Reg. § 53.4958-6(a)). Regulations also encourage but do not require organizations to take certain actions when determining compensation. Regulations provide that an organization has a "rebuttable presumption" that compensation is not an excess benefit transaction if an authorized body (1) approved the compensation arrangement in advance, (2) obtained and relied on appropriate data as to the comparability and reasonableness of the total compensation, and (3) documented the basis for its determination at the time it made its decisions (Treas. Reg. § 53.4958-6(a)). Recently, Congress has raised questions about the adequacy of oversight, reporting requirements, and overall governance of nonprofit and tax-exempt organizations. The Independent Sector, a group that represents nonprofit organizations, convened a Panel on the Nonprofit Sector and in 2005 proposed actions to strengthen governance and accountability of nonprofit organizations. The panel made specific recommendations to promote better governance over executive compensation, including proposals that encourage compliance with the "rebuttable presumption" regulations and better reporting on travel expenses. Survey Results: The following pages summarize responses provided by the 65 hospital systems to selected survey questions. We did not obtain responses to every survey question from all 65 hospital systems either because the hospital systems did not provide a response and should have, or because the question did not apply to their circumstances. As a result, the response frequencies will not always total 65. Governance and Compensation Policies and Practices: Written Policies for the Executive Compensation Body: 40 of the 65 hospital systems reported having written criteria for selecting members of the body that governs executive compensation; 20 of the 40 reported that the criteria address the knowledge for members, 19 of the 40 reported that the criteria address the skills for members, and 21 of the 40 reported that the criteria address the experience for members. All 65 of the hospital systems reported having a conflict of interest policy that covers members of the Executive Compensation Body, and they all reported that the policies require disclosure of potential conflicts. Use of Outside Consultants to Advise on Compensation Matters: All of the 65 hospital systems reported that the Executive Compensation Body can hire outside consultants to advise on compensation and benefit issues. 63 of the 65 hospital systems reported that the Executive Compensation Body has hired outside compensation and benefits consultants since January 1, 2004. 40 of the 65 hospital systems reported having a policy that requires compensation consultants to be free of any conflicts of interest. Practices Related to Compensation Determinations: All of the 65 hospital systems reported that they rely upon comparable market data of total compensation and benefits prior to making compensation determinations for the CEO and 63 of the 65 hospital systems reported doing this for the other top four executives. [Footnote 1] 64 of the 65 hospital systems reported that for the CEO, they documented the basis for compensation determinations at the same time the determination was made, and 58 of the 64 responding hospital systems reported doing this for the other top four executives. Responsibility for Approving Top Executives' Compensation: Hospital systems reported that an Executive Compensation Committee or Entire Board is primarily responsible for: * approving the CEO's base salary-58 of the 65 hospital systems * approving the CEO's bonuses-55 of the 65 hospital systems: * approving the CEO's perquisites-59 of the 65 hospital systems: Responsibility for Approving Top Executives' Compensation: Hospital systems reported that an Executive Compensation Committee or Entire Board is primarily responsible for: * approving the other top four executives' base salary-50 of the 65 hospital systems: * approving the other top four executives' bonuses-50 of the 65 hospital systems: * approving the other top four executives' perquisites-51 of the 65 hospital systems: Deferred Compensation Provided to Top Executives: 51 of the 65 hospital systems reported providing supplemental executive retirement plans (SERPs)[FOOTNOTE 2] to the CEO, and 50 of the 65 hospital systems reported providing SERPs to the other top four executives. 18 of the 65 hospital systems reported providing split-dollar life insurance[FOOTNOTE 3] plans to the CEO and to the other top four executives. 55 and 54 of the 64 responding hospital systems reported providing 457(b) plans for the CEO and the other top four executives, respectively. Hospital systems also reported providing 457(f) and 403(b) plans[Footnote 4]: * 33 of the 64 responding hospital systems reported 457(f) plans for the CEO, and 34 of the 65 for the other top four executives; and: * 45 of the 65 hospital systems reported 403(b) plans for the CEO, and 46 of the 65 for the other top four executives. Severance Packages Provided to Top Executives: 41 of the 65 hospital systems reported that since January 1, 2004, a person serving as CEO or in one of the top four executive positions has left the system. * 2 of the 41 hospital systems reported that since January 1, 2004, they made a severance payment to a departing CEO who resigned, and 5 of the 41 hospital systems reported that they made a severance payment to one of the top four executives who resigned. * 3 of the 41 hospital systems reported that since January 1, 2004, they made a severance payment to a departing CEO who was involuntarily terminated, and 20 of the 41 hospital systems reported that they made a severance payment to one of the top four executives who was involuntarily terminated. Perquisites Provided to Top Executives and Related Internal Control: 55 of the 65 hospital systems reported that they provide for automobile- related expenses as a perquisite to the CEO. * 21 of the 55 hospital systems reported having an internal audit since January 1, 2004 of automobile-related expenses for the CEO. Two other systems reported having an internal audit of automobile-related expenses, but reported that they did not provide this perquisite to the CEO. These two systems provided an explanation for this. See footnote "M" in the survey instrument (Enclosure II). 52 of the 65 hospital systems reported that they provide for automobile- related expenses as a perquisite to the other top four executives. * 21 of the 52 hospital systems reported having an internal audit since January 1, 2004 of automobile-related expenses for the other top four executives. Three other systems reported having an internal audit of automobile-related expenses, but reported that they did not provide this as a perquisite to the other top four executives. Two of these systems provided an explanation for this; an explanation from the other system was not available. See footnote "M" in the survey instrument (Enclosure II). 45 of the 65 hospital systems reported that they provide for memberships in recreational or social clubs as a perquisite to the CEO. * 19 of the 45 hospital systems reported having an internal audit since January 1, 2004 of memberships in recreational or social clubs for the CEO. Two other systems reported having an internal audit of these expenses for the CEO, but reported that they did not provide this as a perquisite to the CEO. One system provided an explanation for this; an explanation from the other system was not available. See footnote "N" in the survey instrument (Enclosure II). 35 of the 65 hospital systems reported that they provide for memberships in recreational or social clubs as a perquisite to the other top four executives. * 14 of the 35 hospital systems reported having an internal audit since January 1, 2004 of memberships in recreational or social clubs for the other top four executives. Three other systems reported having an internal audit of these expenses, but these three systems reported that they did not provide this as a perquisite to the other top four executives. One system provided an explanation for this; an explanation from the other two systems was not available. See footnote "N" in the survey instrument (Enclosure II). Other Perquisites Provided to Top Executives: 25 and 23 of the 65 hospital systems reported that they provide for financial or tax planning as a perquisite to the CEO and the other top four executives, respectively. 17 and 13 of the 65 hospital systems reported that they provide tax preparation as a perquisite to the CEO and the other top four executives, respectively. 7 of the 65 hospital systems reported that they provide for attorney fees as a perquisite to the CEO and the other top four executives. 13 and 8 of the 64 responding hospital systems reported that they provide for personal travel expenses for the spouse of the CEO and the other top four executives as a perquisite, respectively. Certain Perquisites Generally Not Provided to Top Executives: 63 of the 65 hospital systems reported that they do not make loans or state law prohibits them from making loans to the CEO and the other top four executives; 2 systems reported that they make loans. 64 of the 65 hospital systems reported that they do not pay for automobile related expenses for spouses and family members of the CEO and the other top four executives; 1 system did not respond to the specific questions about paying for these expenses for spouses and family members. 63 and 64 of 65 hospital systems reported that they do not pay for memberships in recreational or social clubs for spouses of the CEO and the other top four executives, respectively. Two systems did not respond to this question for the CEO, and 1 did not respond for the other top four executives. 64 of the 65 hospital systems reported that they do not pay for memberships in recreational or social clubs for family members of the CEO and other top four executives. One system did not respond to this question for the CEO, and 1 did not respond for the other top four executives. Entertainment Expenses for Top Executives: 63 of the 65 hospital systems reported providing payment for entertainment expenses. Regarding sports events, * 28 systems reported that they pay for the CEO to attend sports events, 34 reported that they do not pay, and 1 did not respond to the specific question about paying for sports events. * 29 systems reported that they pay for the other top four executives to attend sports events, 33 reported that they do not pay, and 1 did not respond to the specific question about paying for sports events. 63 of the 65 hospital systems reported providing payment for entertainment expenses. Regarding holiday or other company parties, * 49 systems reported that they pay for the CEO and the other top four executives to attend holiday or other company parties, 13 reported that they do not pay, and 1 did not respond to the specific question about paying for these expenses. 63 of the 65 hospital systems reported providing payment for entertainment expenses. Regarding various off-site activities, * 48 systems reported that they pay for the CEO to attend meetings, retreats, or other off-site activities involving trips to resort locations or private, exclusive clubs. Fourteen systems reported that they do not pay and 1 did not respond to the specific question about paying for these types of expenses. For the other top four executives, 46 systems reported that they pay for these expenses, 16 reported they do not, and 1 did not respond to the specific questions about paying for these types of expenses. 63 of the 65 hospital systems reported providing payment for entertainment expenses. Regarding theatre performances, * 17 systems reported that they pay for the CEO to attend theatre performances, 45 reported that they do not pay, and 1 did not respond to the specific question about paying for these types of expenses. * 16 systems reported that they pay for the other top four executives to attend theatre performances, 46 reported that they do not pay, and 1 did not respond to the specific question about paying for these types of expenses. Entertainment Expenses and Related Internal Control: 63 of the 65 hospital systems reported providing payment for entertainment expenses. Of those 63 systems: * 56 systems reported having a written policy covering entertainment expenses. 55 and 53 of the 56 reported that the policy describes the documentation necessary to support business entertainment expenses for the CEO and the other top four executives, respectively. 63 of the 65 hospital systems reported providing payment for entertainment expenses. Of those 63 systems: * 60 systems reported that the CEO's entertainment expenses are reviewed after being incurred, 1 reported that they are not reviewed, and 2 did not respond to the specific question about reviews of these expenses for the CEO. * 59 systems reported that the other top four executives' entertainment expenses are reviewed after being incurred, 2 reported that they are not reviewed, and 2 did not respond to the specific question about reviews of these expenses for the other top four executives. 63 of the 65 hospital systems reported providing payment for entertainment expenses. Of those 63 systems: * 39 and 40 systems reported having an internal audit since January 1, 2004, of entertainment expenses for the CEO and one or more of the other top four executives, respectively. * 9 and 7 systems reported having an external audit (separate from the annual financial statement audit) since January 1, 2004, of entertainment expenses for the CEO and one or more of the other top four executives, respectively. Travel Expenses and Related Internal Control: 62 of the 65 hospital systems reported having a written policy covering travel expenses for the CEO and other top four executives. Of those 62 systems: * 59 systems reported that their policy describes what are legitimate domestic business travel expenses for the CEO and the other top four executives, and 3 systems reported that their policy does not. * 61 and 62 systems reported that their policy describes the documentation necessary to support domestic business travel expenses for the CEO and the other top four executives, respectively. One system did not respond to the question for the CEO. Travel Expenses and Related Internal Control: 64 of the 65 hospital systems reported that the CEO's and other top four executives' travel expenses are reviewed after being incurred. One system did not respond to the specific questions about reviews of these expenses. 40 and 41 of the 65 hospital systems reported having an internal audit since January 1, 2004, of travel expenses for the CEO and one or more of the other top four executives, respectively. 10 and 9 of the 65 hospital systems reported having an external audit (separate from the annual financial statement audit) since January 1, 2004, of travel expenses for the CEO and one or more of the other top four executives, respectively. Enclosure II - Copy of Survey Instrument with Number of Responses for Each Question: [See PDF for Image] [End of Figure] (190151): Footnotes: [1] The other top four executives are the four highest compensated executives other than the CEO. [2] SERPs are maintained by an employer primarily for the purpose of providing deferred compensation to a select group of management or highly compensated employees. For example, when an executive is limited to the amount that can be contributed to a 401 (k) or similar plan because his or her salary exceeds the statutory limit for contributions, employers can add to SERPs, an amount equal to that which an executive would have contributed under the company's 401 (k) if not for the limits. SERP "accounts" are not funded in advance. When benefits are paid to an executive in the future, they are paid from the general assets of the employer. [3] 1n split-dollar life insurance policies, the employer and the covered executive ordinarily split the costs and benefits, sometimes unequally. In some cases, these policies can provide for death benefits up to four times base salary for survivor life insurance. Also, with split-dollar policies, the employer can pay close to 100 percent of the premiums, that earn interest and are not subject to tax. When an executive retires, the employer is repaid--without interest--for the amount it contributed in premiums. Treasury regulations provide guidance on, among other things, the taxation of these benefits. [4] These plans are so named by the specific section of the Internal Revenue Code that provides guidance for the plans. These plans generally allow employees to defer wages for tax purposes. Each plan has its own features, including those related to contributions, distributions, loans, and rollovers. GAO's Mission: The Government Accountability Office, the investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO's commitment to good government is reflected in its core values of accountability, integrity, and reliability. 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