Fatcat executives - at nonprofits?!

The health care industry is a lucrative one. The stories about the massive profits at insurance and drug companies have piled up in recent years. Companies like Aetna, Merck, Hospital Corporation of America, HealthSouth, etc have done exceedingly well, in part by denying people care and thus limiting costs. It makes for a lousy health care system, but an excellent profit-generating business. If you've seen Sicko, I need not explain further. If you haven't, I'll just mention that about 15% of a normal insurance company's budget goes toward finding reasons to deny people coverage while still taking their money.

As with any smart business, the industry has attracted executives skilled at maximizing profits, and many of these executives are rewarded with lavish pay packages. For example, health care CEO Cliff Killingsworth made off with a cool $3.6 million in 2007, including a $1.8M performance bonus.

Mr. Killingsworth runs Massachusetts Blue Cross Blue Shield. A nonprofit company.

A recent Boston Herald article shone the spotlight on the outrageous executive pay practices of Blue Cross and other nonprofit health care providers in the state. It wasn't just Mr. Killingsworth that made a tidy sum as a Blue Cross executive; the politically connected conglomerate paid million dollar packages to nine employees and two other nonprofit health care CEOs in the state were paid over $1M. Furthermore, a few of the Blue Cross board members were paid around $50,000 last year. For seven board meetings.

What, exactly, did all of these folks do to deserve their salaries? This is actually a legitimate question, not rhetorical, because I'm truly perplexed. They didn't have dividend-seeking shareholders to please. They didn't have to outperform much competition in the marketplace.... many Blue Cross customers are locked into the program through their government or union jobs.

I hate to say this, but could it be that the culture of executive excess has gotten so extreme that executive pay packages are no longer tied to any measure of productivity? Rather, are bosses determining their own salaries simply based on what they can paying themselves without inciting an uproar? If so, whose responsibility is it to do something about this?

Well, according to the Herald article linked above, state legislators are starting to ask these kinds of questions:

The pay packages are drawing increasing scrutiny on Beacon Hill as lawmakers debate ways to curb the exponential growth in health-care costs. Legislation being considered today would force insurers and health providers to publicly document reasons for increasing costs of insurance and medical procedures.
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“These salaries are out of control,” said state Sen. Mark Montigny (D-New Bedford). “They don’t pass the smell test or the laugh test. These insurers are hiding behind the veil of their not-for-profit status.”
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“It’s egregious,” said state Sen. Steve Baddour (D-Methuen). “Here we are, fighting to keep down costs amid double-digit increases, and how many millions are these nonprofits giving out? They should add it all up and return it in rate relief.”

What to do, in that case? This is where it gets quite tricky. Does it make sense for the government to place strict salary caps on compensation for nonprofit CEOs? Would it even be deemed constitutional by the courts in today's pro-business climate? Could we place limits on the amount executive salaries can grow from year-to-year in a tax-exempt organization, as is often proposed with state government budgets? These are all legitimate questions to consider.

That said, my personal proposal, while certainly not borne of expert knowledge on the subject, arises from some past work on income inequality and CEO pay research. A bill has existed for some time now in Congress, recently introduced by Rep. Barbara Lee (D-Oakland), that would limit tax deductability of CEO pay in a given company to 25 times the pay of that company's lowest-paid worker. This is a good step in the right direction.

Taking that premise to the next level and applying it to nonprofits, it seems reasonable that a nonprofit working to uphold the public good should see more wage parity than for-profit corporations now do. Thus, for an organization to receive tax-exempt status, it should not be able to pay anyone on its staff or board more than, say, 8 times the amount of its lowest paid worker (including benefits). Considering many nonprofits pay entry-level salaries of around $25,000, that means that no person in that typical organization could earn more than $200,000. About the salary of a military General, member of Congress or cabinet-level executive branch official. If that salary is sufficient for some of the most powerful people in society who shoulder an immense amount of responsibility, it should be sufficient for nonprofit leaders of any ilk.