Post on 21-May-2020
© 2019 Arthur J. Gallagher & Co. For Institutional Use Only. Not for Public Distribution.
Healthcare Compensation & Benefit Trends
• December 18, 2019
Rich BrockNational Practice Leader, Executive Benefits
Jim NelsonManaging Director | Senior Advisor
2© 2019 Arthur J. Gallagher & Co.
For Institutional Use Only. Not for Public Distribution.
Introduction
Discussion Agenda
• Who we are
• Current trends
• Supplemental retirement programs and retention approaches
• Supplemental security benefits
• Discussion and questions
© 2019 Arthur J. Gallagher & Co. For Institutional Use Only. Not for Public Distribution.
Who We Are
4 ©2019 ARTHUR J. GALLAGHER & CO. 4© 2019 Arthur J. Gallagher & Co.
For Institutional Use Only. Not for Public Distribution.4
We know the importance of being a socially responsible company. That is why we strive every day to promote environmental, social, and economic benefits to the communities in which we live and work. Much like our clients, we believe in running our business with integrity and strong values, and pride ourselves in a culture that embodies both.
Whether we are working to help our communities, the environment or striving to always be an ethical company, Gallagher’s employees are making a difference around the world.
Our Corporate Social Responsibility Report is available at www.ajg.com/s/corporate-social-responsibility.
Global Standards of Business ConductThe Global Standards of Business Conduct explain our most important legal and compliance obligations. They also describe the Shared Values that motivate our decision-making and guide our actions every day. We are each accountable for understanding and following the laws, policies, rules and regulations that impact our jobs and the company. As a global insurance brokerage and risk management firm, we are subject to numerous laws, rules and regulations established by the various countries in which we do business.
Our Global Standards of Business Conduct are available at www.ajg.com/about-us/global-standards.
World Class Recognition
Introduction to Gallagher Corporate Social Responsibility
Gallagher has been recognized by the Ethisphere Institute, a global leader in defining and advancing the standards of ethical business practices, as a 2019 World’s Most Ethical Company for the eighth consecutive year. We are the only insurance broker to have been so recognized, underscoring our commitment to leading ethical business standards and practices.
5 ©2019 ARTHUR J. GALLAGHER & CO. 5© 2019 Arthur J. Gallagher & Co.
For Institutional Use Only. Not for Public Distribution.5
Introduction
Executive BenefitsGallagher consults with healthcare organizations to provide solutions to recruit, reward, and retain their executive leadership. We custom design, implement, and administer all types of executive and physician benefit plans with various funding and cost offset strategies. Our focus is on safety and soundness, with ongoing regulatory compliance.
Human Resources & Compensation ConsultingWe offer our clients convenient and direct access to the most comprehensive array of healthcare-specific services available, combined with insightful advice from industry professionals. Because of our integrated approach, our clients enjoy solutions that work together to maximize performance across their entire organizations.
© 2019 Arthur J. Gallagher & Co. For Institutional Use Only. Not for Public Distribution.
Industry Trends
7© 2019 Arthur J. Gallagher & Co.
For Institutional Use Only. Not for Public Distribution.
What Our Clients Are Dealing With
Cash compensation programs are increasingly similar
Sensitivity to the optics and economics of compensation
and benefit programs
Increasing interest in redesigning supplemental retirement plans
Recruitment and retention of talent challenges
Increased regulation of deferred compensation and the impact to
section 457 plans
Impact of 21% excise tax on tax-exempt organization’s executive
cash and benefits programs
8 ©2019 ARTHUR J. GALLAGHER & CO. 8© 2019 Arthur J. Gallagher & Co.
For Institutional Use Only. Not for Public Distribution.8
Trends | Implications for Executive Compensation Programs
Highly Competitive Market
• Recruitment of highly-qualified executives to successfully grow and manage more complex organizations
• Recruitment of executives with more diverse experience and talents
• CEO and executive turnover rates continue to be high
• Retention of executive talent continues to be an objective of Boards
• Aging of senior executive population
9© 2019 Arthur J. Gallagher & Co.
For Institutional Use Only. Not for Public Distribution.
Demographic TrendsExecutive Talent Is AgingMore than 65% of healthcare CEOs are over the age of 55, and half of those are over the age of 60.
Age 40-50,17%
Age 50-60,40%
Age 60-70,37%
Age 70-80,3% Age30-40,
3%
40% Age 50-6037% Age 60-7017% Age 40-503% Age 70-803% Age 30-40
Age 40-50,15%
Age 50-60,35%
Age 60-70,45%
Age 70-80,4%
Age 30-40,2%
45% Age 60-7035% Age 50-6015% Age 40-504% Age 70-802% Age 30-40
Source: Gallagher database 2010 – 2018 / N = 2,400
Age of C-suite Executives Age of Sitting Chief Executive Officers
© 2019 Arthur J. Gallagher & Co. For Institutional Use Only. Not for Public Distribution.
Compensation Trends
11
Salary Trends
0.0%
1.0%
2.0%
3.0%
25th %-tile Average Median 75th %-tile
2.5%2.8%
3.0% 3.0%
* From Gallagher 2019 National Healthcare Leadership Compensation Survey of more than 2,100 health care organizations
Projected 2019 Executive Salary Increases in Hospitals and Health Systems*
12
Salary Trends
4.4% 4.6%5.1% 4.9%
4.1% 4.0% 4.0% 4.0%3.5%
2.8%2.5% 2.6% 2.8% 2.8% 3.0% 3% 3% 3.0% 3.0% 3.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
* From Gallagher 2019 National Healthcare Leadership Compensation Survey of more than 2,100 health care organizations
Average Total Salary Increases from 2000 to 2019*
13 ©2019 ARTHUR J. GALLAGHER & CO. 13© 2019 Arthur J. Gallagher & Co.
For Institutional Use Only. Not for Public Distribution.13
Generally high level of satisfaction expressed by both participants and governing Boards
Annual Incentive Opportunity Levels: CEO 25-40% of salary Sr. Execs 15-25% of salary
Status of Executive Incentive Plans
Incentive Trends
Approximately 90% of health systems provide an
annual incentive plan for executives
Among largest integrated, academic and large
catholic systems, prevalence is nearly universal
Prevalence among hospitals is approximately90%
The prevalence of long-term incentive plans is over
60% large integrated systems
Participation in short-term plans is often extended
beyond the executive team at systems having
incentive plans
Approximately 85% extend annual incentive
opportunity to directors and approximately 65%
includemanagers
* Source: Gallagher 2018 National Healthcare Leadership Compensation Survey of over 2,100 healthcare organizations
14 ©2019 ARTHUR J. GALLAGHER & CO. 14© 2019 Arthur J. Gallagher & Co.
For Institutional Use Only. Not for Public Distribution.14
The Tax Cuts and Jobs Act of 2017 levies an excise tax on not-for-profit executive compensation exceeding $1 million
Its impact on not-for-profit organizations has created a sense of urgency
Rate is equal to pass-through of 21% on annual compensation above $1 million
The tax is applicable to the top five highest paid executive as reported on Form 990
Top five are always included in future years, whether or not they remain in the top five
All forms of reportable compensation are included.• Base salary
• Short and long-term incentive awards
• Perquisites
• Vested 457(f) deferred compensation balances
Excise Tax Implications
© 2019 Arthur J. Gallagher & Co. For Institutional Use Only. Not for Public Distribution.
Benefit Trends
16 ©2019 ARTHUR J. GALLAGHER & CO. 16© 2019 Arthur J. Gallagher & Co.
For Institutional Use Only. Not for Public Distribution.16
Aging of executive population is increasing the amount of attention paid to retirement benefits.
Competitive retirement benefits target 50-75% of salary for career service
(20-25 years) or 2.0% – 3.75% per year of service
85% of CEOs are provided employer-paid supplemental retirement programs*
Supplemental benefits• Equity with general workforce• Legislative and contractual caps• Pressure on cash compensation• Retention
Deferred compensation• 457(f) plans have become less popular in NFP organizations to fund SERPs
Benefit Trends
* Source: Gallagher 2018 National Healthcare Leadership Compensation Survey of over 2,100 healthcare organizations
17© 2019 Arthur J. Gallagher & Co.
For Institutional Use Only. Not for Public Distribution.
A competitive executive benefit plan consists of basic and supplemental benefits.
Basic Benefits
• Between 8% and 10% of salary
Supplemental benefits
• Executives: between 20% and 25% of salary
0%
25%
20%
15%
10%
5%
30%
35%
40%
Rank & FileBasic Benefits
ExecutivesSupplemental Benefits
Market Median Benefit Expenditure
Perc
ent o
fSal
ary
Benefit Prevalence
© 2019 Arthur J. Gallagher & Co. For Institutional Use Only. Not for Public Distribution.
Supplemental Retirement Funding Approaches
19© 2019 Arthur J. Gallagher & Co.
For Institutional Use Only. Not for Public Distribution.
Supplemental Executive Retirement Plans
457(f) – Deferred CompensationDeferred Earnings Plans Provide Tax-Deferred Growth
with Taxable Earnings at Distribution
Split Dollar PlansRestrictive Bonus Plans
The IRS allows four options for funding non-qualified SERPs.
20 ©2019 ARTHUR J. GALLAGHER & CO. 20© 2019 Arthur J. Gallagher & Co.
For Institutional Use Only. Not for Public Distribution.20
Traditional 457(f) deferred compensation plans bring SERP challenges.
• Regulatory changes have impacted deferred comp
• Plans are predominantly short-term deferrals
• Vested amounts are subject to the excise tax
• Benefits are taxed on lump-sum basis
• Double reporting on IRS Form 990
• Investment risk impact
• Administrative requirements
• Reduced plan perception
Supplemental Executive Retirement Plans
21 ©2019 ARTHUR J. GALLAGHER & CO. 21© 2019 Arthur J. Gallagher & Co.
For Institutional Use Only. Not for Public Distribution.21
Not-for-profit organizations are using more creative ways to deliver competitive retirement benefits.
• Address limitations of IRC 457(f)
• Address the 21% excise tax on SERPS
• Utilize more tax-efficient funding vehicles
• Mitigate market volatility
• Ensure delivery of competitive retirement income
• Utilize effective strategies to enhance retention
• Leverage balance sheet versus operating income
• Securitize the benefit for participants
Supplemental Executive Retirement Plans
22 ©2019 ARTHUR J. GALLAGHER & CO. 22© 2019 Arthur J. Gallagher & Co.
For Institutional Use Only. Not for Public Distribution.22
Not-for-profit organizations are increasingly using institutionally structured life insurance to fund SERPs.
• Organization and participant costs are less over lifetime than alternative investments
• Effective long-term accumulation strategy
• Utilizes established tax code
- Mitigates or eliminates excise tax on SERP benefit
• Tax diversification strategy
• Tax-free growth pre- and post-retirement
• Tax-free retirement income
• Tax-free death benefit
• Indexed universal life insurance predictability of returns
Supplemental Executive Retirement Plans
23© 2019 Arthur J. Gallagher & Co.
For Institutional Use Only. Not for Public Distribution.
457(f) Split Dollar Restrictive Bonus Plan
Plan Description • Nonqualified plan for retention andretirement• Healthcare Organization makes contributions on a
pretax or after-tax basis, or promises a stated benefit to be paid at a stated future date
• Investment for Executive retention and retirement• Healthcare Organization pays premium on
life insurance policy on the Executive’s life• Executive borrows from policy during retirement to
supplement retirement income• Healthcare Organization is repaid investment
plus interest from the policy death proceeds
• Bonus plan to Executive for reward and retention• Healthcare Organization pays participant bonus
to pay premiums on an insurance policy (or other asset) and to cover the taxes on the bonus
Funding Instrument • Option to offset expenses○ Corporately Owned Insurance
▪ Institutional lifeinsurance○ Management Account portfolio
• Life insurance policy jointly owned by Executive and Healthcare Organization○ Corporate recovery component○ Executive benefit component
• Life insurance policy owned by Executive• Management Account portfolio owned by Executive• Deferred annuity owned by Executive
Taxation • Pre-tax plan○ Distributions taxed as wages atvesting
• After-tax plan○ Plan contributions taxed as wages
currently; gain taxed as wages atdistribution
• No income or excise tax • Bonus taxed as wages○No additional taxation if benefit is
by loan from life insurance policy○Gain from Management Account
either capital gain or ordinary income, depending on nature of the gain
○Portion of annuity distributions taxed as ordinary income
Healthcare Organization Recovery • At participant’s termination with optional funding instrument
• Investment repayment at stated date• Interest on investment at death
• At participant’s termination with optional funding instrument
Impact on Bottom Line • Expense offset by funding income • Investment with interest income • Bonus expense offset by funding income
Advantages to Healthcare Organization
• Control ofasset• Liquidity• Retention through risks of forfeiture in pre-tax plan
• Not responsible for payingbenefit• Advantageous Form 990 reporting (not Schedule J)
• Complete at termination or retirement of Executive• Bonus can be tied to performance metric• Single Form 990 reporting as bonuses are paid
Disadvantages to Healthcare Organization
• Legal promise with an ongoing expense• 21% excise tax if >$1 million with otherwages• Double Form 990 reporting
• Long-term program • Bonus expense• Not directly retentive
Advantages to Participant • Deferred taxation• Self-directed funds (if offered)
• No taxation• Control policy/income
• No taxation on distributions from life insurance policy
• Plan is portable• Control policy income
Supplemental Executive Retirement Plans
24© 2019 Arthur J. Gallagher & Co.
For Institutional Use Only. Not for Public Distribution.
The funding vehicle for a supplemental retirement program will produce varying incomes at retirement.
A Recent Redesign
Assumptions: Sample executive, $400,000 salary, age 45, retiring at age 65 with 20 years of service; Salary Scale - 3%; 20 year payment stream; Tax Rate – 30%; Illustrated at 6.4% S&P return; gross contribution of 10% of salary; current plan
assumes 5 year rolling vest, paid in cash at age62
The funding vehicle for a supplemental retirement program will have varying impacts on excise tax liability.
A Recent Redesign
Assumptions: Sample executive, EE has total compensation over $1 million and receives fixed annual contribution of $100,000 per year for 20 years.
Supplemental Retirement Program Funding Vehicles
DeferredCompensation (Current Plan)
Deferred Earnings
Restrictive BonusPlan
Split Dollar
After-Tax RetirementIncome $59,900 $61,400 $108,300 $168,300
Deferred Compensation 3-year Rolling
Deferred Compensation
Cliff VestingDeferred Earnings
Restrictive BonusPlan
Split Dollar
Total ExciseTax $496,054 $818,847 $671,274 $420,000 $0
© 2019 Arthur J. Gallagher & Co. For Institutional Use Only. Not for Public Distribution.
Other Benefits
26© 2019 Arthur J. Gallagher & Co.
For Institutional Use Only. Not for Public Distribution.
Disability is typically employer-paid and provided.
• Competitive coverage replaces 50-60% ofincome
• Own occupation to age 65
• No limitation for mental/nervous condition
• Catastrophic rider addresses potential long-term care needs
• Guaranteed issue
• Discounted rates
• Portable upon termination of employment at same discounted rates
Disability Income
$35,000
Catastrophic Disability
25% of Income to$10,000 Monthly Maximum
$25,000
Individual Disability
75% of Income Less Group LTD to$15,000 Monthly Maximum
$10,000
Group Long-Term Disability
60% of Base Salary to$12,500 Monthly Maximum
$0
27© 2019 Arthur J. Gallagher & Co.
For Institutional Use Only. Not for Public Distribution.
Life insurance typically provides pre- and post-retirement coverage.
Life Insurance
Corporate-Owned Split Dollar
Restrictive Bonus Plan
Individually-Owned Split Dollar
Funding Universal Life (UL) Group or Individual Term; Group or Individual UL/VUL Indexed Universal Life
Organizational Cost Minimum Mortality Premium – varies by policy typeP&L – $0
principal and interest recovered
Participant Cost Taxed on reported minimum mortality
Taxed on reported annual premium
Interest at long-term AFR rate (paid through policy)
ER FundedPost-Retirement Coverage
Yes No Yes
Corporate Recovery No No Yes
Guaranteed Issue Yes Depends on type of insurance No
Administrative Simplicity No No No
28 ©2019 ARTHUR J. GALLAGHER & CO. 28© 2019 Arthur J. Gallagher & Co.
For Institutional Use Only. Not for Public Distribution.28
• Meet to confirm objectives
• Data collection
• Analyze current programs by comparing to market and objectives
• Present and discuss analysis
• Confirm next steps as appropriate
Typical Study Process
29 ©2019 ARTHUR J. GALLAGHER & CO. 29© 2019 Arthur J. Gallagher & Co.
For Institutional Use Only. Not for Public Distribution.29
Disclosure
Consulting and insurance brokerage services to be provided by Gallagher Benefit Services, Inc. and/or its affiliate Gallagher Benefit Services (Canada) Group Inc. Gallagher Benefit Services, Inc., a non-investment firm and subsidiary of Arthur J. Gallagher & Co., is a licensed insurance agency that does business in California as “Gallagher Benefit Services of California Insurance Services” and in Massachusetts as “Gallagher Benefit Insurance Services.” Certain appropriately licensed individuals of Arthur J. Gallagher & Co. subsidiaries or affiliates offer securities through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC and or investment advisory services through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Neither Kestra IS nor Kestra AS is affiliated with Arthur J. Gallagher & Co., or Gallagher Benefit Services, Inc. Neither Kestra AS, Kestra IS, Arthur J. Gallagher & Co., nor their affiliates provide accounting, legal, or tax advice. GBS/Kestra (332544)Exp(11/13/2020)
This material was created to provide accurate and reliable information on the subjects covered, but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation.
© 2019 Arthur J. Gallagher & Co. For Institutional Use Only. Not for Public Distribution.
Jim NelsonManaging Director | Senior Advisor jim_nelson@ajg.com
Rich BrockNational Practice Leader, Executive Benefitsrich_brock@ajg.com
© 2018 GALLAGHER BENEFIT SERVICES, INC. ARTHUR J. GALLAGHER & CO. | AJG.COM Gallagher Benefit Services, Inc., a subsidiary of Arthur J. Gallagher & Co., (Gallagher) is a non-investment firm that provides employee benefit and retirement plan consulting services to employers. Securities offered through Kestra Investment Services, LLC, (Kestra IS), member FINRA/SIPC. Neither Kestra IS nor Kestra AS are affiliated with Gallagher. Neither Kestra IS, Kestra AS, Gallagher, their affiliates nor representatives provide accounting, legal or tax advice.
Address
Phone Email
Professional Experience
Jim Nelson Managing Director & Senior AdvisorHuman Resources & Compensation Consulting
Arthur J. Gallagher & Co. HRCC Practice901 Marquette Avenue So. Minneapolis, MN 55402
(612) 865-2852Jim_Nelson@ajg.com
Mr. Nelson has more than 30 years of experience consulting to non-profit organizations. He has worked with more than 300 organizations, including national and regional integrated health systems, universities, foundations, community and specialty organizations.
Mr. Nelson’s experience includes non-qualified benefit plan design, employment agreements, developing retention plans, total compensation consulting, aligning total compensation programs with organizational strategy and consulting to organizations pre- and post-merger as well as organizations in the midst of transformational change.
A nationally recognized expert and thought leader in the compensation and benefit consulting field, Mr. Nelson has presented to a variety of national and state healthcare groups including: The Harvard School of Public Health, American College of Healthcare Executives, American Medical Group Association, American Society of Healthcare Human Resources Association, Premier Inc., Child Health Corporation of America and numerous professional and state hospital and healthcare associations. He has also hosted a national radio program on healthcare.
Additionally, Mr. Nelson’s work has been cited in numerous healthcare publications. He has published and lectured extensively on a variety of compensation, regulatory and healthcare strategy topics throughout his career. Mr. Nelson received his finance degree from the University of St. Thomas and his Chartered Financial Consultant designation from the American College.
Professional DesignationsChartered Financial Consultant
(ChFC®)
Years Experience30+ years
EducationBachelor’s degree in Finance from University of St. Thomas (MN)
Specializes inDesign, implementation and monitoring of supplemental benefit and retirement programs for non-profit organizations
© 2019 GALLAGHER BENEFIT SERVICES, INC. ARTHUR J. GALLAGHER & CO. | AJG.COM Gallagher Benefit Services, Inc., a subsidiary of Arthur J. Gallagher & Co., (Gallagher) is a non-investment firm that provides employee benefit and retirement plan consulting services to employers. Securities offered through Kestra Investment Services, LLC, (Kestra IS), member FINRA/SIPC. Neither Kestra IS nor Kestra AS are affiliated with Gallagher. Neither Kestra IS, Kestra AS, Gallagher, their affiliates nor representatives provide accounting, legal or tax advice.
Address
PhoneEmail
Professional Experience
Rich Brock National Practice LeaderExecutive Benefits Practice
BFB Gallagher Executive Benefits Practice 4250 Congress Street, Suite 225 Charlotte, NC 28209
(704) 264-3355Rich_Brock@ajg.com
In 1995, Rich co-founded the consulting firm of Burns-Fazzi, Brock, specializing in nonqualified executive benefit plans. Since then, the firm has grown to more than 500 nonprofit clients, coast-to-coast. In 2015, the firm was acquired by Arthur J. Gallagher & Co, one of the world’s largest insurance brokerage and risk management firms. Today, Rich is the National Practice Leader for Executive Benefits. His team of consultants specialize in helping organizations across all industries secure their future through leadership continuity and aligning executive performance with strategic goals.
Rich consults with healthcare organizations, educational institutions, and other nonprofit entities on developing benefit plans to meet their strategic goals. He works closely with boards of directors on their due diligence and succession planning. His expertise extends to institutional asset management and benefit funding.
Rich is a frequent speaker at industry conferences and events. He received his Bachelor of Science degree from Wake Forest University. Rich serves on the Wake Forest Athletic Development Board of Directors. When he is not consulting with clients, you can find him biking the hills of Asheville, North Carolina and spending time with his three daughters.
Years’ Experience30+ years
EducationBachelor of Science degree from Wake Forest University (NC)
Specializes inNonqualified benefit plans designed to recruit, retain, and incentivize key talent; nonprofit tax code related to executive benefit plans.