Healthcare Compensation & Benefit Trends · 12/18/2019 · Rate is equal to pass-through of 21% on annual compensation above $1 million. The tax is applicable to the top five highest

© 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


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.

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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.

http://www.ajg.com/s/corporate-social-responsibility

http://www.ajg.com/about-us/global-standards



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.


Industry Trends



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



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



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


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*



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



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


Benefit Trends



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



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


Supplemental Retirement Funding Approaches



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.



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




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




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




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




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


Other Benefits



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



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



• 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



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.


Jim NelsonManaging Director | Senior Advisor [email protected]

Rich BrockNational Practice Leader, Executive [email protected]

© 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) [email protected]

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) [email protected]

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.

Documents

Healthcare Compensation & Benefit Trends · 12/18/2019 · Rate is equal to pass-through of 21% on annual compensation above $1 million. The tax is applicable to the top five highest