By David Wright | Principal of TriscendNP
July 25, 2023
The Service Employees International Union (SEIU) is working on ballot initiatives in four California communities that would cap healthcare executive compensation. Los Angeles would cap the compensation at the salary and expense allowance of the President of the United States (currently $450,000). San Diego, La Mesa and Chula Vista would impose a cap of 15 times the prevailing minimum wage for 2080 hours ($483,600 to $508,560, depending on the community).
The SEIU’s rationale for the ballot initiatives is the rising healthcare costs and “glaring healthcare inequities” exposed by the Covid-19 crisis. The SEIU believes that the proposed ordinances would divert seemingly excess executive compensation to reducing costs and increasing access to high-quality care in struggling communities.
While healthcare associations have voiced their concerns regarding their ability to attract and retain top quality leadership under these measures, efforts to oppose or block the ballot initiatives have thus far been unsuccessful.
To better understand the nuances of the proposed ordinances, and to gain insight from an industry leading Executive Compensation and Benefits law firm, we sought the counsel of Kirk Sherman of Sherman & Patterson, Ltd. Kirk is a nationally recognized and highly regarded expert in the area of non-profit executive compensation and benefits, and has helped hundreds of healthcare organizations over the last 35 years navigate the challenging landscape of retaining and rewarding executives in the nonprofit arena.
The “Limit Excessive Healthcare Executive Compensation Ordinance” is not the first attempt by the SEIU to advance this cause. What is the history of this issue and why have recent actions been more successful then prior attempts?
The SEIU-United Healthcare Workers union has used the threat of ballot initiatives for many years with mixed success. In the past it has been used primarily in an attempt to extract agreements with hospitals that they will not oppose the union’s organizing efforts. The current efforts may be tied more to companion initiatives that would increase the minimum wage for healthcare workers to $25/hour (i.e., in the three communities defining the cap as a multiple of the minimum wage, the higher the minimum wage, the higher the executive compensation cap). Whether the current efforts turn out to be more successful remains to be seen. The Los Angeles initiative has met the signature requirement and will go to voters in March 2024. The other three communities are still in the process of gathering signatures to meet the requirements (San Diego and La Mesa – 10% of registered voters; Chula Vista – 15% of registered voters). If sufficient signatures are gathered, these would likely go on the ballot in 2024, possibly November.
Are there any important differences between the ballot initiatives in the four California cities considering limitations to healthcare executive compensation?
Only in the way they define the cap – the US President’s salary and cap in Los Angeles, and a multiple of the minimum wage in the other communities. Otherwise, the proposed ordinances are the same.
How will Covered Compensation likely be determined as it relates to a Covered Healthcare Facility within a large Healthcare System? Meaning, how might the pay cap impact an executive responsible for multiple facilities both within and outside the city limits?
Executive’s working for a single healthcare provider or facility within the city limits would be fully subject to the limits. Executive’s with responsibilities for multiple healthcare facilities, some of which are located within the city limits and some outside the city limits, would have to prorate their compensation. The compensation for work for facilities within the city limits would be subject to the cap.
Will there be a grandfathering component to the new legislation?
Most constitutions limit a government’s ability to enact new laws that impact contracts in place before the law is enacted. Each of the ballot initiatives would not apply to compensation paid under contracts in effect on the date the City Clerk certifies that the required signatures have been gathered and the measure is qualified to go to the City Council or to the voters. That date has already passed in Los Angeles, but not in the other three communities.
Is anything excluded from the compensation that would be subject to the limits?
The initiatives have exclusions for:
- Compensation under grandfathered contracts and plans. This would likely only include nondiscretionary compensation. Discretionary bonuses, for example, likely would not be grandfathered.
- Contributions or payments required under ERISA covered arrangements. This is an interesting exclusion. It is very broad as many plans are subject to ERISA (e.g., qualified retirement plans, nonqualified retirement plans (e.g., SERPs), and life insurance arrangements). The exclusion was necessary, however, as ERISA expressly preempts any state or local law affecting plans covered by ERISA. Absent the ERISA exception, the whole ordinance may have been preempted.
What are the key timeframes and penalties healthcare leaders should be mindful of if the ordinances pass?
The ordinances would apply to compensation paid in any year. If the compensation paid in that year exceeds the cap, then:
- Any “Person” violating the act is subject to a $1,000 per day penalty ($2,000 if the violation is willful) plus 10% interest.
- Any executive receiving excess compensation during a year must repay the excess (plus 10% interest) by the end of the following year. Persons include natural persons as well as legal entities.
The employer must file an annual report detailing the compensation paid to all executives within 75% of, at or above the limit. Failure to file the report subjects the organization to a $1,000 per day penalty.
How do you see events unfolding in California and other states over the next several years? Meaning, to what extent do you believe this initiative could have wide-spread impact?
If an ordinance is approved by a majority of voters in a city, we expect significant litigation to ensue. Key issues will likely include:
- The constitutionality of a city imposing caps on compensation paid by private businesses;
- Whether an ordinance in one city or state can limit the compensation paid to an executive located in another city or state;
- Whether the ordinance wording is so vague as to be unenforceable. For example, the ordinance imposes fines on “Any Person who violates any provision of this ordinance.” Would that include a payroll clerk who processes a salary in excess of the cap? Would the penalty be for the day the payroll was processed, or for each day until the executive pays back the compensation? If a board of 15 directors votes to approve a payment in excess of the cap, does the penalty apply to each person and become $15,000 per day?
What do you believe should be the primary concern and immediate actions for healthcare leaders, for example, prior to the Los Angeles ballot vote in March of 2024?
Beyond the efforts to defeat the measure through public education, in Los Angeles it is too late to attempt to adopt arrangements that would be grandfathered. For the other three communities, employment agreements would be the first thing to consider to grandfather the compensation paid to current executives.
Second would be to evaluate the existing compensation programs to determine which are ERISA plans and therefore excluded from the cap. ERISA plans include nonqualified deferred compensation plans (e.g., SERPs) and life insurance arrangements like so-called “loan regime split dollar.” If necessary, the employer could direct current cash compensation in excess of the caps into such arrangements. For example, SERPs can pay benefits during employment as well as during retirement. An employer could adopt a SERP that each year accrues $X for two years and then pays out the benefit. That way, after two years, the executive would start receiving distributions that would supplement the salary and bonus otherwise payable each year.
Thanks to Kirk for these responses.
California non-profit healthcare leaders are beginning to face the reality of these daunting limitations. Not the least of which is the likely erosion an already disadvantaged position to recruit seasoned leadership. Such leadership equipped to navigate the ever-increasing complexity of delivering quality affordable care is hard to come by, especially in an aging workforce.
Now more than ever, these measures will stack the odds of success against the nonprofit healthcare delivery system.