Health Development Corporation, DAB No. 429 (1983)

GAB Decision 429

May 31, 1983

Health Development Corporation;
Ford, Cecilia; Settle, Norval Teitz, Alexander


The Health Development Corporation (Grantee) appealed a Public Health
Service (PHS) decision to disallow $5,842 which the Grantee charged to
its Rural Health Initiative grant. The total cost disallowed
represented portions of two separate bonus payments made to the
Grantee's Executive Director in two program years. For the reasons
discussed below, we uphold this disallowance.

The Board's Standard of Review

The Board's procedures found at 45 CFR Part 16 (1982) provide for a
special expedited review for appeals of $25,000 or less in which there
has already been a preliminary review process resulting in a written
decision based on a record. 45 CFR 16.12(d). That process applies to
this appeal. /1/ Under the special expedited process, the Board
generally restricts its review to whether the decision of the
preliminary reviewing authority was clearly erroneous. 45 CFR 16.12(
d)(1). The Board adheres to that standard in this instance.


Background

At its June 20, 1979 meeting, the Grantee's Board of Director's
adopted the following position regarding performance bonuses:

A bonus... shall not exceed one (1) percent of an employee's base
annual salary and shall not be given more than six times a year for
clinic or staff employees... A bonus for clinic staff employees shall be
awarded after... the approval of the Director... The awarding of a bonus
to the (2) Executive Director shall be considered and directed by the
Board.

On April 18, 1981 the Grantee's Board of Directors awarded the
Executive Director a $5,000 performance bonus. On March 17, 1982, the
Grantee's Directors awarded the Executive Director another $5,000 bonus.
PHS contended that the performance awards were excessive when measured
against Grantee's 6% annual bonus ceiling. The 1981 bonus was equal to
approximately 15.1% of the Executive Director's annual salary and the
1982 bonus approximately 13.7% of the Executive Director's salary for
that year. /2/ Therefore, the PHS Regional Office disallowed the amount
by which each of these awards exceeded 6% of the Executive Director's
annual salary for a total disallowance of $5,842.


Before the PHS Grant Appeals Board, the Grantee argued that, as an
administrator, the Executive Director was not governed by the same bonus
guidelines as other employees. The Grantee argued that in June 1979 its
Board of Directors clearly outlined a different bonus policy for the
Executive Director. The Grantee contended that the PHS Regional Office
had agreed with this practice in 1979.

PHS contended that until August 1982, the Grantee's policy limited
bonuses to 6% annually. /3/ PHS denied that it had ever agreed to a
performance award policy for the Executive Director in excess of the 6%
maximum for other employees, noting that the applicable cost principles
did not distinguish between compensation for different types of
personnel. While PHS did not deny that the Grantee's Board was the
logical body to approve salary increases and awards for the Director,
PHS determined that the Grantee (3) could not exceed its own policy
regarding the award of performance bonuses.


ANALYSIS

We conclude that the PHS Grant Appeals Board Decision was not clearly
erroneous.

The cost principles at 45 CFR Part 74, Appendix F, /4/ are applicable
to the Grantee's program through federal regulation found at 42 CFR
51c.113 (1980). The regulation at 45 CFR Part 74, Appendix F, G.6.(g)3
allows a grantee to provide incentive compensation to its employees to
the extent that:

... the overall compensation is determined to be reasonable and such
costs are paid... pursuant to an established plan followed by the
institution....


The PHS Grants Policy Statement indicates that bonus payments are:

Allowable as part of a total compensation package provided that such
payments are reasonable and are made according to a formal policy of the
grantee institution that is consistently applied. p. 15 (1976)

Although a literal reading of the Grantee's bonus policy would seem
to limit employees to no more than six 1% bonuses annually, PHS
apparently conceded that an employee could, in the alternative, receive
one 6% bonus per year. The bonus policy indicated that staff bonuses
would be approved by the (Executive) Director and that any bonus for the
Executive Director would be approved by the Board of Directors.The bonus
policy did not, in any manner, indicate that the Executive Director was
eligible for more than a 6% annual bonus. Indeed, since the policy does
not set a separate percent limit for the Executive Director and the
reference to the Executive Director follows the 6% limitation, the
implication is that it was intended to (4) apply to him. The policy
merely dictated that the Executive Director had final approval of clinic
staff bonuses and the Board of Directors had final approval of the
Executive Director's bonus payments. This is consistent with a sound
system of checks and balances where the Executive Director oversees the
employees and the Board of Directors oversees the Executive Director.

The Grantee argued, and PHS concurred, that the Board of Directors
was the proper body to approve salary increases and bonus awards for the
Executive Director. We agree. However, this authority does not give
the Board of Directors free rein to award bonuses to the Executive
Director irrespective of pertinent federal guidelines. The Grantee also
argued that PHS, by acquiescing in the Grantee's bonus policy as
established in 1979, had approved a separate bonus system for the
Executive Director. However, the Grantee has presented nothing to show
that PHS was aware of any policy to award more than a 6% annual bonus to
the Executive Director.

We do not believe that PHS was unreasonable in rejecting the
Grantee's argument that its bonus policy clearly took the Executive
Director out of the 6% bonus limitation. The policy subjects
consideration and approval of a bonus for the Executive Director to the
Board of Directors. It does not provide that the Executive Director is
not bound by the 6% ceiling.

Even if PHS had accepted the argument that the Executive Director was
not bound by the bonus policy, there would be a question as to the
allowability of these awards. The Grantee has not shown that it had any
other "formal policy," "consistently applied" with regard to bonuses for
the Executive Director. Any award made by the Board of Directors would
then have been completely discretionary. While the Board of Directors
clearly is the proper authority to oversee and approve the Executive
Director's compensation, federal guidelines are just as clearly intended
to limit that authority. An award made without a formal policy would
not meet the federal requirements for incentive compensation.

(5)

Conclusion

For the reasons discussed above, we have determined that the decision
of the PHS Grant Appeals Board was not clearly erroneous. Therefore, we
uphold the PHS decision to disallow $5,842. /1/ The Region IV Office of
Grants Management made the decision to disallow this cost after
two regional office employee visited the Grantee to discuss its policies
and practices. The Grantee appealed that decision to the PHS Grant
Appeals Board, which issued a written decision upholding the
disallowance. The Grantee then appealed the PHS Decision to this Board.
/2/ These percentages were calculated by dividing each $5,000 award by
the last indicated annual salary of the Executive Director for the year
in question as set out in the PHS Grant Appeals Board Decision. Since
we do not know the Executive Director's precise salary for each year,
the actual percentage represented by each bonus may vary. However, we
believe these figures present an accurate illustration of the issue in
this appeal. /3/ On August 18, 1982, the Grantee's Board of Director's
clarified the Grantee's policy regarding bonuses by indicating that the
Board itself would set the salary and any specific awards for the
Director. The Board indicated that salaries and awards for all other
staff would be subject to the Personnel Policies. /4/ The first
performance bonus was awarded in April 1981. Effective July 9, 1981,
the applicable cost principles were no longer set forth as Appendix F to
Part 74. Accordingly, the cost principles were found in OMB Circular
A-122 when second bonus was awarded. The relevant cost principle did
not change, however, so we cite only Appendix F.

JULY 07, 1984