11 Hospital, Health System Executive Compensation Trends

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Hospital and health system executive compensation is affected by several factors in the healthcare industry, including a greater focus on quality and patient satisfaction, as well as consumers' increasing involvement in their healthcare. As healthcare organizations face the uncertainty of the healthcare reform law's constitutionality and changing regulatory requirements, the need to recruit and retain strong leaders may be more important than ever. Here are 11 hospital and health system executive compensation trends experts are seeing in the current market.

1. Total compensation is increasing slightly. One trend is that hospital executive compensation is increasing by approximately 3 percent per year, according to David A. Bjork, PhD, senior vice president and senior advisor of the executive compensation and governance practice at Integrated Healthcare Strategies. IHS' Spring 2012 Salary Increase, Incentive and Benefit Updates Survey found that the average budgeted salary increases for hospital and health system executives in 2012 are 2.5 percent.

Some healthcare executives, however, are choosing to forgo compensation increases or bonuses. "Despite the odds against many of the C-suite executives and the fact that they are leading their organizations through unparalleled economic times, we are seeing more and more of these executives take a voluntary pay cut," says David Gillan, vice president of purchased services at Novation. "These executives want to lessen the burden on the organizations they are leading and realize the cuts are being felt by all staff."

In 2011, median and average base salaries for independent hospital CEOs were $467,500 and $482,300, bringing their median and average total annual cash compensation to $496,400 and $539,200, respectively. Independent health system CEOs had a median base salary of $649,900 and an average base salary of $687,900, which brought their median and average total annual cash compensation to $790,100 and $861,500, respectively, according to IHS' 2011 National Healthcare Leadership Compensation Survey.

Compensation
Source: IHS
Position 2011 median base salary 2011 average base salary 2011 median total annual cash 2011 average total annual cash
Independent hospital
CEO $467,500 $482,300 $496,400 $539,200
CFO $263,600 $279,800 $275,700 $312,100
COO $265,000 $283,800 $287,900 $319,900
Independent health system
CEO $649,900 $687,900 $790,100 $861,500
CFO $371,100 $381,900 $427,800 $454,800
COO $389,000 $414,400 $430,900 $491,900


2. Compensation increases are higher at standalone hospitals. Standalone hospitals tend to give higher increases in compensation for their executives than hospitals under a system, according to Paul Esselman, executive vice president and managing principal at Cejka Search. "One of the reasons is standalone hospitals are up against the market and have to perform in order to stay independent. There is so much more pressure on leadership to perform, to deliver quality and safety scores and implement initiatives," he says. In comparison, hospitals under a large system have more resources and support at their disposal to meet quality and cost goals.

In 2011, total cash compensation for integrated health system CEOs and independent hospital CEOs differed by roughly 3 percentage points: Integrated health system CEOs had a 3.1 percent increase while independent hospital CEOs had a 6 percent increase from the previous year, according to Hay Group's 2011 Hospital Prevalence and Planning Report.

Compensation Increases
Source: Hay Group
Position Median base salary increase 2010-2011 Median total cash increase 2010-2011
Integrated health system CEO 4% 3.1%
Independent hospital CEO 5% 6%


3. Boards are more conservative. One new trend in hospital and health system compensation is that the organizations' boards are being more conservative and more cautious, Dr. Bjork says. Their caution is motivated by several reasons, including lower reimbursements, pressure to reduce costs and the public's perception of executive compensation. "Boards are also nervous about the future because of healthcare reform," Dr. Bjork says. "They're concerned about the effects of accountable care on the financial health of their institutions and the kind of transformation the organizations need to go through in order to thrive in the future. They know that healthcare organizations are going to need to change a lot, and they're in part wondering how those changes will affect the way they deliver pay to the organizations' leaders."

4. Boards' focus on reducing costs affects compensation.
The pressure to reduce costs in healthcare has caused many hospital and health system boards to be more conservative in adding new components to an executive's compensation package, Dr. Bjork says. "They are really focused on trimming costs and becoming cost-effective, and it's starting to affect the way they look at executive pay," he says.

This focus on reducing costs has triggered some boards to raise the threshold for awarding executives bonuses for financial improvement. For example, executives at Chattanooga, Tenn.-based Erlanger Health System did not receive bonuses despite the system's fiscal year 2011 profit because the board of trustees instituted stricter bonus criteria. In FY 2010, Erlanger had an $8.6 million profit and gave $1.9 million in bonuses. In FY 2011, the system made a profit of $5.4 million. Under the new bonus system, Erlanger must have an operating margin of 30 percent, a total profit of $12 million and a 25 percent increase in admissions, among other requirements.

5. Boards' awareness of public perception yields fewer bonuses. Hospital and health system boards are also less apt to hand out large bonuses to the organization's leaders because the public tends to portray executive compensation increases negatively. "They know they're going to have to defend their decision, so they're finding it difficult to be generous even when they are very impressed with the performance they're getting out of their leaders," Dr. Bjork says. Boards are awarding bonuses less not due to poor performance, but due to concerns about the public's perception. "Very few boards really believe that executive pay is too high. But they're acutely attuned to all the criticism they hear and see in print that executive pay is too high. They're really responding to the public relations risk more than they are to their own sense that pay is too high," he says.

The public's attack on hospital leaders' compensation increases can be particularly harsh when the increases follow layoffs at the organization. For instance, there was backlash against Jackson Health System in Miami when it was found that CEO Carlos Migoya earns roughly $850,000 per year while the system made more than 1,100 layoffs.

However, if cutting staff is the best solution to poor financial performance, leaders are only being rewarded for doing their job, Dr. Bjork says. Some boards are delaying bonuses to executives until months or a year after the layoffs occurred to avoid the public's perception that the executives are benefiting at the employees' expense.

Mr. Esselman suggests consumers' greater awareness of healthcare executives' compensation will force hospitals and health systems to be more transparent with the community and communicate more effectively. Delivering high quality care may also reduce the public's negative viewpoint of healthcare leaders' compensation. "When patients in the hospital feel like they're getting the best care, the compensation of their executives becomes less of an issue," he says.

6. Pay increases for new leaders. One trend that has continued from previous years is that new executives recruited from other organizations are often compensated more than their predecessors. Experienced executives are usually paid well, and it typically takes a good increase to persuade an experienced executive to change jobs, according to Dr. Bjork. This trend may become more important as more hospital and health system executives reach retirement age, the stresses of healthcare reform spur some executives to retire early and hospitals search for new leaders to transform an organization struggling with healthcare reform regulations.

Hospitals increase pay for new executive leaders in part to attract the strongest leaders to the organization. "Committees are very divided," Dr. Bjork says. "They're cautious as they are making their decisions, but they understand that they need first rate talent, so they are willing to pay enough to get really good talent and hold onto them."

7. Boards are becoming more involved in compensation plans. As boards are becoming more attuned to efforts to reduce the cost of care and more sensitive to the public's view of compensation, they are beginning to take a larger role in developing goals for executives' incentive plans, according to Dr. Bjork. "In the past, they used to be more willing to let management take the lead in deciding what the measures should be. Boards are now exerting more control over deciding what the measures are, how to weight the measures and what the goals should be," he says.

The Center for Healthcare Governance noted in a monograph that the Patient Protection and Affordable Care Act's provisions for rewarding high quality and penalizing low quality partly motivated hospital compensation committees to take more responsibility for goal-setting in executive pay. By becoming more involved in establishing targets for incentive payments, boards can ensure the hospital or health system is incentivizing the correct behavior to reach quality and safety goals. Boards are focusing on quality, physician alignment and patient satisfaction metrics, among others.

8. Compensation is based on quality metrics. Hospital and health system executives' bonuses are increasingly based partly on quality and safety performance. This shift is due in part to healthcare reform's emphasis on quality and safety and their relationship to financial rewards or penalties. Regardless of whether the law is deemed unconstitutional or not in June, this trend is likely to continue due to greater transparency, which allows patients to be more selective in choosing healthcare providers, and the benefits of saved costs and saved lives that come with higher quality. "I believe we're going to continue to see compensation and bonus compensation for healthcare executives not be solely based on financial performance of the organization but on things like quality, safety and service," Mr. Esselman says.

9. Compensation is based on the ability to align physicians. In addition to rewarding healthcare leaders for quality, hospitals and health systems are also rewarding their leaders for success in aligning physicians, as it is also encouraged under the healthcare reform law. "The leaders that are able to achieve collaboration are highly sought after," Mr. Esselman says. "Those highly sought after leaders, when they're successful in achieving some of these [physician alignment] initiatives, will be rewarded." Leadership's engagement of the community and collaboration with payors and local physician groups can help drive greater quality and cost savings and will be rewarded in leaders' compensation packages. "Physician alignment strategies will become an increasing piece to a hospital executive's compensation because every hospital wants to have a strong medical staff, and it really falls on the leadership of that hospital to create that environment where physicians want to come to their hospital and admit their patients," Mr. Esselman says.

In fact, nearly 38 percent of hospitals and health systems will use some type of physician alignment criteria in their incentive plans in 2012, according to IHS' Spring 2012 Salary Increase, Incentive and Benefit Updates Survey.

10. Compensation is based on patient satisfaction.
Patient satisfaction is also becoming more common in hospital and health system executives' compensation. "Senior leaders will increasingly be rewarded for overall patient satisfaction with their organization because each leader has a hand in shaping a patient's experience," Mr. Esselman says. "For example, a CFO who improves the accuracy and efficiency of the patient billing process has a positive impact on patient satisfaction." The 2011 Hay Group Healthcare Compensation Study found that 79 percent of providers use patient satisfaction as the primary measure for annual incentives across all executive employee groups of the organization.

11. Long-term incentives are becoming more prevalent. More hospitals and health systems are including long-term incentives in their executives' compensation packages as healthcare reform requires changes that will affect the entire system of delivery over time. "By and large it's an effort to put into place a program that focuses on transformation. They're recognizing that if they focus only on this year's performance, they're not focused on the need to transform how healthcare is delivered," Dr. Bjork says. He says long-term incentives, which usually look ahead three years, are also a way to retain leaders because they must wait three years to receive their bonus.

In 2001, 39 percent of large non-profit health systems used long-term incentive plans for CEOs. By 2011, this number reached 45 percent, according to an IHS report. In that same time span, the median long-term incentive opportunities for non-profit health system CEOs increased from 20 percent of salary to 28 percent of salary per year, according to IHS.

The 2011 Hay Group Healthcare Compensation Study found that only 14 percent of non-profit integrated health systems offered long-term incentive plans in 2006, but 25 percent offered these plans in 2011. Similarly, 14 percent of non-profit secular integrated health systems had long-term incentive plans in 2006 and 23 percent had them in 2011. Non-profit religious integrated health systems showed the most change, going from 8 percent offering long-term incentive plans in 2006 to 31 percent offering the plans in 2011.

Overall, hospital and health system executive compensation trends reflect trends in the industry as a whole: there is a greater focus on transparency, quality, physician alignment, patient satisfaction and long-term change. As the challenges in healthcare today demand strong leadership, hospital and health system executives may continue to see increases in compensation to attract and reward high talent. However, there is likely to also be some restraint in bonuses from the board as the market increases pressure on organizations to reduce costs.

Long-Term Incentive Plans
Source: IHS
Year Large non-profit health systems using long-term incentive plans for CEOs Median long-term incentive opportunities for non-profit health system CEOs
2001 39% 20% of salary
2011 45% 28% of salary


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