While many hospitals have temporarily frozen executive salaries, a few have gone a step further and actually cut them.
When a hospital has to lay off workers, an executive pay cut sends employees a message more eloquently than words that the C-Suite is making sacrifices, too, says Ron Seifert, executive compensation practice leader for the Hay Group in Philadelphia. "It tells the employees that the executives are doing what they can to make this as painless as possible for the organization," he says.
The level of the cut tends to be 5-10 percent of base salary, Mr. Seifert says. He says executives, who usually have a role in deciding the cut, may base the percentage on the question: "How much can you cut back base pay before it hurts?"
Such cuts, when distributed among a 20-person senior management team, are more than just symbolic, Mr. Seifert says. When average earnings for the group are $250,000 to $300,000 a year, the hospital can have enough money to fund a program or a few middle management salaries, he says.
Pay cuts can have a negative connotation
An executive pay cut is much less popular than a salary freeze because it has a more negative connotation, says David Bjork, senior vice president & senior advisor for Integrated Healthcare Strategies in Kansas City.
"A fee freeze is delaying an increase while a pay cut is taking some action," he says. He adds that since benefits are tied to the salary level, a fee cut requires complicated adjustments of benefits levels. As with hiring freezes, Mr. Bjork says pay cuts should be temporary and preferably followed up by a raise, bonus or some other reward.
Targeted pay cuts are preferrable
"Pay cuts and other reductions tend to be more dramatic at the top of the house than inside the house, Mr. Seifter says. Executives below the C-Suite level should be protected because "you want to keep these people as motivated as possible," he says. Also, the hospital's financial problems were caused by bad decision-making, and "these people were not in the line of sight," he says. "They did not have role, so you don't want to penalize them."
Mr. Bjork is not a fan of using system-wide pay cuts rather than laying off workers as a way to balance the budget. "It sounds fair and good, but it's not the way big organizations deal with cost control," Mr. Bjork says. "The simplest way to cut costs is not to fill positions."
Examples of executive pay cuts
Premier Health Partners (Dayton, Ohio.). In conjunction with a freeze on employee salaries, and top executives at this four-hospital system are taking a 2 percent cut in base compensation in 2010. “We’re trying to take into account some of the economic trauma,” CEO Tom Breitenbach told the Dayton Daily News.
St. Joseph Regional Medical Center (South Bend, Ind.). When the hospital initiated a pay freeze for employees in 2009, executives received an 8 percent cut in pay. St. Joseph needed to keep expenses in line to prepare for the opening of a new $355 million facility later in the year.
Beth Israel Deaconess Medical Center (Boston). In early 2009, when the hospital forecast it would need to cut 600 jobs, CEO Paul Levy and skilled employees came up with a plan to cut their salaries and benefits and contain layoffs to 70. The hospital finished 2009 with a gain of $10.3 million and raises were returned to the staff in April. Those who declined raises last year will receive a 3% increase over their actual 2009 salaries.
Learn more about the Hay Group.
Learn more about Integrated Healthcare Strategies.
When a hospital has to lay off workers, an executive pay cut sends employees a message more eloquently than words that the C-Suite is making sacrifices, too, says Ron Seifert, executive compensation practice leader for the Hay Group in Philadelphia. "It tells the employees that the executives are doing what they can to make this as painless as possible for the organization," he says.
The level of the cut tends to be 5-10 percent of base salary, Mr. Seifert says. He says executives, who usually have a role in deciding the cut, may base the percentage on the question: "How much can you cut back base pay before it hurts?"
Such cuts, when distributed among a 20-person senior management team, are more than just symbolic, Mr. Seifert says. When average earnings for the group are $250,000 to $300,000 a year, the hospital can have enough money to fund a program or a few middle management salaries, he says.
Pay cuts can have a negative connotation
An executive pay cut is much less popular than a salary freeze because it has a more negative connotation, says David Bjork, senior vice president & senior advisor for Integrated Healthcare Strategies in Kansas City.
"A fee freeze is delaying an increase while a pay cut is taking some action," he says. He adds that since benefits are tied to the salary level, a fee cut requires complicated adjustments of benefits levels. As with hiring freezes, Mr. Bjork says pay cuts should be temporary and preferably followed up by a raise, bonus or some other reward.
Targeted pay cuts are preferrable
"Pay cuts and other reductions tend to be more dramatic at the top of the house than inside the house, Mr. Seifter says. Executives below the C-Suite level should be protected because "you want to keep these people as motivated as possible," he says. Also, the hospital's financial problems were caused by bad decision-making, and "these people were not in the line of sight," he says. "They did not have role, so you don't want to penalize them."
Mr. Bjork is not a fan of using system-wide pay cuts rather than laying off workers as a way to balance the budget. "It sounds fair and good, but it's not the way big organizations deal with cost control," Mr. Bjork says. "The simplest way to cut costs is not to fill positions."
Examples of executive pay cuts
Premier Health Partners (Dayton, Ohio.). In conjunction with a freeze on employee salaries, and top executives at this four-hospital system are taking a 2 percent cut in base compensation in 2010. “We’re trying to take into account some of the economic trauma,” CEO Tom Breitenbach told the Dayton Daily News.
St. Joseph Regional Medical Center (South Bend, Ind.). When the hospital initiated a pay freeze for employees in 2009, executives received an 8 percent cut in pay. St. Joseph needed to keep expenses in line to prepare for the opening of a new $355 million facility later in the year.
Beth Israel Deaconess Medical Center (Boston). In early 2009, when the hospital forecast it would need to cut 600 jobs, CEO Paul Levy and skilled employees came up with a plan to cut their salaries and benefits and contain layoffs to 70. The hospital finished 2009 with a gain of $10.3 million and raises were returned to the staff in April. Those who declined raises last year will receive a 3% increase over their actual 2009 salaries.
Learn more about the Hay Group.
Learn more about Integrated Healthcare Strategies.