6 Questions to Consider When Drawing Up Your CEO's Contract

Tags: hospital leaders

When your hospital board decides to hire a new CEO, the board members should be extremely thorough about deciding compensation, forming incented goals and planning for unexpected termination or departure. Nolan A. Newman, CPA, of accounting and healthcare consulting firm Newman Dierst Hales shares six questions your compensation and search committees should consider when determining compensation and writing your new CEO's contract.

1. What does market data say about the going rate for incoming CEOs at similar facilities? Whether your CEO hire is a planned succession or an unexpected situation, your compensation committee should have market data on CEO compensation at its disposal as part of its regular, ongoing work. If your committee is functioning properly, the members should regularly review what other hospitals of similar location and size pay their executives and compare that pay to your own practices. When drawing up a contract for an incoming CEO, look at market data to determine the average compensation for similar roles. Once you have that average, you can determine where your CEO falls in relation to other CEO candidates in terms of performance.

2. Where does the CEO fall compared to other candidates in terms of previous performance? Once you know the average compensation of similar CEO roles, you can tweak the base salary to fit your candidate's personal background and strengths. The market data available for CEO compensation will most likely give a range of salaries, and you should evaluate your candidate's previous performance to determine where he or she should fall in that range. "Obviously a hospital is going to want to employ a winner, so a lot of times, they're going to want to go with someone who's really good and falls in that ninetieth percentile," Mr. Newman says. "That could modify the compensation package."

3. How do the CEO's strengths fit with your organization's needs? You might also increase salary based on the CEO's specific strengths. For example, if your hospital is planning to implement an EMR, you might provide higher compensation for a CEO who has experience successfully implementing an EMR in the past. If you are hiring a CEO with previous successes building physician-hospital relationships, you might bump up the salary because of those strengths. Make it clear within your compensation committee why you are offering the compensation you decide on. That way, when you need to negotiate with the CEO over salary, you can rationalize your decision by pointing out the strengths and previous successes that led to the compensation you chose.

4. How will you measure the CEO's performance and provide incentives for improvement? Over the last 15 years, Mr. Newman says variable or incentive compensation has become a greater component of total compensation. "When you're in contract negotiations with the CEO, the hospital is going to lay out its expectations of what it wants to accomplish," Mr. Newman says. "Those expectations might already be documented in a hospital strategic plan, but if you don't have solid goals for the one, three and five-year marks, the search committee has to bring that to the table and develop some mutual goals with the CEO." Make the CEO's goals simple and easy to understand. You don't want to reach the time to decide bonuses and realize your CEO was unaware of your hospital board's expectations.

5. How will you adjust incentives if your hospital is financially unstable? Especially in today's fluctuating economy, you cannot necessarily predict whether your hospital will have the finances necessary to provide bonuses in a year or two. Make sure to include the plan for bonuses if your hospital is unprofitable in your CEO's contract. Some hospitals choose to implement a formulaic solution, in which the hospital has to be profitable to provide bonuses. "If the hospital is not prospering financially or is having real financial problems, the document should be very clear about the solution," says Mr. Newman. "If the plan is not clear or doesn't have a profitability threshold but the CEO has achieved the goals in the contract, the compensation committee and CEO have to work together to determine if a bonus is reasonable." Mr. Newman says CEOs will often forego part or all of their bonuses in order to help the hospital. The increasing transparency concerning executive salaries means the public will often criticize hospital CEOs for accepting bonuses when their hospitals are struggling financially, he says.

6. What will happen when your CEO leaves the organization? Your CEO's contract should also include a plan for the CEO's departure. "What happens to the remainder of the CEO's contract and benefits if they leave voluntarily or involuntarily and for cause or not for cause?" Mr. Newman says. "You could have an unplanned exit, so the contract should be clear about what happens to Supplemental Executive Retirement Plan benefits if a CEO is terminated, dies or becomes disabled and cannot work."

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