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10 Predictions on the Future of Hospital Executive Compensation

Stories on hospital executive compensation have littered newspaper headlines in 2011 so far. In April, Salinas (Calif.) Valley Memorial Healthcare System came under fire for the $4 million retirement package offered to outgoing president and CEO Sam Downing, while Wayne Smith, president and CEO of Franklin, Tenn.-based Community Health Systems saw his compensation nearly double from 2008-2010. While executive salaries are expected to increase as the recession ebbs, the raises come alongside an emphasis on transparency and accountability, forcing some hospital compensation boards into the spotlight as they defend their decisions. Jim Nelson of Sullivan, Cotter and Associates, Robin Singleton of DHR International and John Fulcher of Bauer Consulting Group discuss 10 trends expected to shape hospital executive salaries over the next several years.

1. Executive salary increases will remain in the 2.5-3 percent range. Mr. Nelson says he expects overall salary increases to stay in the 2.5-3 percent range, mirroring trends that Sullivan, Cotter and Associates has seen over the past several years. "Prior to that, senior healthcare executives might have seen increases in the 4-5 percent range, but salary increases have become more modest and will probably stay that way for the foreseeable future," Mr. Nelson says. According to Integrated Healthcare Strategies' Executive Compensation Survey, hospital CEOs earned an average of $452,400 in 2010, while health system CEOs raked in around $683,000. Hospital CFOs earned an average of $268,400 in 2010 and health system CFOs made an average of $378,000. In addition to a "leveling off" of increases, Mr. Nelson also expects executive salary increases to align more closely with increases in the general healthcare workforce; in other words, if hospital employees receive a 3 percent salary increase overall in 2011, executives are likely to see a similar jump. Mr. Nelson indicated that the overall increase doesn't preclude boards approving larger increases for higher performers, executives who may be paid lower in the market or executives who receive promotions.

He says several factors are driving this stabilization of salary increases. In an era when "transparency" and "documentation" are the popular buzzwords, compensation committees and hospital boards are becoming less likely to raise executive salaries above the market rate for their size and type of organization. Mr. Nelson says boards are becoming more cautious. There is an increasing preference by boards to link pay to the performance of the organization, so compensation plans are relying more on incentive pay to reward executives versus salary increases. These incentive plans are used to align executive pay with overall organizational performance.  

2. Incentive awards will return to higher amounts. Despite the stagnation in executive salary increases, Mr. Nelson expects incentive awards to return to historic levels, signaling a possible return to economic stability. "Over the last couple of years, incentive awards have been lower because of the issues hospitals face during trying economic times," he says. "Even in some organizations that have performed well, either the executives or the board occasionally decided it might be appropriate to delay payments or not pay them at all." The use of executive incentives is widespread in the hospital industry, with 83 percent of health systems and 82 percent of hospitals reporting the use of short-term incentives and 35 percent of systems and 22 percent of hospitals reporting the use of long-term incentives, according to Integrated Healthcare Strategies. According to the 2010 Hay Group Healthcare Survey, sponsored by TIAA-CREF, the average annual incentive payment for CEOs of non-profit healthcare organizations is $335,300; CFOs make slightly less at an average of $136,300. These incentive payments made up an average of 37.3 percent of total compensation for non-profit hospital CEOs and 29.1 percent of total compensation for non-profit hospital CFOs.

Mr. Nelson says that while high-performing organizations will see a return to robust incentive payments, he notes that along with increased incentive awards, board expectations for executive performance are increasing as well. He says he has seen an increasing emphasis on quality outcomes and community benefit in addition to the traditional financial performance measures in executive incentive plans. "To get the maximum possible award, you have to have outstanding performance in each of the criteria," he says. Awards are usually based on 5-8 objectives, which are closely aligned with the strategic goals of the organization.

3. Non-traditional executive backgrounds will demand higher salaries. Driven by current demands in healthcare, Ms. Singleton says hospitals are increasingly looking to hire executives with clinical, finance and information technology backgrounds. This means some hospitals are choosing to hire C-suite leaders without a healthcare background. She says because many of these candidates are moving into the healthcare industry from "corporate America" — and leaving high-paying jobs to do so — executive salaries must increase to attract top talent.

The healthcare industry is also seeing an influx of talent from other industries as hospitals create previously non-existent positions to cater to the "patient experience," says Ms. Singleton. In order to get reimbursed in the future, hospitals and physicians will have to demonstrate accountability on many levels, and they will have to demonstrate patient satisfaction scores and quality scores, she says. "In that case, a new person might come [into the healthcare industry] from the hospitality industry, and that means a higher salary. There's an increase in salaries of about 15-20 percent when you recruit from corporate America."

4. Incoming executives will demand higher pay than the leaders they replace. According to an American College of Healthcare Executives report, the hospital CEO turnover rate sat at 16 percent in 2010, a number that Thomas C. Colan, PhD, FACHE, CAE, president and CEO of ACHE said was "too high." Hospitals losing their executives may agree with Mr. Colan: As long-time CEOs retire, up-and-coming leaders are demanding more money to step into the same roles.

"Those CEOs have been at the hospital a long time and are fairly highly compensated, and they're pretty maxed out on the internal scale," Ms. Singleton says. "But in order to replace them with people of their caliber — as well as people who can face the challenges of the future — it's unbelievable. Hospitals are having to pay much higher." She says hospitals that want to recruit top talent must pay at the 95th percentile.

The demand for high compensation is exacerbated if a candidate arrives from an area like New York or California, where average salaries are much higher. Mr. Fulcher says states with a higher cost-of-living will also have to pay better salaries, and candidates are unlikely to accept anything less than they made at their last organization. "I haven't seen any hospitals paying less than what they're paying the current CEO or less than what the incoming candidate is making," Ms. Singleton says. "Very few people will move for less than a 3-5 percent salary increase."

5. Sign-on bonuses and relocation allowances will become more prevalent.
More hospitals are offering sign-on bonuses to candidates to offset the cost of relocating and compete with other facilities, Mr. Fulcher says. "If you want to be competitive, you have to pay a sign-on bonus," he says. "You'll have sign-on bonuses that are between $5,000 and $10,000 and relocation packages that are between $3,000 and $10,000."

Ms. Singleton says she has seen hospitals increase their relocation allowances to help candidates sell their houses and find a new place to live. "Hospitals are having to give candidates a sign-on bonus … so they can price their house at a much lower sellable price, or they have to give them the money to rent a place and have the cash to make the mortgage payment," she says.

Mr. Fulcher says some hospitals are choosing to authorize direct billing for candidate relocation, rather than asking candidates to pay for relocation and then reimbursing part of the cost. Direct billing allows the hospital more control over how relocation funds are spent and takes some pressure off the candidate in terms of paying relocation fees.  

6. Supplemental benefits will simplify.
Non-profit hospitals may simplify supplemental benefits for executives in the next few years, following a decision by the IRS to clarify the way supplemental benefits are now taxed and disclosed on Form 990, according to Mr. Nelson. "While there are supplemental benefits, such as supplemental retirement programs to bring executive retirement benefits to competitive norms, they're much simpler than they used to be," he says. Supplemental benefits are often required to offset the legislative or contractual caps on group benefits and retirement plans.

For example, more boards are deciding to align the executive level of benefits with the benefits of the general workforce, meaning if an employee receives two times his salary for life insurance, executives would also receive two times their salary for life insurance. However, if caps on life insurance prevent the executive from receiving two times his or her salary (likely a considerable amount more than an employee would receive), the hospital might add supplemental life insurance to bring benefits to a competitive level. But clearly, the rich benefit plans of the past are going away.

7. "Back filling" will mean paying better candidates more money. Ms. Singleton says she predicts hospitals will have to "back fill" positions as they try to undo cuts made during the recession. In order to offset decreased reimbursement and drops in case volume, many hospitals eliminated C-suite roles such as the COO and attempted to spread leadership duties among fewer people. Now that the economy is recovering, hospitals are finding that their leaders are overburdened with work, and some leaders are unable to handle the increasing demands of the industry.

As facilities look to replace or add more talented leaders, they will have to spend more to recruit sought-after candidates. "When you raise the bar and say you want someone stronger in the role that can handle more and has a higher skill set, you'll have to pay more for that," Ms. Singleton says. "That could be anywhere from an 8-12 percent increase."

8. Perquisites will continue to decline. Mr. Nelson says healthcare organizations are increasingly eliminating perquisites such as country clubs, automobile allowances, tax gross ups and travel expenses that used to serve as an additional compensation for hospital executives. He says the decrease in perquisites is motivated in part by the public perception that executive perks are unnecessary, by tax law changes and by the increasing requirements for reporting of perquisites on IRS Form 990. "There are some perks that are standing the test of time, if they serve a legitimate business purpose" he says. "For some executives, there may be a very legitimate reason to give executives country club dues so they can fundraise and meet with the community leaders. But I think that by and large, boards are challenging perks more than they have in the past." He says the perks that survive will be those that boards deem necessary for the executive's role: for example, auto allowances for executives who spend a lot of time traveling by car.

9. Past compensation practices will be challenged. Mr. Nelson says as transparency and documentation become more important, compensation committees and hospital boards are exerting more control over the executive compensation process. "In other words, they're saying, 'Why are we doing what we're doing, and does it still make sense in today's environment?'" Mr. Nelson says. He says in more instances, the full board of directors is involved in overseeing executive pay. There is also a need for non-profit hospitals to clearly document their decisions and be careful to establish that compensation committee decision-makers, as well as their compensation advisors, are independent and do not benefit from the final compensation decisions.

He says the board's review of the analysis of third-party data used to determine executive compensation is also becoming more stringent, as required by the IRS. Instead of viewing market data analysis as a cursory task, boards are expected to think seriously about the hospital's position in the market and calculate how compensation should be awarded based on that position. The boards are also considering whether they are getting data from the right types of organizations. "If the hospital is going to be paying above the median or in the upper quartile for performance, the boards are asking whether the hospital is really performing at those levels," Mr. Nelson says.

10. Severance packages will increase to offset the risk of new positions.
As hospitals create never-before-seen positions — "director of patient experience," for example — Ms. Singleton believes severance packages will increase in length. "Severance packages are holding at 18 months, with 12 as a minimum, and some CEO searches are going to 24 months," she says. More robust severance packages can calm the nerves of candidates who are unsure about filling a "non-essential" hospital job — one that was recently created as a new project but may not be necessary in a few years.

These newly-created positions may also pose a problem for recruitment, as hospitals and search agencies may struggle to find suitable candidates. "There could only be three or four people with that title in the country," Ms. Singleton says. "We may have to look at unusual titles, do a lot of original research and go outside healthcare."

Read more about Sullivan, Cotter and Associates.

Read more about DHR International.

Read more about Bauer Consulting Group.

Related Articles on Compensation:
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Healthcare Occupations Top List of Country's Highest-Paying
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