3 Trends Affecting Non-Profit Hospital CEO Compensation

"Transparency" and "accountability" are the key words for non-profit hospital CEO compensation in the next few years. Christian Britton, an associate with PRM Consulting Group, discusses three trends hospital compensation committees should expect as they move into 2011 and beyond.

1. IRS will enforce intermediate sanctions on hospital CEO compensation. Intermediate sanctions are applied by the IRS to "disqualified persons" within an organization, including CEOs for non-profit hospitals. The regulations allow the IRS to penalize non-profit hospitals for providing compensation over fair market value to a CEO. "There's a lot of light shining on CEO compensation in general," Mr. Britton says. "The focus isn't so much on the amount given to the CEO, but instead the justification of why that amount is [reasonable]." He says going forward, non-profit hospitals and health systems will have to provide a clear rationale, including market data and quantifiable CEO accomplishments, to show that compensation does not fall into the category of an "excess benefit transaction."

He says for CEOs who are paid above the market rate for their position, hospitals and health systems will have to make solid cases for why the compensation level is appropriate. "You could make cases where the CEO is a top performer and someone [the hospital] cannot live without," he says. "If you're paying at the 75th percentile of the market, you'll have to come up with a very strong justification as to why you feel they are a top performer and that you need to reward your CEO at that level."

2. Compensation committees must check market data regularly. To avoid public criticism or IRS action on inappropriate CEO compensation levels, Mr. Britton says hospitals and health systems should check market compensation data on a regular basis. "One of the best ways to stay critical and scrutinize your [CEO's compensation] is to do your due diligence," he says. "You should take frequent looks at where the market is and where you stand relative to the market." Your position in the market should be a large determinant of your executive team's compensation, he says. Even if you can provide evidence that your executives have performed well, compensation that does not match up with your hospital's market position is likely to invite scrutiny.

To make sure your hospital is using the appropriate market data for your facility, Mr. Britton recommends looking at data for hospitals with similar revenues and bed counts to be sure of an “apples to apples” comparison. "When you're looking at CEO compensation, you want to look at the broader, national picture," he says. "When you focus yourself too much on locale, it distorts the picture of where you're truly competing."

3. Compensation committees may need to re-adjust compensation based on external factors. Hospital and health systems increasingly use CEO incentive plans in addition to base salaries to reward executives for meeting pre-determined goals. For example, a goal that is set in the annual incentive plan would be to increase revenues by 10 percent. However, as the economy continues to challenge hospital finances, Mr. Britton says compensation committees may be forced to re-adjust how they compensate their CEO based on those external factors — and to be prepared to explain the rationale. For example, if a hospital is located in an area that experiences a sudden and severe economic downturn, the hospital may suffer despite the CEO's best attempts to boost revenues. "There are times when things happen and it wasn't the CEO's fault, and [the CEO] may, unfortunately, have to take the heat for it," he says. "In that case, the compensation committee may have to make a judgment call when things don't go according to plan based on the external factors."

Mr. Britton says one clear task stands out for non-profit hospital compensation committees in 2011: increase transparency. Your hospital should expect to be held accountable for what you pay your executives, so make sure you're prepared to share your reasons for the compensation of your executives.  

Read more about PRM Consulting Group.

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