4 Factors That Determine Hospital Executive Compensation

Hospital executive compensation runs the gamut, with the top health system CEOs making millions of dollars a year. Here three experts discuss four factors affecting hospital executive compensation.

1. Medical background. According to the 2009 AMGA Medical Group Compensation and Financial Survey, the median compensation of non-physician CEOs in healthcare organizations was $259,302 in 2009, compared to $417,934 for physician CEOs in healthcare organizations in the same year. According to Lois Dister, executive vice president and managing principal of Cejka Executive Search, physician executives are currently in high demand. "Reform and the development of accountable care organizations require leadership skills that encompass clinical background, finance, operations and medical information," she says.

Ms. Dister says the best healthcare organizations will provide physicians with opportunities to gain experience in a multitude of areas, such as service line growth, financial management, technology advancement and clinical integration. "Earning an MBA affords physicians an opportunity to not only learn business-relevant subject matter, but to have the shared experience of a very different learning process which prepares them to work alongside their non-physician colleagues," she says. For those physicians considering executive positions, the pursuit of an MBA may be worth it — according to Cejka Executive Search's research, physician CEOs and presidents with an MBA earned a 22 percent greater median salary than those without.

2. Community type. According to the Internal Revenue Service's Exempt Organizations Hospital Compliance Project Final Report, top management officials at non-profit hospitals saw wide differences in compensation based on the community surrounding their hospitals. According to the report, top management officials earned the following average salaries based on community type:

  • High population — $650,200
  • Critical access hospitals — $152,699
  • Rural — non-critical access hospitals - $289,500
  • Other — $427,500

Editor's note: Data on for-profit or community hospital executive compensation is not currently available.

3. Hospital revenue. Hospital revenue also plays a factor in compensation of hospital CEOs. According to Ms. Dister, the struggling economy may mean hospital executives sacrifice bonuses or incentive pay. "Because we have seen a trend toward basing a larger percentage of total compensation on performance, the component based on financial performance [of the hospital] would stagnate or drop with the decline of hospital revenue and margins," she says.

Nolan A. Newman of accounting firm Newman Dierst Hales agrees that the fluctuating economy means CEO contracts often include a plan for how compensation will be affected if the hospital is financially unstable. "If the hospital is not prospering financially or is having real financial problems, the plan document could be very clear about the solution," he says. He adds that CEOs often forego part of 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.

According to the Internal Revenue Service's Exempt Organizations Hospital Compliance Project Final Report, top management officials at non-profit hospitals made the following average compensation based on hospital revenue:

  • Revenue under $25 million — $149,700
  • Revenue between $25 and $100 million — $289,600
  • Revenue between $100 and $250 million — $465,300
  • Revenue between $250 and 500 million — $642,100
  • Revenue over $500 million — $877,200

4. Completion of pre-determined goals.
According to Bill Quirk, national director of healthcare consulting for Hay Group, the use of executive incentive plans in U.S. hospitals is becoming ubiquitous. He says around 90 percent of hospitals in America today use incentive plans, compared to almost zero in the early 1980s, meaning executives who expect to receive top compensation will have to meet standards set forth by the hospital.

If a CEO is making $100,000 per year, Mr. Quirk says he or she might be incented on a short-term basis at 30 percent of that base salary to meet annual goals. So if goals are completed in a given year, the CEO would earn $130,000. That same CEO might also be held to a long-term incentive program, which multiplies that percentage over a number of years for goals that take longer to implement — the construction of a new cancer center or the development of a service line, for example. So for a three-year long-term incentive plan, the CEO would be compensated an extra 90 percent or his or her salary during the third year.

Read more about compensation:

-10 Recent Healthcare Compensation Controversies

-10 Statistics About Compensation of Physician Executives Based on Management Experience

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