4 Trends in Non-Profit Hospital Executive Compensation Over the Next 5 Years

Every week, the healthcare industry sees headlines about hospital executive compensation controversy — how much CEOs are making, who decides it and whether the pay is reasonable. As hospitals struggle to stay financially viable, executive compensation practices will demand more oversight and data measurement to ensure hospital leaders are paid what they deserve. William Quirk, national director of healthcare consulting for Hay Group, discusses four ways executive compensation is changing as the effects of healthcare reform loom on the horizon.

1. Almost every hospital in America will use an executive incentive plan. According to Mr. Quirk, around 90 percent of hospitals in America today use incentive plans, compared to almost zero in the early 1980s. And rather than shy away from incentive plans that might penalize bad behavior, hospital executives are growing more and more enthusiastic about the chance to prove their worth and make money based on real progress.

Incentive programs are effective in part because they allow a hospital to diminish compensation without touching base salary. "We see frozen salaries, but we don't see diminished salaries," Mr. Quirk says. "We just see incentives that don't pay out if goals are not achieved." This means the executive is almost entirely responsible for his or her compensation increases or decreases — except in a situation where the hospital is financially unstable and cannot pay the incentive. Giving the executive responsibility for maintaining a high-quality hospital will be essential as the government introduces stricter regulations on quality patient care and readmissions.

2. Long-term incentive plans will become more important. As the effects of healthcare reform on hospitals become clearer, long-term incentive plans that focus on strategic direction will be essential, Mr. Quirk says. "Going forward, hospitals will have to ask, 'Can we really be all things to all people? Do we need to stick to acute-care rather than branching out into exotic programs?'" he says. "With reimbursement going down, hospitals are going to have to be careful about picking the right focus and making sure they implement it correctly."

Unlike short-term incentive programs, which might focus on annual goals such as improving annual operating efficiency, long-term incentive programs focus on loftier goals that are accomplished over the span of many years. These goals depend on the hospital's strategic direction, and might include measures like improving patient satisfaction from the 40th percentile to the 80th percentile or building a new cancer center. Because non-profit hospitals don't have the option of offering stock options as long-term incentives, executives are incented with a percentage of their salary. If a CEO is making $100,000 per year, he or she might be incented on a short-term basis at 30 percent of that base salary to meet annual goals. For long-term incentive programs, that percentage is multiplied by the number of years, so a three year incentive program would compensate the CEO at an extra 90 percent of his or her base salary.

Long-term incentive programs will become more important as hospitals look several years ahead to plan for major changes. For example, a hospital that plans to meet meaningful use requirements might incent its CEO on a long-term basis to effectively implement an EMR.

3. Incentives will focus on true areas of need rather than areas that are already strong. For an incentive plan to work, hospital boards have to sit down and examine the real failures at their hospital. Mr. Quirk says if a hospital is at the 93rd percentile for physician satisfaction, they should stop incenting hospital executives to increase that number. "Statistically, it's not going to happen," he says. "Once you reach your target achievement level in the incentive plan, find something else you need to work on."

As data management systems become more widespread, hospitals have the option to measure many different metrics to determine compensation. "If your cost per discharge is at the 80th percentile of teaching hospitals in America, you have to get that number down, and the incentive program might help with that," Mr. Quirk says. Track data over time and use it to find your areas of weakness, whether they lie in patient satisfaction, physician satisfaction, FTEs per occupied bed, infection rates or any number of other metrics.

4. Perks will become less and less common. Already, the healthcare industry has almost done away with perks unrelated to job title, Mr. Quirk says. Unlike in the 1980s and 1990s, when executives might receive private helicopter use and first class air fare for spouses as part of their compensation package, healthcare executives are now usually only offered business-related perks. "If there's a country club membership and it's used for business, the percentage the CEO uses for business can be taken off taxes," Mr. Quirk says. "Spouses are still encouraged to attend professional association meetings, but it's all work-related.  Private helicopters, Lear jets — that doesn't exist in not-for-profit healthcare."

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