5 Common Hospital Executive Compensation Practices

Here are five common hospital executive compensation practices, according to various experts and benchmarking surveys.

1. Appointing a compensation committee to determine salaries. Fifty-six percent of non-profit hospitals report that executive compensation is decided by a compensation committee, according to the Internal Revenue Service's Exempt Organizations Hospital Compliance Project Final Report. Recruitment experts believe that percentage is increasing: as compensation transparency becomes more and more expected, hospitals and health systems will want to dedicate a committee to the task of determining whether compensation is fair. Jim Otto, senior consultant at Hay Group, says many compensation committees take this responsibility one step further by articulating a "compensation philosophy" for the facility. "If you have a compensation philosophy, the odds are good you will pay reasonably, and the converse also holds," he says.

2. Distributing large severance and retirement packages. The annual compensation of hospital and health system CEOs often seems paltry compared to the packages they receive upon departure or retirement. Georgia's Memorial Health recently reported the system may pay fired CEO Phillip Schaengold as much as $900,000. Mr. Schaengold was CEO for 18 months and was paid approximately $616,000 plus benefits annually. If the board pays him for his entire 18 months, the buyout would total around $900,000.

Former Milwaukee-based Aurora Health Care COO Donald Nestor received $8.2 million in salary, bonuses and other compensation after his retirement from the system in Jan. 2009, a total that was disclosed two weeks after Aurora announced plans to eliminate 175 jobs by the end of 2010. Mr. Nestor said the $8.2 million included deferred and other compensation that had accumulated over his 20-year career with the healthcare system.

According to Kathy Noland, vice president of board and CEO services at B.E. Smith, hospital boards often guarantee large severance packages to let executives know they can make necessarily risky decisions without being penalized. "The principle behind that is the board of directors wants the CEO to make prudent decisions for the mission and values of the organization," she says. "[The severance] package gives the CEO a confidence level to make those decisions. If for any reason they are terminated without cause, there is that extension of salary until they are engaged in their next employment."

3. Paying more for clinical backgrounds. 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. This disparity suggests that a clinical background is a valuable trait for a CEO. According to Lois Dister, executive vice president and managing principal of Cejka Executive Search, physician executives are in high demand as hospitals and health systems look to develop ACOs and deal with healthcare reform. She says these initiatives "require leadership skills that encompass clinical background, finance, operations and medical information."

4. Opting not to disclose compensation information. While most compensation experts agree that hospitals and health systems should promote transparency around executive compensation, facilities are often hesitant to provide salary information on their top earners. Following the resignation of CEO Paul Levy from Boston's Beth Israel Deaconess Medical Center in January, hospital officials decided not to disclose whether or not the executive would receive severance pay. In an email written to Boston Globe columnist Brian McGrory, a public relations consultant hired by BIDMC said, "It is a longstanding policy at BIDMC to protect the privacy of our employees; consequently, we do not comment on personnel matters for any individual," according to Mr. McGrory's column.

In another instance, a judge stepped in to decide whether Wuesthoff Health System had to disclose information on the separation packages paid to eight former executives following the system's rescue-sale to Health Management Associates in 2010. The health system claimed the executive separation packages were covered by a trade-secret exemption under state law. The packages were later disclosed, following negotiations between the Florida Attorney General and former Wuesthoff board members and their lawyers. The nine executives received $10.6 million in separation pay between them.

5. Basing compensation on quantifiable incentives. Incentive plans are common for hospital executives and will become increasingly prevalent over the next few years, according to many compensation experts. According to Ms. Noland, CEO bonuses are currently tied to the same performance indices that healthcare organizations will be held accountable for as pay-for-performance and accountable care organizations take effect.

Recent news backs up Ms. Noland's claim: in mid-December, executives at Parkland Memorial Hospital in Dallas received $3.8 million between 160 leaders for reducing ED waiting times and the rate of hospital-acquired infections. The executive incentive plan, which was modeled after plans in other industries, required achieving pre-set goals related to each manager's job. For example, the hospital set a goal to reduce pneumonia associated with patients on ventilators and accomplished that goal by reducing incidences of pneumonia by 44 percent, from 119 in 2009 to 68 in 2010.

Read more on executive compensation:

-3 Trends Affecting Non-Profit Hospital CEO Compensation

-5 Recent Healthcare Compensation Controversies

-Proposed Bill Would Cap Maine Hospital Executive Salaries

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