5 Points on Designing a CEO Incentive Compensation Plan

Hospital incentive plans are increasingly focused on quantifiable measures that are critical for hospital success, meaning only the most focused CEOs can achieve the top financial rewards for their work. Ralph DiPisa, partner of executive healthcare recruiter Phillips DiPisa, discusses five essential traits of an effective CEO incentive plan.

1. Goals should be tiered, not "all or nothing." Mr. DiPisa says an incentive plan should be made up of several goals, meaning the plan could be partially accomplished and still mean a payout for the CEO. For example, if the hospital sets four equally-weighted goals, and the CEO accomplishes three but fails on the fourth, he or she would receive 75 percent of the incentive payment. This means that a CEO discouraged over one particular goal will not give up on the rest of the goals. It also offsets the impact of the economy, which may make particular goals — increasing hospital revenue or attracting more providers, for example — more difficult.

Incentive plans are formed in many different ways, but hospital boards can also choose to weight specific goals to make them more important. If patient satisfaction is the number one objective in the hospital's strategic plan for 2011, the hospital board might weight that goal more heavily to direct the CEO's focus.

2. Incentive goals should combine personal and organizational objectives. Compensation experts agree that most incentive goals should be quantifiable and measurable. That means that at the end of the year, the hospital board should be able to look at the goals and the CEO's progress and determine very clearly whether those goals were met. Even goals that seem more subjective — creating better relationships with the medical staff, for example — should use physician satisfaction surveys and other data to inform the board's determination.

Mr. DiPisa says many hospitals choose to combine personal and organizational objectives to encourage a more dynamic CEO. Organizational objectives might include decreasing readmission rates, improving patient satisfaction scores or increasing profit. Personal objectives might include improving the CEO's knowledge of finance or working on his or her presentation skills. By including personal goals in the incentive plan, hospitals ensure that the CEO continues to grow those personal tools that help accomplish organizational goals.

3. Only the best CEOs should earn 100 percent of their incentive. According to Mr. DiPisa, CEO incentive plans should be designed to really challenge the CEO rather than simply create the semblance of accountability. Compensation specialists discuss incentive plans in terms of a "threshold" and a "target" — the threshold being the minimum amount the hospital expects the CEO to accomplish, and the target being the desired amount. If the CEO has the opportunity to earn 25 percent of his or her base salary by accomplishing a set of goals, the compensation committee might set the threshold at 12.5 percent, meaning half the goals were accomplished. The target would be set at 20 percent, meaning most, but not all, of the goals were accomplished.

The CEOs who are top in their field could earn 100 percent of that incentive. "This is the part that separates the men from the boys and the women from the girls," he says. Some compensation committees will allow the best CEOs to "take the top off" the incentive plan and actually earn more than 100 percent, assuming they have met all the goals and accomplished extra objectives.

4. Incentive goals should not exceed eight.
While a hospital strategic plan might include 68 goals for the year, Mr. DiPisa says a CEO incentive plan should include between four and eight goals. He says he has seen client organizations that divided the plan into four personal goals and four organizational goals. If the CEO's goals outnumber eight, Mr. DiPisa says there's a good chance the CEO will accomplish fewer goals and become frustrated with the incentive plan.

Mr. DiPisa, who has served as a hospital CEO in the past, says, "Having run a hospital before, you could be busy every day and all day attending meetings, making presentations and going to small groups. You could do that for a whole year and think, 'I worked so hard this year' and have actually accomplished nothing," he says. Because CEOs are so busy, you need to concentrate the CEO's attention on several goals and make sure those are a priority next to the hustle and bustle of "making the trains run on time," Mr. DiPisa says.

5. CEO goals should trickle down. While your hospital staff probably shouldn't be told the exact financial reward your CEO will receive for accomplishing a specific goal, they should be on the same page about the hospital's main priorities. The CEO will find it difficult to accomplish his or her goals if the organization isn't on board. For example, while the CEO can take measures to improve patient satisfaction, the people who most often affect the patient experience are the physicians, nurses and staff members on the "front lines" of the hospital.

He says CEO goals can be spread throughout the facility by implementing incentive plans two or three levels down. "Maybe middle managers would have the opportunity to have a piece of their compensation bonus-based, and they should have the same goals as the CEO," he says. "The CEO's goal might be to grow cardiology by a certain percent, and the person two or three levels down might have goals around increasing the number of echocardiograms [or other more granular objectives]."

He adds that while organizational goals should be public, personal goals should probably be kept private.

Learn more about Phillips DiPisa.

Read more about executive compensation:

-Large Health System CEOs Beat Compensation Average by $15M

-15 Statistics on Healthcare Leader Compensation

-6 Statistics About ASC Administrator Compensation

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