Jim Otto, senior consultant at Hay Group, offers six steps to help hospitals determine executive compensation through benchmarking and building a clear compensation philosophy.
1. Decide which benchmarking data is appropriate for your hospital. According to Mr. Otto, a variety of data on executive compensation exists, and your compensation committee should first decide which data is appropriate for your facility. "Do we look at data regionally, statewide or only nationally?" he says. "If we're a not-for-profit hospital, do we only look at not-for-profit data, or are we going to look at for-profit data too?" He says if hospitals are planning to look at non-profit and for-profit executive compensation data, they must consciously decide whether to examine those data sets separately, blended or weighted.
He says the compensation data you choose will also be affected by whether your hospital offers annual and long-term incentives to executives. According to Mr. Otto, most hospitals use annual incentives, but long-term incentives are rarer. When you look at compensation data, be sure to look at data that presents both base salary (compensation before incentives) and total cash compensation (compensation after incentives). If you only look at average compensation, you may be looking at hospitals that use different base salary/incentive models than yours.
2. Decide where you fall in the market. Executive compensation will depend on where your hospital falls in the market, Mr. Otto says. If your hospital is a renowned, competitive facility that wants to attract the best talent in the country, you will likely have to compensate your executives in the 90th percentile. If you dominate a regional market and are unlikely to draw executive candidates from all over the country, you may be more comfortable as a 50th percentile payor. This determination all depends on your hospital's mission, standing and financial health.
Mr. Otto says your hospital's market determination can differ for base salary and incentive plans. For example, your hospital might choose to pay at the 50th percentile for base salary but at a higher percentile for your incentive plan. "You might say, 'Given the performance we're expecting, we're targeting something higher in the market [for annual incentives] because we want to really provide cash growth based on performance rather than base salary increases."
3. Articulate your processes in a compensation philosophy. According to Mr. Otto, the IRS encourages hospitals — especially non-profit hospitals — to keep an executive level "compensation philosophy" to provide transparency on compensation decisions. "If you have a compensation philosophy, the odds are good you will pay reasonably, and the converse also holds," he says.
Your compensation philosophy will help your compensation committee make better informed decisions that are aligned with the organization's strategy. The philosophy should outline your organization's mission, your place in the market, the determinants for an individual candidate's compensation and a clearly defined process for deciding base salary and incentives.
4. Discuss compensation decisions with your new hire. More organizations are choosing to sit down with newly hired executives and going through the compensation statement together, according to Mr. Otto. "Hospitals are going into some detail in terms of the hospital's compensation philosophy, showing market data on compensation range and letting the executive know where they sit in the range," he says. Make the decision about compensation a discussion. The executive might have ideas to contribute about the combination of base salary and incentive plans that will help your organization fine-tune its decision and tailor the compensation plan to the candidate.
5. Decide whether to offer an annual and long-term incentive plan. "If you look at any survey that captures prevalence of annual incentives, the vast majority of organizations have an annual incentive plan for their executives," Mr. Otto says. "In structuring that plan, one of the design elements has to be, 'What is the incentive opportunity?'" He says cash compensation market data can help your hospital decide what kind of opportunity you want to provide your executive.
The opportunity for incentives means the percentage of base salary the executive can gain on an annual basis through meeting various performance standards. Long-term incentive plans, which are rarer but gaining in popularity, use similar measures but are spread out over time for projects that necessitate 3-5 years for completion.
He adds that while the majority of organizations use an annual incentive plan, there are still organizations that choose not to for various reasons. He says your organization should look at its values and goals and decide whether an incentive plan will help your CEO accomplish those goals. "That's a threshold issue you have to answer right away," he says. The same goes for long-term incentive plans: Just because they're rarer doesn't mean your hospital shouldn't use one. It just depends on your long-term goals and organization's personal values, he adds.
6. Decide how benefits fit into your compensation plan. Your organization should spend as much time deciding benefits as base salary and incentive plan, Mr. Otto says. Some hospitals will choose to weigh benefits more heavily, especially if the provision of higher cash compensation is more difficult. Since executives are often given more and better benefits than other staff members, you organization should spend time thinking about which benefits are appropriate for the position.
Many hospitals have come under fire in recent years for offering benefits that many feel are not related to the executive position. Mr. Otto says you should make sure your benefit plan is competitive but reasonable and examine data on "prevalence of benefits" to determine how similar hospitals structure executive benefits.
Learn more about Hay Group.
Read more about compensation:
-6 Ways to Determine Staff Compensation at Your Hospital
-Hospital Workers See Pay Raises, Bonuses
1. Decide which benchmarking data is appropriate for your hospital. According to Mr. Otto, a variety of data on executive compensation exists, and your compensation committee should first decide which data is appropriate for your facility. "Do we look at data regionally, statewide or only nationally?" he says. "If we're a not-for-profit hospital, do we only look at not-for-profit data, or are we going to look at for-profit data too?" He says if hospitals are planning to look at non-profit and for-profit executive compensation data, they must consciously decide whether to examine those data sets separately, blended or weighted.
He says the compensation data you choose will also be affected by whether your hospital offers annual and long-term incentives to executives. According to Mr. Otto, most hospitals use annual incentives, but long-term incentives are rarer. When you look at compensation data, be sure to look at data that presents both base salary (compensation before incentives) and total cash compensation (compensation after incentives). If you only look at average compensation, you may be looking at hospitals that use different base salary/incentive models than yours.
2. Decide where you fall in the market. Executive compensation will depend on where your hospital falls in the market, Mr. Otto says. If your hospital is a renowned, competitive facility that wants to attract the best talent in the country, you will likely have to compensate your executives in the 90th percentile. If you dominate a regional market and are unlikely to draw executive candidates from all over the country, you may be more comfortable as a 50th percentile payor. This determination all depends on your hospital's mission, standing and financial health.
Mr. Otto says your hospital's market determination can differ for base salary and incentive plans. For example, your hospital might choose to pay at the 50th percentile for base salary but at a higher percentile for your incentive plan. "You might say, 'Given the performance we're expecting, we're targeting something higher in the market [for annual incentives] because we want to really provide cash growth based on performance rather than base salary increases."
3. Articulate your processes in a compensation philosophy. According to Mr. Otto, the IRS encourages hospitals — especially non-profit hospitals — to keep an executive level "compensation philosophy" to provide transparency on compensation decisions. "If you have a compensation philosophy, the odds are good you will pay reasonably, and the converse also holds," he says.
Your compensation philosophy will help your compensation committee make better informed decisions that are aligned with the organization's strategy. The philosophy should outline your organization's mission, your place in the market, the determinants for an individual candidate's compensation and a clearly defined process for deciding base salary and incentives.
4. Discuss compensation decisions with your new hire. More organizations are choosing to sit down with newly hired executives and going through the compensation statement together, according to Mr. Otto. "Hospitals are going into some detail in terms of the hospital's compensation philosophy, showing market data on compensation range and letting the executive know where they sit in the range," he says. Make the decision about compensation a discussion. The executive might have ideas to contribute about the combination of base salary and incentive plans that will help your organization fine-tune its decision and tailor the compensation plan to the candidate.
5. Decide whether to offer an annual and long-term incentive plan. "If you look at any survey that captures prevalence of annual incentives, the vast majority of organizations have an annual incentive plan for their executives," Mr. Otto says. "In structuring that plan, one of the design elements has to be, 'What is the incentive opportunity?'" He says cash compensation market data can help your hospital decide what kind of opportunity you want to provide your executive.
The opportunity for incentives means the percentage of base salary the executive can gain on an annual basis through meeting various performance standards. Long-term incentive plans, which are rarer but gaining in popularity, use similar measures but are spread out over time for projects that necessitate 3-5 years for completion.
He adds that while the majority of organizations use an annual incentive plan, there are still organizations that choose not to for various reasons. He says your organization should look at its values and goals and decide whether an incentive plan will help your CEO accomplish those goals. "That's a threshold issue you have to answer right away," he says. The same goes for long-term incentive plans: Just because they're rarer doesn't mean your hospital shouldn't use one. It just depends on your long-term goals and organization's personal values, he adds.
6. Decide how benefits fit into your compensation plan. Your organization should spend as much time deciding benefits as base salary and incentive plan, Mr. Otto says. Some hospitals will choose to weigh benefits more heavily, especially if the provision of higher cash compensation is more difficult. Since executives are often given more and better benefits than other staff members, you organization should spend time thinking about which benefits are appropriate for the position.
Many hospitals have come under fire in recent years for offering benefits that many feel are not related to the executive position. Mr. Otto says you should make sure your benefit plan is competitive but reasonable and examine data on "prevalence of benefits" to determine how similar hospitals structure executive benefits.
Learn more about Hay Group.
Read more about compensation:
-6 Ways to Determine Staff Compensation at Your Hospital
-Hospital Workers See Pay Raises, Bonuses