CEO Compensation in Healthcare: 10 Key Thoughts

How much leaders of hospitals and health systems are paid is a nuanced topic. To expand on the issue of CEOs' pay, here are 10 key thoughts.

1. The New York Times and the American Hospital Association appear to be in the beginning of a discussion or debate about the compensation of healthcare leadership.

2. Other newspapers, such as the Charlotte Observer and The Wall Street Journal have regularly run stories around the compensation of health system leadership. Some of the articles seem to criticize the compensation paid to CEOs and other executive leaders.

3. The compensation figures, as they are described, can be widely differentiated between for-profit health systems and nonprofit health systems. For-profit systems often have pay that really reflects stock options and other grants that both come with high risk and aren't available to nonprofit executives.

With the for-profit systems, the stock and equity appreciation is often a major component of reported figures. CEOs of large nonprofit systems may earn $300,000 to $500,000 in some cases and up to $1 million to $2 million in others. These numbers often pale in comparison to compensation of CEOs of large complex companies of similar size. In fact, many nonprofit leaders chose over the course of their career to give up the compensation available in the for-profit sector to purse nonprofit healthcare leadership opportunities.

4. We subscribe to the core concept in the book by Jim Collins, "Good to Great". Essentially, an organization is highly to wholly dependent on great people who are highly motivated. At all levels, employees must be compensated well to assure great talent is in place. Pay need not be excessive, but it cannot be low either. Quite frankly, great employees and leaders cannot be paid enough. They are often worth more to a company than they are paid.

5. Many hospital and health system leaders are running organizations that have $100 million to billions of dollars in revenues. Leadership of such organizations is highly complex and demanding. In the non-healthcare context, people who run $100 million to multibillion-dollar organizations often receive serious compensation, plus they have the chance to make equity returns. Thus, they often are paid a great deal more than leaders of nonprofit systems.

6. In choosing to compensate CEOs fairly or highly, or whatever one might describe it as, most boards make a very clear choice that having the right leadership is critical to the success of the system. Great employees throughout the system are critical as well. The CEO serves as a lever to help assure the entire organization moves in the right direction.

If a CEO earns $1 million a year, in a $500 million a year system, he or she is paid about 2/10ths of 1 percent of revenue. The value to that organization is much higher than $1 million a year if the CEO performs well and leverages himself or herself well. To look at this a different way: The board evaluates whether the organization should pay the CEO X dollars or buy equipment worth X dollars each year. In the view of most boards, hiring and retaining the right CEO is far more valuable than any incremental spend in other areas.

7. The great challenge in evaluating the appropriateness of CEO pay doesn't become difficult with a great or very good CEO. There, it is often very clear that the CEO is far more valuable than his or her costs. Of course, the best CEOs spend a huge amount of their effort developing the next level of talent, which makes them less valuable over time. If they develop talent right, CEOs do become more replaceable.

8. The challenge with CEO pay often comes where a weak CEO is paid like a well-performing CEO. Here it is incumbent on the board to make changes.

9. Boards are aware that hospital and health system CEO turnover has hit an all-time high. If an organization wants to keep a CEO who has demonstrated the ability to drive improvement and execute strategy, they must offer a competitive pay arrangement.

10. Hospitals and health systems are among the most complex organizations to manage, and today's CEOs are leading their organizations through the biggest reform healthcare has seen since the creation of Medicare in 1965. They are facing a myriad of financial and operational pressures, from declining reimbursement to health IT implementation and more.

More Articles on CEO Compensation:
CEO Compensation of the 25 Top-Grossing Nonprofit Hospitals
16 Statistics: Salaries and Cash Compensation for Hospital and System CEOs
10 Latest Stories on Healthcare Executive Compensation

 

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