Compensation Manifesto: 11 Steps for Hospital CEOs and Compensation Committees to "Get it Right"

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Compensation of hospital CEOs and other top hospital executives, especially at non-profit organizations, is undergoing mass amounts of scrutiny, thanks in part to the new federal standards that require transparency of all tax-exempt organizations.

Kenneth Ackerman, chairman of Integrated Healthcare Strategies and former president of Geisinger Medical Center in Danville, Pa., spoke at the American College of Healthcare Executives 2012 Congress on Healthcare Leadership in Chicago on March 19. He said that hospital executives and the compensation committee within the board of directors must be on the same page if community members, media and all other interested parties are to understand the methodology behind the salary figures. He explained 11 checklist points for hospital executives and hospital compensation committees to follow in order to reach that level of understanding.

1. Have a dedicated compensation committee. A compensation committee is typically composed of five board members tasked with setting the compensation of the hospital CEO and other high-paid executives. That committee wields an extraordinary amount of power when it comes to setting the pay standards for the hospital, so it must be a dedicated group of independent directors who possess the necessary skill sets. Mr. Ackerman emphasized that setting compensation is more than just an accounting task — it needs to come from a group of people who are willing to show the time commitment and will not have any conflicts of interest.

2. Prepare a compensation committee charter. Mr. Ackerman has seen compensation committee charters at hospitals that are three to four sentences, but a charter that is that short will not have much of an impact or detail as to how things are run. "That's not a charter," Mr. Ackerman said of a three- to four-sentence compensation charter. "You have to spell out in some detail what has been delegated and how the compensation committee is going to govern."

3. Adopt a board-approved compensation philosophy. Similar to the charter, a compensation committee must put forth a board-approved philosophy on how compensation is viewed in the hospital. Mr. Ackerman said the philosophy is the bedrock of any good compensation plan, and it helps keep the board and CEO on the same wavelength.   

4. Focus on total compensation. A compensation committee cannot only focus on the cash compensation, which includes salary, benefits and other immediate cash incentives. The federal government is looking at the entire spectrum of compensation, which includes deferred compensation and retirement plans, and therefore that must be reflected on the Form 990. "That's what the IRS expects of your organization," Mr. Ackerman added.

5. Establish the Rebuttable Presumption Reasonableness. Internal Revenue Code 4958 established many provisions for tax-exempt organizations, including hospitals. Under IRC 4958, a tax-exempt organization can establish RPR, which more or less validates why an executive was paid a certain amount. Mr. Ackerman said every hospital CEO and compensation committee should establish the RPR because it is a safe harbor and provides protection as to the compensation rationale. He said every compensation committee and board meeting should include in their minutes how compensation was determined with supporting documentation, such as providing comparability data of other healthcare executive compensation trends.

6. Hold regularly scheduled meetings. Speaking of meetings, executives and compensation committees should meet at least two or three times per year as a minimum. "Holding meetings only once a year is not doing the job," Mr. Ackerman said. "Things are moving too fast. To have [the committee] making informed decisions, doing it in one or even two meetings won't do it justice."

7. Ensure adequate time to deliberate and conduct CEO appraisal. Because there are so many different factors that affect hospital executive compensation, such as comparability data and hospital revenue size to name a few, Mr. Ackerman said hospitals should allow for enough time to set the right compensation. This is especially true as boards and committees set the compensation for the hospital CEO, which usually receives the most scrutiny.

8. Hold executive sessions. Executive sessions are meeting agenda discussions in which board and compensation committee members debate and question the CEO and other executives on performance and other issues that are pertinent to setting their pay. Mr. Ackerman said after board members conduct their inquiries, the executives can be excused for further debate. "This may take five minutes, or this could take 20 minutes," Mr. Ackerman says. "But it's good governance, and it sets the tone."

9. Instill an environment of continuous quality. "If the board isn't committed to [self-evaluation], who is?" Mr. Ackerman asked. He said CEO self-evaluation and committee self-evaluations will ensure that compensation is justified while also ensuring the right people are being retained for the jobs.  

10. Prepare to address media inquiries. Every hospital executive, especially the CEO, should know who the hospital's media spokesperson is and what the simple statement will be regarding his or her salary and benefits. Any comments on compensation should be directly attributed to the statement, yet thoughtful enough to answer any potential questions from deadline-pressured reporters.

11. Practice full disclosure to the board using tally sheets. In 2002, the U.S. Securities and Exchange Commission required that for-profit entities use tally sheets, which describe an executive's current and potential total compensation, retirement income and severance benefits and what a lump sum severance benefit could be if the executive were let go without cause. These types of compensation sheets are not required of non-profit hospitals, but Mr. Ackerman said it is certainly a best practice. "The best practices in corporate America should occur in the not-for-profit sector," he said.

More Articles on Hospital Executive Compensation:

HCA CEO Richard Bracken's Total Compensation Dropped 85% in 2011

Consulting Stipend of Former St. John's Medical Center CEO Questioned

Vanguard CEO Charles Martin Jr.'s Compensation Tops $3.7M

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