Executive Compensation: 9 Things Every Hospital CEO Should Know

The six- and seven-figure salaries of hospital and health system CEOs have made big headlines in the past year, from journalist Steven Brill's investigative piece in TIME magazine to local residents voting to cap executive pay at El Camino Hospital in Mountain View, Calif.

Every year, CEO compensation is scrutinized closely, but it's not just the public that is eyeing the figures. Hospital boards are becoming more cautious to ensure the top leaders of their organizations are compensated enough for retention, but not in excess to raise eyebrows.

At the American College of Healthcare Executives' 56th Congress on Healthcare Leadership in Chicago, a distinguished panel of hospital CEOs and healthcare compensation consultants described several compensation issues and topics that healthcare CEOs must keep in mind — and act on — this upcoming year.

1. Documentation is crucial. In December, Glenn Fosdick, longtime president and CEO of The Nebraska Medical Center in Omaha, found out the IRS would be conducting a routine audit of the academic medical center — and the feds would be there until May gathering necessary documents. When it came to the compensation portion of its audit, Mr. Fosdick said the IRS had no questions because he and his board make sure their Form 990 was detailed and descriptive in how his and others' compensation figures were calculated.

"We documented everything well, and we gave clarity on what the compensation committee is trying to do," Mr. Fosdick said.

2. Compensation committees must get adopt best practices. At last year's ACHE Congress, Kenneth Ackerman and David Bjork, PhD, both of Integrated Healthcare Strategies, outlined 11 crucial steps that hospital compensation committees must take to keep executive compensation fair and transparent. This year, they both said those same principles still apply, and in particular, it's paramount that compensation committees have a charter and philosophy so all stakeholders understand why they are making their decisions.

Christine Schuster, RN, president and CEO of Emerson Hospital in Concord, Mass., said those compensation committee best practices are the most important tools hospitals should adopt this year. "I put this on my board plan for the year, and you have to start the dialogue," Ms. Schuster said. "It took us eight years to have all the best practices, but you have to start some place."

3. Understand the basics of Dodd-Frank. In July 2010, President Barack Obama signed the Dodd-Frank financial reform bill into law. Within the law, for-profit, publicly traded companies were required to hold "say-on-pay" votes every one to three years. Shareholders would vote on whether the proposed executive compensation should be allowed, but the votes are nonbinding.

Although this law only affects private companies, Mr. Ackerman says the concepts are still very influential in non-profit healthcare organizations because there is a lot of overlap in best practices between the private and the non-profit sectors.

"Say-on-pay has a way of influencing people in the board rooms," Mr. Ackerman said. "You must describe the relationship between performance and executive pay — and it must be reasonable. These are sensible governance measures."

4. Public scrutiny of hospital pay will not go away anytime soon. As long as salaries and benefits are reported, they will always be a source of ire and discussion. But compensation committees are increasingly trying to heed the voices of dissent. "Boards are a lot more engaged, cautious and skeptical than they were five to six years ago," Dr. Bjork said. "They are slowing salary growth and are questioning above-average salaries."

5. Paying the median is not always easy. Most hospitals and health systems ideally want to pay their top brass in the 50th percentile and a median package. However, because there is a high amount of hospital CEO turnover, it has become more difficult for boards to start at the middle.

"It's very difficult to recruit the median," Dr. Bjork said. "If you are replacing any executive, you likely have to pay more than person who left, unless you promote internally."

Tim Rice, CEO of Cone Health in Greensboro, N.C., agreed, saying when he first made his way up the ranks internally, his compensation was below the median. However, the board had sound policies in place, and explained them well, so it didn't appear as if the board was "shooting darts at a dart board."

6. CEO annual salary increases will be modest, at best, for the foreseeable future. In 2012, executive compensation increased approximately 3 percent year-over-year, and Dr. Bjork sees much of the same in the future. "It's probably going to be 3 percent for next three to five years, perhaps lower, if reimbursement continues to get squeezed."

7. Incentive programs are evolving to include quality and performance. Annual incentive plans are almost universal for hospital and health system executives today, but Mr. Rice of Cone Health mentioned that performance and quality measures are becoming a bigger piece of that puzzle. "We are definitely more community-centric in those goals," he said.

8. Perquisites are disappearing. Car allowances, country club memberships and other commonplace perquisites of the past are falling by the wayside, as many view them as unnecessary today, Dr. Bjork says. However, hospital boards are instead folding the value of those perks into the base salaries or allowances. CEOs are not outwardly receiving a car allowance, for example, but a boost in salary could go toward that.

9. Practicing sound compensation strategies makes your life easier. All three hospital CEOs on the panel emphasized the importance of being proactive and transparent in their compensation efforts. They said taking that type of approach on a difficult topic makes it more palatable for the community.

"Since I first moved into the sector, the dynamic has changed a lot," Mr. Rice said. "It's so much better when you know the [compensation] policy and plan, and it's worth doing the work."

"No matter how well or poor your organization is doing, compensation is an uncomfortable topic for most people," Mr. Fosdick added. "The bottom line is, the earlier you start and the better educated everyone is, the better we can confront the challenges of today."

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