Hospital Executive Pay Freezes: When Are They Appropriate?

While there have been some high-profile pay freezes for hospital employees, this approach tends to be limited to senior executives and is often a way for executives to share the pain of mass layoffs.

U.S. hospitals carried out 152 mass layoffs in 2009, according to the Bureau of Labor Statistics. In this situation, "a salary freeze for executives can show proportionality," says Ron Seifert, executive compensation practice leader for the Hay Group in Philadelphia. "If the organization has to make drastic cutbacks in staff, the idea is that maybe the executives shouldn't get a pay raise."

Salary freezes tend to be limited to executives and perhaps also department heads because people at "the top of the house" are better prepared to take a cut in pay than rank-and-file employees, says David Bjork, senior vice president & senior advisor for Integrated Healthcare Strategies in Kansas City. "The rationale is, 'Let's reduce the salaries of the people who can afford it,' " he says.

Other times to implement freezes
In addition to balancing off layoffs, Mr. Bjork says hospitals might institute pay freezes in other occasions, such as:

  • When they are concerned about the hospital's financial future and aren’t sure the hospital could otherwise take on additional expenditures.
  • To mirror freezes in the community. Sometimes members of the hospital board have been freezing pay in their own businesses and want the hospital to do the same. "A salary freeze would put the hospital in step with the community," Mr. Bjork says.
  • When institutions funded by the state, county or city see a reduction in funds. In these cases, pay freezes or hiring freezes are required.

Not to be overused
"Salary freezes are easy to take because they are temporary," Mr. Bjork says. "They tend to last 12-18 months, and when they're expired you don’t follow it up with another one."

Mr. Seifert says freezes could be demoralizing when used again and again. "Executives have been working harder, much more than they have been," he says. When the freeze ends, he says, executives should be rewarded with a pay hike.

Mr. Seifert adds that freezes may not be a good idea if the market for executives is very competitive. Mr. Bjork, on the other hand, says it is unlikely that a pay freeze would be enough to push executives find a new job, particularly in the middle of a recession. "Executives understand what is going on in the rest of the world," he says.

Some examples of pay freezes

Cleveland Clinic. When the recession first hit in Dec. 2008, CEO Toby Cosgrove, MD, instituted a hiring and salary freeze for employees not in direct patient care. The Clinic lost $62 million on $4.9 billion revenues for last year, largely due investment losses, but it has recovered and expects to add 1,800 full-time jobs this year, a 5 percent growth rate.

Swedish Covenant Hospital. Rather than order layoffs, CEO Mark Newton asked employees to forgo their annual pay increases and promised that if employees introduced operational efficiencies to help the hospital reach its financial goals, they would get the withheld money back, in full. Mr. Newton lifted the freeze and fulfilled his promise in April, paying employees a total of $1.5 million in withheld raises. Employees got back merit increases that made up as much as 3 percent of their pay.

Learn more about the Hay Group.

Learn more about Integrated Healthcare Strategies.

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