Compensation Issues

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How Hospital Executives Can Use Performance, Negotiations to Increase Earning Power

Hospital executive compensation is largely based on comparisons with similar positions in similar organizations. Hospital leaders need to distinguish themselves through performance and negotiate with the board to increase their earning power. Jim Nelson, a managing principal of SullivanCotter, and Deedra Hartung, executive vice president and managing principal of Cejka Executive Search, discuss six ways hospital leaders can increase their earning power.

1. Improve margins and quality. "The greatest influence on pay is performance," Mr. Nelson says. Specifically, hospital executives can prove their worth to the organization by improving the hospital's margins, quality outcomes and the community's health because these metrics benefit the hospital's finances directly and indirectly. As CMS will start penalizing hospitals for preventable readmissions, quality outcomes will be particularly important for hospitals' bottom lines going forward. "Demonstrating effectiveness in generating market growth and clinical outcomes are key determinants of the earning power of executives," Ms. Hartung says. "Benchmark your results so you have a strong track record of metrics showing value you helped to drive," she says.

Leaders' strategies to achieve growth and positive clinical outcomes must focus beyond just financial results. Patient safety, patient satisfaction and other non-monetary results should also be considered. "Growth for the sake of growth will not be a sustainable strategy, so it will not be the only measure by which a hospital executive will be compensated," Ms. Hartung says. "Acquisition, consolidation and new delivery methods will not only be based on scale, but on shared savings and win/win outcomes for all stakeholders."

2. Develop new markets. Hospital leaders can increase their earning power by looking for opportunities to expand the hospital's patient base and service offerings. "Seek projects and responsibilities in which you can demonstrate your leadership, creativity and effectiveness in driving positive returns through growth opportunities such as joint ventures, acquisitions and development of new service lines," Ms. Hartung says.

"Another thing an executive can do [to increase earning power] is to position their organization to be successful in the changing healthcare environment," Mr. Nelson says. Hospital executives will need to develop new markets as healthcare reform programs encourage hospitals to change the way they deliver care. "Acute-care admissions will drop as there is more emphasis on delivering care through outpatient/ambulatory [centers] and in the home," Ms. Hartung says. "Finding these new revenue sources outside the 'bricks and mortar' will be key."

3. Engage physicians. Mr. Nelson says leaders can increase their earning power by integrating physicians and aligning goals of quality care and efficient care delivery. Partnering with physicians may allow leaders to improve care coordination for patients, which in turn can save money from medical errors avoided and elimination of duplicative testing. Hospital leaders could be rewarded for these savings through greater compensation. In addition, partnering with physicians positions the organization for developing an accountable care organization or participating in other programs healthcare reform legislation will implement in the future.

Ms. Hartung says initiatives designed to foster collaboration between physicians and hospitals can help hospital executives develop new leadership skills. "[Healthcare reform] present[s] more opportunity for leaders with a vision for creative leadership [to do] some risk-taking and aligning the interest of everyone involved, and thus increase their value to the organization," she says.

4. Build experience. Experience is also a factor in hospital executive compensation. One way to gain experience is to invest in education through professional organizations, courses and other resources. For example, leaders can work to become a fellow of the American College of Healthcare Executives. Gaining experience can help leaders earn higher compensation in their current position and position them to be leaders of larger organizations. These larger organizations will look to recruit leaders with a proven track record, Mr. Nelson says. As healthcare reform initiatives encourage hospitals and health systems to merge and partner, leaders with experience will be in high demand and will be better compensated due to the larger size of the organization.

5. Take on more responsibility. Moving to a bigger organization is not the only way to earn more compensation, however. "Conventional wisdom is that moving on is the way to move up," Ms. Hartung says. "[But] with consolidation, it is now possible to seek the next step up within the system if it is growing in scope." Leaders can increase their earning power by taking on more responsibility within the hospital. Partnerships between hospitals and other organizations, including health systems, physician groups and outpatient centers, provide leaders with an opportunity to expand their role and thus their compensation.

One challenge with staying in one organization for a long period of time, however, is encouraging the board of directors to continue benchmarking compensation against similar positions in similar organizations. "Longer service executives tend to be paid less over time," Mr. Nelson says. "There's a tendency to downplay the need to [compare compensation with peers] the longer an executive is in an organization." Mr. Nelson says leaders should urge boards to review the executives' compensation annually or at least every two to three years to keep up with the changing market. 

6. Negotiate with the board. Hospital executives can increase their earning power by negotiating with the hospital board for less guaranteed pay and more incentive-based compensation, according to Mr. Nelson. He says that leaders whose pay is based more on incentives and then perform well have the opportunity to earn more compensation overall than leaders with less incentive-driven pay. Some incentive pay metrics include operating income, cash flow, days cash on hand, quality outcomes, patient satisfaction and employee satisfaction. Mr. Nelson says hospitals are likely to use more incentive compensation as healthcare reform goals stress improving quality and lowering cost. "[Healthcare] organizations will look more towards long-term, sustained performance, which means that in addition to traditional measures, you'll see an increase in long-term incentive compensation," Mr. Nelson says.

Mr. Nelson also suggests leaders ensure an appropriate balance between current and deferred compensation. Hospital leaders can benefit from deferred compensation because they can earn interest on their income before taxes are applied.

Related Articles on Executive Compensation:

How to Avoid IRS Penalties for Non-Profit Hospital Leaders' Compensation
How Healthcare Reform is Affecting Hospital Leaders' Compensation

Trends in Hospital Executive Compensation: Q&A With Deedra Hartung of Cejka Executive Search


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