Compensation Issues

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Taking pay cuts: Why some hospital executives leave money on the table

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When times get tough, some hospital executives end up taking a pay cut, whether they want to or not.

In 2009, the U.S. was still in the throes of the Great Recession; Beth Israel Deaconess Medical Center in Boston being no exception. To alleviate the impact of the economic hardship and to prevent laying off hundreds of workers, president and CEO at the time Paul Levy and his executive team took matters into their own hands.

Mr. Levy voluntarily took a 10 percent pay cut on his roughly $800,000 annual salary and gave up a 33 percent bonus opportunity, while his executive team chose to take a 5 percent pay cut and gave up 15 to 25 percent bonus opportunities.

"We took some pretty hefty salary reductions, and I think it made an impression on people," said Mr. Levy.

The former head of Beth Israel then asked the hospital staff to brainstorm ways to save money, prevent layoffs and shield the hospital's low-wage workers — housekeepers, transporters, food service workers and others — from pay cuts as much as possible.

The response was overwhelmingly encouraging, with nurses, physicians and staff alike offering to give up raises, forgo vacation time and give up a portion of the employer match on their 401(k) retirement plans, said Mr. Levy.

Despite the positive outcomes at Beth Israel, a hospital or health system executive voluntarily taking a pay cut is an exceedingly rare occurrence, according to David Bjork, PhD, senior vice president and senior advisor of total compensation and rewards at Integrated Healthcare Strategies.

"There are times when a hospital is performing poorly and they need to make a decision to cut back on the costs associated with the workforce," said Dr. Bjork. "More often than not, hospitals will look at cutting costs by reducing benefits, freezing salaries, temporarily not paying bonuses, slowing down hiring and laying workers off long before they'll consider cutting executives' salaries."

When executive pay cuts do happen, it's more commonly done voluntarily on the part of the executives' than imposed by a hospital board or compensation committee.

In large, multimillion-dollar hospitals and multibillion-dollar health systems, a small percentage of one or even several executives' pay doesn't make a big difference financially, according to Dr. Bjork. Instead, the gesture tends to be symbolic — a way of showing hospital staff members that the executives are willing to make a sacrifice just like everyone else.

For Mr. Levy and his team, taking a pay cut was about doing the right thing and building trust with the hospital staff, not just about finances.

"To me, [taking a pay cut] was just the moral thing to do. If you are going to freeze people's salaries or reduce staff, I don't see how you'd feel right with yourself not doing taking a cut, but I know a lot of people don't feel the same way."

Finances might not have been the number one driver behind Mr. Levy's decision, but that's not to say his pay cut wasn't financially effective. Between the compensation cuts taken by the former CEO and his executive team, and the cost-cutting strategies suggested by the staff, the hospital was able to save between 400 and 600 jobs, as well as more than $16 million, according to a PBS NewsHour report.

Another reason executives may take a pay cut is because their job is being reconfigured and they are taking on a smaller role with different responsibilities, according to Jim Otto, a senior principal at Hay Group who specializes in issues involving executive compensation at healthcare organizations.

Occasionally, an executive will make the decision to take a pay cut with this type of job change rather than move on to a different organization, although this situation is peculiar to an individual's circumstances.

Hospital board- and compensation committee-imposed salary reductions also exist, but they are particularly uncommon situations and have become even less common in recent years, according to Mr. Otto.

"The last time I saw — I wouldn't even call it a trend — programmatic pay cuts happening with some frequency in the recent past was during the recession," said Mr. Otto. "Then, you might have seen pay cuts being applied across the board at the senior executive level."

Executive pay is not easy for hospital boards or compensation committees to cut due to legal and contractual issues, and it's even more challenging due to the sensitive nature of compensation in general.

Regardless of the reasons behind why a pay cut is taken, the practice is not common. That may be because many executives don't see it as actually making a huge financial difference or because compensation is just such a touchy matter in business, regardless of the industry.

"Compensation is one of the most deeply personal things you can touch with someone on the job," said Mr. Otto. "A lot of people think of their compensation as demonstrating their worth, it may be a reflection of how they think of themselves, so talking about pay cuts — even temporary ones — is a sensitive topic."

According to Mr. Otto, at the senior executive level, CEOs should work to get their team to consider putting pay cuts on the table as part of a larger overall strategy for the good of the organization as opposed to taking a potential pay cut as a personal slight.

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