The best executive compensation packages: Attractive yet sensible

Say goodbye to the private jet, the club membership and the tax breaks, because being a healthcare executive doesn't pay quite like it used to.

About a decade ago, hospitals — especially those in the for-profit arena — began discontinuing practices like the above, which have increasingly negative optics in a time of belt-tightening, value-based goals that don't leave room for even perceived excesses.

What's left might be as lucrative, but it's more cleverly packaged.

The "perks" — executive benefits — employers now offer are structured so that benefits may require meeting long-term or graduated goals to achieve the payoffs.

This is a very different executive compensation strategy than in the past. While nonprofit and for-profit hospitals may have different compensation strategies — for-profit hospitals and health systems, especially large ones that are doing well, tend to have more resources and benefits such as equity to offer prospective executives — both are moving away from ongoing benefits such as car allowances or club memberships.

"Even though they don't [necessarily] have a dollar value, they have negative impressions, oftentimes," says Betsy Field, a senior consultant for Towers Watson specializing in compensation.

The trend of dropping "luxury" executive benefits in healthcare has been ongoing throughout the past decade. According to Ms. Field, Form 990 disclosures, tougher economic times and closer scrutiny have made if very difficult to provide a compelling business case for certain types of executive benefits, when executive compensation packages already tend to be large. Performance-based compensation opportunities, however, are becoming more prevalent in healthcare, she adds.

The remaining executive benefits serve a dual purpose. "When you're recruiting someone into an organization, or if there's some situation going on where there's a retention concern, you may see a hiring or retention bonus. For these, the best practice is to ask what's the business need and the business rationale. There is a business need for those remaining perks," says Ms. Field.

An emerging trend in executive benefits in healthcare is to restructure the mix of total remuneration to be more performance-based, which provides the potential for upside value. For example, Ms. Field says retirement has traditionally been a significant portion of the compensation package for executives. Now, the supplemental piece of the executive retirement package is increasingly being reallocated to a long-term incentive opportunity, which provides more immediate, performance-based incentives for executives.

These long-term incentives are often structured in the form of multi-year, overlapping goal cycles, with a new overlapping cycle set up each year and performance bonuses paid out in cash. While this type of benefit may not be quite the standard or at the same value as it is in for-profit organizations, the offer is still compelling enough to attract executive candidates from the for-profit industry.

Indeed, this kind of compensation package shift comes at a time when the roles of healthcare executives are less and less defined by previous healthcare provider experience. Accordingly, the performance-based aspect of compensation restructuring is attractive for executive candidates from a variety of industries. "Some of these long-term incentives are opening up the market for executive talent, which is becoming much broader. The pressure is on to restructure the package," says Ms. Field.

According to Ms. Field, just because the total compensation package is more "sensible," doesn't mean it can't pay off. The key to recruiting executives is to make the total package — from salary to welfare benefits and retirement to extras — an attractive proposition. And, the restructured package also may help organizations attract executives from any industry who are truly invested in doing good work and are equipped for the challenge.

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