New models of patient care delivery are developing to meet the organization’s current objectives: provide patients with a better experience, improve the health of patients, and reduce costs.
To accomplish these and other goals, hospitals must rely on highly skilled and experienced leaders who can set a course and steer the organization through uncharted territory. Like many other nonprofit organizations, nonprofit hospitals must compete for executive talent in a playing field where for-profits have a distinct advantage. For-profit hospitals have more access to capital, making it more of a challenge for nonprofits to attract, retain, and compensate senior management. The competition for top executive talent and limitations on levels of executive compensation require nonprofit healthcare organizations to develop new approaches to attracting and rewarding these high-level executives.
Challenges for Hospitals
Recruitment and compensation initiatives are demanding tasks for any organization, but they can be considerably more difficult for nonprofit hospitals. Here’s a quick overview of some of the unique challenges faced by nonprofit healthcare providers.
Cost
Top executives require specialized knowledge and skills that were developed over many years, including managing cost control and reporting issues. Additionally, top-level managers must keep up with the latest developments in technology and methods of delivering service. As a result, these top-level positions are in great demand and command high levels of compensation. Executive compensation in for-profit organizations are typically higher than those offered by nonprofits.
High Turnover
Since nonprofits can’t match for-profit salaries, turnover is higher for nonprofits. About 20% of hiring at nonprofits is filling jobs that are available because of turnover, with staff typically leaving to take positions at for-profit organizations that pay more.
Fierce competition has led to a high level of turnover in the hospital industry for both nonprofit and for-profit hospitals. According to one report, CEO turnover at hospitals has increased sharply, rising from 17% in 2012 to 20% in 2013, the highest level since 1981. In fact, the turnover rate for hospital CEOs is higher than any other field, with the length of employment averaging about 3 years.
High turnover rates are endemic to non-profit organizations. Recent studies show that more than half of nonprofits don’t have a formal recruitment strategy, while most (68%) lack a succession plan.
Restrictions on Pay Offerings
Nonprofits are restricted in the types of payment vehicles they can offer. For example, they’re unable to provide any type of equity-based compensation or incentives based on revenue or profit sharing. In addition, there are stringent restrictions for long-term incentives, retirement compensation, and deferred compensation.
Reasonable Compensation
The IRS requires tax-exempt organizations not to exceed reasonable compensation. Nonprofit hospitals must be careful that salaries aren’t above an amount that isn’t specifically spelled out by the IRS. Salaries deemed “excess benefits” may violate IRS regulations or state restrictions.
In addition, the IRS also stipulates there be no conflicts of interest among anyone participating in, deliberating, or voting on the salary in question. Examples of a conflict of interest include any of the executive’s family members, anyone who could benefit financially from the transaction, any employee who works under the executive, any employee whose own compensation is subject to review by the executive, or anyone engaged in any business arrangement with the nonprofit that the director oversees.
Complex Compliance Matters
To compete with for-profit organizations, tax-exempt organizations can take advantage of compensation plans such as 457 deferral plans and executive-owned life insurance plans. However, organizations must pay strict attention to compliance issues surrounding the structure, documentation, and administration of these plans. Failure to comply with these regulations can have serious consequences, including heavy tax penalties, and loss and repayment of compensation.
Finding Solutions
We mentioned the challenges facing nonprofit corporations when it comes to matching the compensation provided by for-profit organizations. Necessity dictates that nonprofits find creative solutions to compete with for-profits. Following are some ways nonprofit hospitals are looking to fill the compensation gap.
Mergers and Affiliations
To compete with for-profit organizations, nonprofit hospitals have been merging or creating strategic affiliations, enabling them to increase market share, expand revenue streams, and become more efficient. Strategic affiliations allow hospitals to share services, programs, and even medical personnel. This can sometimes result in large, complex “mega systems.”
While consolidation can save the organization money, critics are concerned that services can suffer. With cuts in staffing and services, the hospital faces pressure to keep high-profit services and eliminate lower profit services. Local services such as clinics could face cuts.
Long-Term Incentive Plans
Executive compensation packages at nonprofits have customarily concentrated on delivering annual incentives, measured by criteria that include employee engagement, financial goals, patient satisfaction, patient safety, and quality. These measures have been refined to be more outcome-based than process-based, and have grown to include population health metrics.
To deliver competitive compensation and focus on long-term outcomes that support new strategies, more nonprofits are contemplating and deploying long-term incentive plans for top executives, a component that’s common in for-profit organizations.
While nonprofit hospitals are unable to provide the stock or equity-based incentive plans offered by for-profits, adding an executive long-term incentive plan to the total compensation package focuses on outcomes that support the hospital’s long-term business plans.
The metrics for long-term incentive plans are usually connected to market share increases or performance improvements.
A Final Word
Relying on compensation as the sole means of attracting top executive talent can have unintended consequences. We’re not suggesting that pay shouldn’t be a significant motivating factor, but rather than hiring an executive who’s driven by a high salary, nonprofit hospitals should seek to attract upper-level managers motivated by their commitment to the organization and its mission. Stressing characteristics such as the organization’s culture, including working hours, environment and work/life balance can go a long way toward attracting someone who is in synch with the hospital’s goals and not merely in it for the salary. A top-level executive who is aligned with the hospital’s mission is more likely to stay longer, reducing costly turnover.
Contributed By: Cory C. Grant is the Founder of Grant, Hinkle & Jacobs. Mr. Grant works with non-profit healthcare organizations to help custom-design and fund programs that will attract, reward, and retain doctors and key staff.
The views, opinions and positions expressed within these guest posts are those of the author alone and do not represent those of Becker’s Hospital Review/Becker’s Healthcare. The accuracy, completeness and validity of any statements made within this article are not guaranteed. We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with them.
