Spe­cial fea­ture: Mod­est pay hikes continue for hospi­tal, sys­tem ex­ecs

On­go­ing push for trans­parency and links be­tween pay and per­for­mance continue to drive trends

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Es­tab­lish­ing cri­te­ria for ex­ec­u­tive pay in the health­care sec­tor is dif­fi­cult enough, but hospi­tal boards continue to face added pres­sure from gov­ern­ment of­fi­cials and the pub­lic de­mand­ing in­creased trans­parency in the process. Last month, for ex­am­ple, New Hamp­shire At­tor­ney Gen­eral Michael De­laney held a news con­fer­ence to dis­cuss the New Hamp­shire Cen­ter for Pub­lic Pol­icy Stud­ies’ re­search on ex­ec­u­tive com­pen­sa­tion at not­for-profit hos­pi­tals. The re­port re­leased in July was three years in the mak­ing. Re­searchers be­gan their work in 2009 af­ter pub­lic criticism that ex­ec­u­tives were earn­ing too much in re­la­tion to the amount of char­ity care pro­vided.

Ef­forts to keep salaries in check con­tin­ued this year, ac­cord­ing to Mod­ern Health­care’s 32nd an­nual Ex­ec­u­tive Com­pen­sa­tion Sur­vey. Sul­li­van, Cot­ter and As­so­ci­ates, a Chicagob­ased con­sul­tancy, once again pro­vided data for the sur­vey.

Over­all, the av­er­age base pay for ex­ec­u­tives rep­re­sent­ing 26 po­si­tions at hos­pi­tals grew by 3.2% for 2012, or $246,366 ver­sus $238,712 in the pre­vi­ous year. In 2011, hospi­tal ex­ec­u­tives’ base pay in­creased 3.1%.

The sur­vey also an­a­lyzed data from ex­ec­u­tives mak­ing up 41 job po­si­tions at health­care sys­tems. Their av­er­age base pay in­creased by 3.6% to $284,406 in 2012, com­pared with $274,571 the pre­vi­ous year. In 2011, sys­tem ex­ec­u­tives saw their base pay in­crease 3.3%.

In the C-suite, chief fi­nan­cial of­fi­cers were among the ex­ec­u­tives see­ing the largest av­er­age gains in to­tal cash com­pen­sa­tion, and it didn’t mat­ter where they worked: CFOs at hos­pi­tals as well as sys­tems saw their com­pen­sa­tion in­crease by 4.8%. While chief com­pli­ance of­fi­cers at hos­pi­tals saw a larger raise of 5.9%, CCOs work­ing at health­care sys­tems saw a 3.9% av­er­age in­crease.

CFOs at sys­tems where net rev­enue ex­ceeded $1 bil­lion earned an av­er­age of 5% more than last year, tak­ing home a salary of $671,895. Mean­while, fi­nance ex­ec­u­tives at larger free-stand­ing hos­pi­tals, those with more than $250 mil­lion in an­nual rev­enue, also re­ceived a 5% in­crease in to­tal cash com­pen­sa­tion, ac­cord­ing to the sur­vey.

“In par­tic­u­lar, for a po­si­tion like CFO, you’re es­sen­tially see­ing a lot of fi­nan­cial chal­lenges in the in­dus­try be­cause of health­care re­form, a lot of chal­lenges, es­pe­cially in health sys­tem merg­ers and ac­qui­si­tions,” says Kathy Hast­ings, a manag­ing di­rec­tor at Sul­li­van, Cot­ter. “It in­creases the scope and breadth of re­spon­si­bil­i­ties for a po­si­tion like CFO.”

In the cur­rent fi­nan­cial cli­mate, providers are see­ing more value in an ef­fec­tive CFO and are of­fer­ing the more tal­ented can­di­dates higher salaries as com­pe­ti­tion for the best and the bright­est heats up, Hast­ings says. CFOs are also tak­ing on ad­di­tional du­ties, with the health­care in­dus­try elim­i­nat­ing some man­age­rial jobs, which is also driv­ing their com­pen­sa­tion, she says.

Mean­while, CEOs at health­care sys­tems earned a 3.7% in­crease in av­er­age to­tal cash com­pen­sa­tion, while chief oper­at­ing of­fi­cers earned a 3.8% bump. Chief ad­min­is­tra­tive of­fi­cers also earned an av­er­age 3.7% in­crease.

While other po­si­tions rep­re­sented in the sur­vey posted sig­nif­i­cantly smaller growth in their pay, no po­si­tions saw de­creases in their av­er­age to­tal cash com­pen­sa­tion.

Ron Seifert, a vice pres­i­dent and the ex­ec­u­tive prac­tice leader for the Hay Group, a global con­sul­tancy based in Philadel­phia, says ex­ec­u­tives aren’t tak­ing pay cuts. If some salaries are de­creas­ing, it’s likely be­cause of turnover, he says, with those new to their jobs re­ceiv­ing lower pay than their pre­de­ces­sors.

That’s in line with an ob­ser­va­tion Amer­i­can Col­lege of Health­care Ex­ec­u­tives Pres­i­dent and CEO Thomas Dolan has made, say­ing that was also a trend worth not­ing when talk­ing about salaries of not-for-profit as­so­ci­a­tion ex­ec­u­tives (June 18, p. 22).

There were sev­eral de­creases in me­dian fig­ures for ex­ec­u­tive po­si­tions rep­re­sented in this year’s sur­vey. For ex­am­ple, data from 26 COOs at smaller free-stand­ing hos­pi­tals, those with rev­enue of less than $250 mil­lion, saw me­dian cash com­pen­sa­tion fall by 4.3% com­pared with 2011. Top re­im­burse­ment ex­ec­u­tives at sys­tems saw their me­dian to­tal cash com­pen­sa­tion drop by 8.8%.

De­spite the de­creases in some of the me­dian cash com­pen­sa­tion cat­e­gories, Hast­ings says she ex­pects pay in­creases to be a no­table trend in the fu­ture, and in­creases in bonuses and other in­cen­tives that lift to­tal cash com­pen­sa­tion should continue in com­ing years. While the In­ter­nal Rev­enue Ser­vice now has stricter rules that re­quire not-for­profit or­ga­ni­za­tions to dis­close these ad­di­tional pay­ments, Hast­ings says the pub­lic in­for­ma­tion won’t com­pletely curb them, but the scru­tiny is here to stay.

“I think the watch­ful eye of the pub­lic, fed-

eral gov­ern­ment and the states will continue to look at ex­ec­u­tive com­pen­sa­tion in all in­dus­tries, not just health­care,” Hast­ings says.

CEOs work­ing at sys­tems were the only ones with av­er­age to­tal cash com­pen­sa­tion ex­ceed­ing $1 mil­lion, an amount that was in­flated by pay pack­ages of CEOs at sys­tems with net rev­enue of more than $1 bil­lion. Break­ing down CEO pay by or­ga­ni­za­tion size showed that those CEOs at or­ga­ni­za­tions bring­ing in more than $1 bil­lion were the only ones in the sur­vey earn­ing av­er­age to­tal cash com­pen­sa­tion of more than $1 mil­lion, earn­ing more than $1.3 mil­lion last year (See chart, p. 24).

Con­trast that with CEOs at sys­tem hos­pi­tals with less than $250 mil­lion in net rev­enue, who earned av­er­age to­tal cash com­pen­sa­tion of $365,099—a 0.7% in­crease from the prior year.

COOs at sys­tems with net rev­enue above $1 bil­lion took home the sec­ond-largest to­tal cash com­pen­sa­tion amount, $872,815. Both CEOs and COOs at the larger sys­tems saw 3.9% in­creases in av­er­age to­tal cash com­pen­sa­tion.

Keep­ing pace

The method­ol­ogy of this year’s sur­vey was the same as past years, and Tom Pav­lik, manag­ing prin­ci­pal at Sul­li­van, Cot­ter, says the re­sults were also sim­i­lar to 2011’s num­bers. The in­dus­try con­tin­ues to grap­ple with changes, par­tic­u­larly to re­im­burse­ment poli­cies, and that up­heaval has helped keep salary in­creases in step with prior years, he says.

To­tal cash com­pen­sa­tion grew last year at es­sen­tially the same pace as base pay. CEOs in 2012 saw their to­tal cash com­pen­sa­tion, which in­clude bonuses, grow at 3.7%, or slightly higher than the rate of their salaries, he says.

Bob Clarke, CEO of health­care search firm Furst Group, based in Rock­ford, Ill., says the process of how hospi­tal boards de­ter­mine bonuses has fun­da­men­tally changed dur­ing the past three years. Ex­ec­u­tives must hit strate­gic goals pre­cisely to earn their bonuses, where in the past there was “a fair amount of wig­gle room,” Clarke says.

“There’s a clin­i­cal par­al­lel, as there clearly is a fo­cus on out­comes, pa­tient ex­pe­ri­ence and pa­tient sat­is­fac­tion, which is ap­pro­pri­ate for the op­er­a­tions team to fo­cus on re­im­burse­ment,” he adds. “And that changes the bonus struc­ture.”

Those changes to in­cen­tive pack­ages won’t mean raises will re­turn to the same lev­els as prior years. Clarke says the days of 6% or 7% an­nual in­creases are long gone.

But not all hos­pi­tals were in the fi­nan­cial po­si­tion to of­fer in­cen­tives or raises. Take 25-bed Val­ley Re­gional Hospi­tal in Clare­mont, N.H., one of the 23 not-for-prof­its hos­pi­tals in the New Hamp­shire at­tor­ney gen­eral’s study. Even though the Sul­li­van, Cot­ter data show an in­crease in the av­er­age CEO pay, that’s not the case at Val­ley Re­gional. The at­tor­ney gen­eral’s re­port, which uses IRS doc­u­ments, shows CEO Claire Bowen’s salary dropped in 2010 by 0.4% to $292,064. In­clud­ing Val­ley Re­gional, top ex­ec­u­tives at nine of the hos­pi­tals listed in the re­port saw com­pen­sa­tion de­creases in 2010.

Val­ley’s Re­gional’s board of trus­tees hopes to se­lect a re­place­ment by year’s end for Bowen, who has an­nounced plans to re­tire in March. Board Pres­i­dent Carol Vi­vian echoes Clarke in say­ing that fi­nan­cial and qual­ity out­comes af­fect CEO in­cen­tive pack­ages. Val­ley Re­gional, a crit­i­cal-ac­cess hospi­tal, will be­gin the search for a new CEO in Oc­to­ber and also start set­ting new per­for­mance goals for the hospi­tal’s new chief ex­ec­u­tive, Vi­vian says.

“We do de­ter­mine what per­cent­age of the goal has been ac­com­plished and have a mone­tary amount tied to it,” Vi­vian says. “If we feel like 70% of what we’re look­ing for is achieved, that’s what we’ll award. Some of them will be all or noth­ing.”

The New Hamp­shire at­tor­ney gen­eral’s re­port crit­i­cized Val­ley Re­gional for not keep­ing a pub­lic record of meet­ings min­utes in which board mem­bers dis­cussed CEO com­pen­sa­tion. Vi­vian says there was no in­ten­tional dis­re­gard for pro­to­col, and that min­utes will be pro­vided for such pro­ceed­ings in the fu­ture.

Closer scru­tiny

The at­tor­ney gen­eral’s re­port also ex­plored the cri­te­ria be­hind com­pen­sa­tion, specif­i­cally how boards draw up in­cen­tive pack­ages based on achiev­ing strate­gic goals.

“I was frus­trated by the light (the re­port) por­trayed us in be­cause it makes it sound like we’re just kind of mak­ing de­ci­sions about CEO com­pen­sa­tion in a vac­uum, and that’s not that case,” Vi­vian says.

While Vi­vian says she wishes the re­port of­fered a bet­ter char­ac­ter­i­za­tion of Val­ley Re­gional, she rec­og­nizes the need to take a closer ex­am­i­na­tion of how not-for-profit hos­pi­tals set their ex­ec­u­tive pay. Away from the board, she works for a bank and notes that in­dus­try also has seen an in­creased level of scru­tiny over ex­ec­u­tive pay.

The at­tor­ney gen­eral’s of­fice listed 23 not- for-prof­its in its re­port, and the high­est salary be­longed to Nancy Formella, pres­i­dent of 371-bed Dart­mouth-Hitch­cock Memo­rial Hospi­tal, Le­banon, N.H. She earned $783,533 in 2010.

As­sis­tant At­tor­ney Gen­eral An­thony Blenk­in­sop says the state hopes to up­date the sur­vey with salary data about ev­ery five years. The af­fil­i­a­tion deal be­tween 233-bed Catholic Med­i­cal Cen­ter, Manch­ester, N.H., and Dart­mouth-Hitch­cock prompted the need for the at­tor­ney gen­eral’s study, Blenk­in­sop says. Talks be­tween the two started in 2009 and the deal was nixed in 2010.

CMC’s then-pres­i­dent and CEO, Alyson Pit­man Giles, ranked sec­ond on the at­tor­ney gen­eral’s list, earn­ing $776,940 in 2010. Pit­man Giles, who stepped down early this year, de­clined to com­ment via e-mail for the story.

The re­port failed to find any link be­tween the amount of char­ity care a hospi­tal de­liv­ered and a CEO’s pay.

“The only real cor­re­la­tion was the larger the in­sti­tu­tion, the wealth­ier the in­sti­tu­tion—in terms of net pa­tient rev­enue—the higher the salary that was paid,” Blenk­in­sop says. TAKE­AWAY: Top-level health­care ex­ec­u­tives

will continue to see com­pen­sa­tion pack­ages closely

tied to broad mea­sures of their per­for­mance.

In an ex­clu­sive pod­cast in­ter­view, Mod­ern Health­care re­porter Ashok Sel­vam talks with Kathy Hast­ings, a manag­ing di­rec­tor at Sul­li­van, Cot­ter and As­so­ci­ates. Hast­ings dis­cusses some key sur­vey find­ings. To lis­ten, visit mod­ern­health­care.com/pod­casts.

Hast­ings

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