Un­der the spot­light

Boards see evolv­ing role in com­pen­sa­tion over­sight

Modern Healthcare - - GOVERNANCE - Me­lanie Evans

In the more than a dozen years that Clem Wilkes Jr. has served as a di­rec­tor of Moun­tain States Health Al­liance, the com­pen­sa­tion ar­range­ment with the hos­pi­tal sys­tem’s chief ex­ec­u­tive has un­der­gone plenty of changes.

The John­son City, Tenn.-based sys­tem’s top ex­ec­u­tive no longer re­ceives an au­to­mo­bile as a job perk. The board of di­rec­tors has re­struc­tured the CEO’s re­tire­ment pay­outs. And ev­ery three years, the board re­views in­cen­tives tied to fi­nan­cial and qual­ity per­for­mance. The changes, says Wilkes, keep Moun­tain States in line with evolv­ing reg­u­la­tions and stan­dards.

But change has not been limited to the CEO’s pay­ment ar­range­ment. The board it­self has evolved to keep pace with new ex­pec­ta­tions for not-for-profit gov­ern­ing boards, which have grown in re­cent years along with pub­lic scru­tiny.

Me­dia and pub­lic con­cern over ex­ec­u­tive com­pen­sa­tion has grown with the in­tense fo­cus on U.S. health­care spend­ing. Time mag­a­zine pub­lished a spe­cial re­port this year that was highly crit­i­cal of ex­ec­u­tive com­pen­sa­tion at not­for-profit hos­pi­tals.

U.S. Sen. Chuck Grass­ley (R-Iowa) also has raised the is­sue. “Hos­pi­tals have to ask them­selves whether they’re do­ing ev­ery­thing pos­si­ble to ful­fill their char­i­ta­ble mis­sion be­fore set­ting ex­ec­u­tive salaries,” he said ear­lier this year.

Deal­ing with scru­tiny

On­go­ing in­ter­est in not-for-profit hos­pi­tal gov­er­nance and ex­ec­u­tive com­pen­sa­tion from state at­tor­neys gen­eral, watch­dog groups and con­gres­sional com­mit­tees has led in re­cent years to in­creased dis­clo­sure of ex­ec­u­tive pay and perks. The In­ter­nal Rev­enue Ser­vice ex­panded its re­port­ing re­quire­ments for not-for-profit gov­er­nance and highly paid ex­ec­u­tives five years ago—and in do­ing so re­quired or­ga­ni­za­tions to make the in­for­ma­tion pub­lic. Fail­ure to do so can jeop­ar­dize hos­pi­tals’ tax breaks.

For board mem­bers who live and work in com­mu­ni­ties that their hos­pi­tals serve, that means scru­tiny can come from neigh­bors as well as reg­u­la­tors, es­pe­cially when the town news­pa­per pub­lishes ex­ec­u­tive pay at the lo­cal hos­pi­tal. “Any board mem­ber might be asked in the gro­cery store: ‘Why did you de­cide to pay our CEO that much?’ ” says Pamela Knecht, pres­i­dent of Chicago-based con­sult­ing firm Ac­cord Limited.

In re­sponse to in­creased scru­tiny, di­rec­tors and trus­tees are “not just sit­ting back and re­spond­ing to things,” but have grown more proac­tive, says Dou­glas Hast­ings, a health­care at­tor­ney in the Wash­ing­ton of­fice of Ep­stein Becker & Green.

Some states and hos­pi­tal trade groups have re­sponded with new train­ing and cer­ti­fi­ca­tion for hos­pi­tal gov­ern­ing boards. At least a dozen states of­fer some ed­u­ca­tion for di­rec­tors and trus­tees, ac­cord­ing to re­search pub­lished by the Amer­i­can Jour­nal of Med­i­cal Qual­ity in 2011. In New Jersey, hos­pi­tal board train­ing has been re­quired by law since 2009.

In Ten­nessee, where Moun­tain States Health Al­liance owns seven hos­pi­tals, state hos­pi­tal as­so­ci­a­tion board cer­ti­fi­ca­tion re­quires mem­bers to demon­strate knowl­edge of their fidu­ciary duty, which in­cludes over­sight to en­sure that prof­its are in­vested to serve the hos­pi­tals’ char­i­ta­ble mis­sion and do not in­stead en­rich ex­ec­u­tives.

Di­rec­tors and trus­tees say they are con­scious of pub­lic scru­tiny of ex­ec­u­tives’ com­pen­sa­tion.

Moun­tain States di­rec­tors were the first full health sys­tem board to earn the state’s hos­pi­tal gov­er­nance cer­ti­fi­ca­tion, Wilkes says.

All di­rec­tors for Moun­tain States re­view com­pen­sa­tion dis­clo­sures be­fore they are made pub­lic. Out­side con­sul­tants brief the board on the ele­ments of com­pen­sa­tion and the process for set­ting the chief ex­ec­u­tive’s pay. “It’s not a sur­prise,” he says.

In­creas­ingly, the work of set­ting and eval­u­at­ing a hos­pi­tal CEO’s salary and bonuses is done by a board com­pen­sa­tion com­mit­tee, a sub­set of the board en­tirely com­posed of in­de­pen­dent di­rec­tors or trus­tees—those with­out fi­nan­cial ties or po­ten­tial con­flicts of in­ter­est.

Sixty per­cent of all hos­pi­tal gov­ern­ing boards sur­veyed by the Gov­er­nance In­sti­tute in 2011 op­er­ated a com­pen­sa­tion com­mit­tee, up from 54% in 2009 and 48% two years ear­lier. Re­sults are not yet avail­able for this year. Also more preva­lent are gov­er­nance or nom­i­nat­ing com­mit­tees, which iden­tify the bal­ance of skills needed by the board and rec­om­mend or se­lect those who may be best suited for var­i­ous com­mit­tees such as fi­nance, strate­gic plan­ning, qual­ity, in­vest­ment and com­pli­ance, as well as com­pen­sa­tion. The 2011 Gov­er­nance In­sti­tute sur­vey found nearly three out of four boards in­cluded a gov­er­nance or nom­i­nat­ing com­mit­tee, com­pared with 67% four years ear­lier.

Faye Hum­mel, a Univer­sity of North­ern Colorado nurs­ing pro­fes­sor, joined the Platte Val­ley Med­i­cal Cen­ter’s com­pen­sa­tion com­mit­tee four years ago and was named chair­woman this year. She says com­mit­tee mem­bers at the 70-bed hos­pi­tal in Brighton, Colo., must re­cruit and re­tain tal­ented ex­ec­u­tives in a com­pet­i­tive mar­ket while also meet­ing the lo­cal com­mu­nity’s cul­ture and ex­pec­ta­tions.

“We are com­mu­nity mem­bers,” Hum­mel

says. “We live here. We use this hos­pi­tal. Our friends use this hos­pi­tal. We absolutely be­lieve that we are up for any of that pub­lic scru­tiny.”

Platte Val­ley wants its com­pen­sa­tion com­mit­tee makeup to re­flect a bal­ance of mem­bers from its over­all board, she says, and its com­mit­tee char­ter does not call for spe­cific skills.

But reg­u­la­tors want com­pen­sa­tion work by boards to be limited to in­de­pen­dent board mem­bers. Re­view and ap­proval of the board’s com­pen­sa­tion process by in­de­pen­dent board mem­bers is one stan­dard that boards must meet to sat­isfy the IRS’ cri­te­ria for good gov­er­nance over­sight of ex­ec­u­tive com­pen­sa­tion. That pol­icy is “as strict as it gets,” says Ac­cord’s Knecht.

Sean Pa­trick Mur­phy, se­nior vice pres­i­dent and cor­po­rate gen­eral coun­sel for So­laris Health Sys­tem, Edi­son, N.J., says ex­ec­u­tive com­pen­sa­tion is one area where boards have clear reg­u­la­tory guid­ance. Still, ques­tions arise with vari­a­tions in board prac­tice or ex­ec­u­tive com­pen­sa­tion. “If they’re do­ing what they are sup­posed to be do­ing, it should be de­fen­si­ble, legally and morally,” says Mur­phy, a gov­er­nance ex­pert.

Boards must dis­close to the IRS and the pub­lic their per­for­mance on the IRS’ good-gov­er­nance cri­te­ria, which in­clude whether the board com­pared com­pen­sa­tion to other sim­i­lar or­ga­ni­za­tions and whether the board doc­u­mented its work as it went through the process.

That greater trans­parency should fo­cus boards’ at­ten­tion, Mur­phy says. “If board mem­bers weren’t vig­i­lant about this in the past, they have good rea­son to be now.”

Ex­perts in com­pen­sa­tion pro­vide the Platte Val­ley board with com­pen­sa­tion data from com­pa­ra­ble or­ga­ni­za­tions, which the board can then an­a­lyze and ap­ply to their hos­pi­tal, she says. “We have to be very thoughtful and strate­gic about en­sur­ing our or­ga­ni­za­tion re­mains healthy,” Hum­mel says, and ex­ec­u­tive re­cruit­ment is one av­enue to do so.

Stay­ing com­pet­i­tive

A tough mar­ket for top tal­ent in­flu­ences boards’ de­ci­sions. “We cer­tainly don’t want to over­com­pen­sate, but we feel just as strongly about un­der­com­pen­sat­ing,” says Lyle Knight, im­me­di­ate past chair­man of the Billings (Mont.) Clinic board of di­rec­tors. “We of­fer ameni­ties in Billings, but they also of­fer cer­tain ameni­ties in New York City. We know we have to com­pete.”

Re­cruits to the Billings Clinic com­pen­sa­tion com­mit­tee, who are rec­om­mended by its gov­er­nance com­mit­tee and ap­proved by the full board, have worked for or au­dited large com­pa­nies or served on for-profit cor­po­ra­tion boards. That gives them valu­able ex­pe­ri­ence and in­sight into com­pen­sa­tion at so­phis­ti­cated or national or­ga­ni­za­tions, Knight says.

“That’s prob­a­bly the best train­ing,” he says. “We look for per­sonal ex­pe­ri­ence.”

Some boards have seen their com­pen­sa­tion com­mit­tees broaden their du­ties to in­clude set­ting com­pen­sa­tion for highly paid physi­cians em­ployed by the hos­pi­tal sys­tem, Knecht says. “We’re see­ing a big­ger role for com­pen­sa­tion com­mit­tees than just the com­pen­sa­tion for the CEO and se­nior ex­ec­u­tives.”

The IRS re­quires dis­clo­sure of not-for-profit hos­pi­tals’ most highly com­pen­sated em­ploy­ees, which can in­clude physi­cians.

Chil­dren’s Hos­pi­tal of Wis­con­sin in Mil­wau­kee three years ago over­hauled its gov­er­nance af­ter hir­ing a new chief ex­ec­u­tive. It em­ploys roughly 100 doc­tors and den­tists and adopted a pol­icy to re­view physi­cian com­pen­sa­tion in re­sponse to reg­u­la­tory in­ter­est in not­for-profit com­pen­sa­tion, says Peggy Troy, the hos­pi­tal’s pres­i­dent and CEO. “There’s a spot­light on it.”

Doc­tors whose com­pen­sa­tion ex­ceeds the mar­ket’s 75% per­centile face board re­view when pro­duc­tiv­ity mea­sures don’t seem to jus­tify that com­pen­sa­tion level. The board must au­to­mat­i­cally re­view any doc­tor with com­pen­sa­tion that ranks in the top 10%.

“It was in all of our best in­ter­ests to have the process and the out­liers re­viewed at the board level,” she says.

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