Another year of big pay hikes for not-for-profit hos­pi­tal CEOS

Modern Healthcare - - NEWS - By Rachel Lan­den

De­spite the on­go­ing pub­lic ire aimed at ex­ec­u­tives at not-for­profit health­care sys­tems be­cause of their mul­ti­mil­lion­dol­lar pay pack­ages, their salaries and to­tal cash com­pen­sa­tion con­tin­ued to rise at a far faster clip than av­er­age worker salaries in 2012—the most re­cent year with full data avail­able.

Boards and com­pen­sa­tion con­sul­tants con­tinue to cite mar­ket forces—the need to keep up with peers to hold onto skilled health­care lead­ers—as the main rea­son for the in­creases.

To­tal cash com­pen­sa­tion grew an av­er­age of 24.2% from 2011 to 2012 for the 147 chief ex­ec­u­tives in­cluded in Mod­ern Health­care’s anal­y­sis of the most re­cent pub­lic in­for­ma­tion avail­able for not-for-profit com­pen­sa­tion. Of those 147 CEOs, 21, or 14.3%, saw their to­tal cash com­pen­sa­tion rise by more than 50%.

Another 51, or 35.7%, re­ceived to­tal cash com­pen­sa­tion in­creases of 10% or higher. The data came from Form 990s filed by not-for-profit sys­tems to the IRS for 2011 and 2012.

Hos­pi­tal sys­tems, their boards and out­side com­pen­sa­tion con­sul­tants jus­tify these raises as ad­just­ments nec­es­sary to keep pace with what the mar­ket dic­tates and to com­pete for tal­ent that might flee to more-lu­cra­tive for-profit po­si­tions. At Dig­nity Health, a 37-hos­pi­tal sys­tem based in San Fran­cisco, the to­tal com­pen­sa­tion of its ex­ec­u­tives was es­tab­lished “to ap­prox­i­mate the pre­vail­ing mar­ket con­di­tions for com­pa­nies of sim­i­lar size and rev­enues,” ac­cord­ing to a writ­ten state­ment.

Sim­i­larly, at Rochester, Minn.-based Mayo Clinic, a mar­ket as­sess­ment for com­pen­sa­tion pur­poses is con­ducted an­nu­ally, “but we have a con­tin­ual re­view as we see shifts in the com­pet­i­tive land­scape,” said Jill Rags­dale, Mayo Clinic’s chief hu­man re­sources of­fi­cer. “We want to make sure we can re­cruit and re­tain the high­est qual­ity of staff.”

Mayo Clinic eval­u­ates and sets its com­pen­sa­tion through the work of its board, an in­de­pen­dent com­mit­tee and third-party com­pen­sa­tion con­sul­tants. And many con­sul­tants agree that salaries have to be high to at­tract the kinds of peo­ple who can lead a health­care or­ga­ni­za­tion.

“Not every­one can step up and step into run­ning a health­care sys­tem with 25 to 50 hos­pi­tals,” said Tom Flan­nery, a part­ner with con­sult­ing firm Mercer. “It’s a heck of a com­plex job.”

But crit­ics of the high­dol­lar pay­outs ar­gue the high salaries paid to not­for-profit hos­pi­tal ex­ecu- tives un­der­mine the mes­sage that their core busi­ness is mis­sion-driven. “It is some­what unique in the non­profit sec­tor that you have a class of CEOs that are work­ing for pub­lic char­i­ties that are be­com­ing mil­lion­aires,” said Ken Berger, pres­i­dent and CEO of Char­ity Nav­i­ga­tor. “An av­er­age CEO salary for a mid- to large-size pub­lic char­ity is around $125,000. When it comes to not-profit hos­pi­tals, it’s off the scale.”

Berger con­trasts those salaries with the $400,000 paid to the pres­i­dent of the United States. “How big and com­pli­cated is the struc­ture that (he) man­ages?” Berger said.

$2.2 mil­lion av­er­age

The av­er­age 2012 cash com­pen­sa­tion for the CEOs was $2.2 mil­lion in 2012. But that fig­ure masks a wide dis­par­ity in pack­ages.

At the low end of that range was Tom Se­bas­tian of Com­pass Health, a men­tal health and chem­i­cal de­pen­dency ser­vices provider in Everett, Wash. Se­bas­tian’s 2012 to­tal cash com­pen­sa­tion was $178,810.

On the other end stood Joseph Trun­fio of three-hos­pi­tal At­lantic Health Sys­tem in Mor­ris­town, N.J., whose to­tal cash com­pen­sa­tion was $10.7 mil­lion in 2012, a 201.9% in­crease over his prior year com­pen­sa­tion. That was largely due to pay­outs for a re­ten­tion bonus and other de­ferred com­pen­sa­tion.

A sim­i­lar sce­nario took place at another sys­tem in New Jersey, where Barn­abas Health CEO Ron­ald Del Mauro re­ceived $21.6 mil­lion in de­ferred re­tire­ment com­pen­sa­tion in 2012 even though he no longer worked at the sys­tem. Del Mauro was ex­cluded from Mod­ern Health­care’s anal­y­sis to avoid skew­ing the over­all cal­cu­la­tions. The for­mer CEO at the West Orange, N.J., sys­tem re­ported to­tal com­pen­sa­tion of about $3 mil­lion, much closer to the group av­er­age.

“Only $8 mil­lion were em­ployer con­tri­bu­tions,” said Scott Mar­i­ani, tax part­ner and co-prac­tice leader of health­care ser­vices at WithumSmith & Brown. “The rest were in­vest­ment gains over time.”

Other top CEO earn­ers for 2012 in­cluded Ge­orge Halvor­son, then in his last year as CEO of Oak­land, Calif.based Kaiser Per­ma­nente, who re­ceived $9.9 mil­lion in to­tal com­pen­sa­tion in 2011, up 24.6% from the prior year; Wil­liam Pe­tas­nick, CEO of Mil­wau­kee-based Froedtert Health, who re­ceived $6.6 mil­lion in to­tal com­pen­sa­tion, a 227.2% hike from 2011; and Pa­trick Fry of Sut­ter Health, who still runs the Sacra­mento, Calif.based sys­tem and re­ceived $6.4 mil­lion in to­tal com­pen­sa­tion, up from $5.2 mil­lion in 2011.

Fry also topped the list when look­ing only at base com­pen­sa­tion—the core salary be­fore bonuses and re­tire­ment set asides. He re­ceived a 53.5% raise in 2012, bring­ing his base to $2.4 mil­lion. Sut­ter, which owns 23 hos­pi­tals in Cal­i­for­nia and one in Hawaii, re­ported 2012 rev­enue of $9.8 bil­lion and op­er­at­ing in­come of $549 mil­lion.

A spokesper­son for Sut­ter was un­avail­able for com­ment re­gard­ing ei­ther Fry’s salary or to­tal cash com­pen­sa­tion. But pre­vi­ous in­quiries into Fry’s com­pen­sa­tion have been de­fended as rea­son­able and nec­es­sary in order to at­tract and keep skilled lead­er­ship, again echo­ing the

The Mod­ern Health­care sur­vey re­sults sug­gest in­creases hos­pi­tal in their sys­tem base com­pen­sa­tion CEOs re­ceived that was about four times greater than av­er­age work­ers, who have earned less than 2% an­nual pay hikes in re­cent years.

mantra re­peated by other hos­pi­tal sys­tems and boards.

He wasn’t alone. The av­er­age in­crease in base salary in 2012 was 7.4% over 2011 pay, bring­ing the av­er­age to $825,991. The 143 CEOs in Mod­ern Health­care’s base com­pen­sa­tion sur­vey ex­cluded those who served par­tial years and sev­eral re­tir­ing ex­ec­u­tives.

Av­er­age work­ers get 2% hikes

The sur­vey re­sults sug­gest hos­pi­tal sys­tem CEOs re­ceived in­creases in their base com­pen­sa­tion that was about four times greater than av­er­age work­ers, who have got­ten an­nual pay hikes of less than 2% in re­cent years. Of the 143 an­a­lyzed, 37, or 25.9%, re­ceived raises in their base com­pen­sa­tion that were 10% or higher; another 69, or 48.3%, had raises be­tween 2% and 9.9%; and just 23 of the group, or 16.1%, saw a de­cline in their base com­pen­sa­tion, ac­cord­ing to Form 990s.

As the pay gap be­tween hos­pi­tal CEOs and av­er­age work­ers widens, the maxim about the need to hold on to top tal­ent re­mains the same. “Dig­nity Health’s ex­ec­u­tive com­pen­sa­tion phi­los­o­phy is de­signed to at­tract and re­tain the cal­iber of ex­ec­u­tives re­quired to ful­fill its mis­sion of care,” ac­cord­ing to a writ­ten state­ment. It is par­tic­u­larly im­por­tant, they say, be­cause of the breadth, com­plex­ity and scope of the sys­tem and its ser­vices.

And the way hos­pi­tals and health sys­tems and their boards are at­tract­ing the right peo­ple to fill those top jobs seems to be in­creas­ingly through top dol­lars. It’s nec­es­sary, they say, to be com­pet­i­tive.

“We want to make sure we can re­cruit and re­tain the high­est qual­ity of staff, while bal­anc­ing ben­e­fits and the salaries that are rea­son­able as com­pared to other or­ga­ni­za­tions,” Mayo’s Rags­dale said.

Dig­nity Health and Mayo Clinic both do that with the help of their boards, an in­de­pen­dent com­mit­tee and le­gal coun­sel, while us­ing third­party com­pen­sa­tion con­sul­tants to per­form mar­ket as­sess­ments.

“It’s a bal­ance of mak­ing sure we’re in a po­si­tion to re­cruit and re­tain but also to be good stew­ards with our fidu­ciary re­spon­si­bil­ity,” Rags­dale said.

Com­pared to com­pa­ra­bly sized or­ga­ni­za­tions in the for-profit arena, CEO com­pen­sa­tion at not-for-profit health sys­tems lags con­sid­er­ably, other ex­perts ar­gue. “The com­pen­sa­tion ra­tio of a CEO in ma­jor cor­po­ra­tions is 250 to 300 times the av­er­age worker’s com­pen­sa­tion in that com­pany,” said Ken Ack­er­man, chair­man of In­te­grated Health­care Strate­gies.

But when you com­pare even large not-for-profit en­ter­prises, you don’t see those kinds of multiples, he said.

“Peter Drucker, rec­og­nized as the No. 1 man­age­ment con­sul­tant in the world, al­ways re­ferred to health­care as be­ing as com­pli­cated as any busi­ness he’s ever worked with. He even made the point that a small hos­pi­tal is very com­pli­cated,” Ack­er­man said.

“I don’t have any trou­ble with my col­leagues that are hand­somely paid. They’re earn­ing ev­ery penny of what they’re mak­ing,” he said.

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