It's Get­ting Tougher At The Top

Not-for-profit ex­ec­u­tive pay growth slows as per­for­mance met­rics stiffen

Modern Healthcare - - EXECUTIVE COMPENSATION SURVEY - By Rachel Lan­den

Ex­ec­u­tive salaries at not-for-profit hos­pi­tals and health sys­tems have come un­der scru­tiny, with crit­i­cal at­ten­tion fo­cused on mul­ti­mil­lion­dol­lar com­pen­sa­tion pack­ages. But those su­per­size pay pack­ages are not the norm, ac­cord­ing to Mod­ern Health­care’s 34th an­nual Ex­ec­u­tive Com­pen­sa­tion Sur­vey.

Av­er­age to­tal cash com­pen­sa­tion, in­clud­ing bonuses and in­cen­tives, for all hos­pi­tal ex­ec­u­tive ti­tles sur­veyed for 2014 was $319,400, a 2.3% in­crease from $312,300 for those same ti­tles last year. At the sys­tem level, com­pen­sa­tion pack­ages were higher, though the per­cent­age in­crease over the pre­vi­ous year was lower than at the hos­pi­tal level. Across 54 sys­tem ti­tles in­cluded in the sur­vey this year, the av­er­age to­tal cash com­pen­sa­tion rose 1.8%, from $425,000 in 2013 to $432,500 this year.

Those per­cent­age in­creases for both hos­pi­tals and sys­tems are down from last year, when av­er­age to­tal cash com­pen­sa­tion at the hos­pi­tal level was up 4.2%, and at the sys­tem level, it was up 4.8%.

The rea­son for the smaller in­creases this year may be that it’s get­ting tougher for ex­ec­u­tives to meet pay-for-per­for­mance cri­te­ria. “I think the per­for­mance goal-set­ting process is be­com­ing more rig­or­ous,” said Kathy Hast­ings, a man­ag­ing direc­tor at Sul­li­van, Cot­ter and As­so­ciates, a Chicago-based com­pen­sa­tion con­sul­tant that pro­vided data for the sur­vey. “Pay­outs are a lit­tle lower be­cause it’s get­ting harder to meet tar­gets.”

The Mod­ern Health­care sur­vey tracks base salaries, bonuses and in­cen­tives for hos­pi­tal ex­ec­u­tive and ad­min­is­tra­tive ti­tles. The method­ol­ogy em­ployed by Sul­li­van, Cot­ter for the 2014 sur­vey is un­changed from 2013, though some of the ti­tles did change. That is part of a trend that the con­sult­ing firm ex­pects to con­tinue, as more physi­cian-ex­ec­u­tive po­si­tions are added, and as clin­i­cal in­te­gra­tion, pop­u­la­tion health man­age­ment, merg­ers and con­sol­i­da­tions af­fect job re­spon­si­bil­i­ties, spans of con­trol and ul­ti­mately salaries, Hast­ings said.

Mem­bers of the 1%

In the past sev­eral years, ex­perts have sug­gested that the hefty in­creases in to­tal cash com­pen­sa­tion might health­care’s be re­flec­tive shift to­ward of value-based pay­ments re­ward­ing hos­pi­tal lead­ers for achiev­ing se­lected qual­ity out­comes.

CEOs at stand-alone or af­fil­i­ated hos­pi­tals earned an av­er­age base salary of $662,800 and to­tal cash com­pen­sa­tion of $770,900. But CEOs serv­ing mul­ti­ple-hos­pi­tal sys­tems bested that, with an av­er­age base salary of $955,800 and to­tal cash com­pen­sa­tion of $1.25 mil­lion.

Those pay lev­els placed these CEOs well within the top 1% of wage earn­ers in the U.S. That has prompted crit­i­cism, given the sharp po­lit­i­cal de­bates over the mer­its of giv­ing not-for-profit hos­pi­tals tax ex­emp­tions and over grow­ing in­come in­equal­ity in the U.S. But sim­ply cut­ting pay could have un­in­tended neg­a­tive con­se­quences, ex­perts say.

“If you’re run­ning a $10 bil­lion to $15 bil­lion health­care sys­tem, that is an un­be­liev­ably com­plex, high-risk, de­mand­ing job,” said Tom Flan­nery, a part­ner with con­sult­ing firm Mercer. “The peo­ple able to do that are few and far be­tween. If they are able to demon­strate they are pro­vid­ing the high­est level of qual­ity at an ap­pro­pri­ate cost, they’re worth their weight in gold.” But when they can’t demon­strate their value, he added, there will be con­tro­versy.

In the past sev­eral years, ex­perts have sug­gested that the hefty in­creases in to­tal cash com­pen­sa­tion might be re­flec­tive of health-

The meth­ods of ty­ing pay to per­for­mance may be im­prov­ing. In the past, per­for­mance-based mea­sure­ment was cen­tered around ab­so­lute or in­ter­nal mea­sures with­out ref­er­ence to other com­pa­ra­ble hos­pi­tals or sys­tems. But the trend now is on com­par­ing hos­pi­tals and sys­tems to their peers.

care’s shift to­ward value-based pay­ments re­ward­ing hos­pi­tal lead­ers for achiev­ing se­lected qual­ity out­comes.

In the not-for-profit hos­pi­tal sec­tor, the use of qual­ity-based in­cen­tives for ex­ec­u­tive pay has pro­lif­er­ated in re­cent years. In ad­di­tion, some for-profit hos­pi­tal sys­tems, par­tic­u­larly Tenet Health­care Corp. and HCA, in­creas­ingly have moved to tie ex­ec­u­tive pay to qual­ity-of-care mea­sures.

In­cen­tives widely used

Of the nearly 1,000 not-for-prof­its par­tic­i­pat­ing in this year’s sur­vey, be­tween 80% and 90% re­ported the use of an­nual in­cen­tive plans for their ex­ec­u­tives, the same rate as in 2013. This year’s slow­down in com­pen­sa­tion growth is not in­dica­tive of a shift away from link­ing pay to per­for­mance or par­ing back per­for­mance-in­cen­tive plans, said Tom Pav­lik, man­ag­ing prin­ci­pal at Sul­li­van, Cot­ter. “The preva­lence of hav­ing in­cen­tive op­por­tu­ni­ties is still very high,” he said.

What might be dif­fer­ent, Pav­lik and his col­leagues sug­gest, is the de­gree to which hos­pi­tal lead­ers are meet­ing the per­for­mance tar­gets re­quired to earn the same level of pay­out they pre­vi­ously did.

Part of that arises from the dif­fi­cul­ties and un­cer­tain­ties in­her­ent in this pe­riod of health­care re­form, as re­im­burse­ments de­cline and op­er­at­ing mar­gins nar­row. The other fac­tor is that boards can’t sim­ply look to prior years as guides when set­ting tar­gets for their ex­ec­u­tives, be­cause strate­gies may need to shift to keep up with reg­u­la­tory and mar­ket pres­sures un­der health­care re­form.

“You can’t re­ally rely as much on past per­for­mance, and pre­dic­tive analy­ses are harder to do,” says Lisa Perl­mut­ter, se­nior ex­ec­u­tive com­pen­sa­tion con­sul­tant at Tow­ers Watson. As a re­sult, gov­ern­ing boards are spend­ing more time es­tab­lish­ing com­pen­sa­tion struc­tures based on how hos­pi­tals and sys­tems per­form ver­sus their peers.

That means mak­ing com­par­isons across clin­i­cal, op­er­a­tional and fi­nan­cial met­rics. “Mor­bid­ity, mor­tal­ity, pa­tient sat­is­fac­tion, read­mis­sions, rev­enue growth, mar­ket share— those are the types of mea­sures that we see are be­com­ing much more prom­i­nent,” said Mercer’s Flan­nery.

Still, there is ev­i­dence that the method­ol­ogy of link­ing ex­ec­u­tive pay to qual­ity of care is not nec­es­sar­ily ro­bust. A study by re­searchers at the Har­vard School of Pub­lic Health and pub­lished in JAMA In­ter­nal Medicine in Jan­uary found no cor­re­la­tion be­tween CEO com­pen­sa­tion and qual­ity or fi­nan­cial per­for­mance at not-for-profit hos­pi­tals. “We found no as­so­ci­a­tion be­tween CEO pay and hos­pi­tals’ mar­gins, liq­uid­ity, cap­i­tal­iza­tion, oc­cu­pancy rates, process-qual­ity per­for­mance, mor­tal­ity rates, read­mis­sion rates, or mea­sures of com­mu­nity ben­e­fit,” the au­thors wrote, af­ter an­a­lyz­ing the com­pen­sa­tion and per­for­mance of nearly 2,000 CEOs at pri­vate, not­for-profit hos­pi­tals.

On the other hand, the meth­ods of ty­ing pay to per­for­mance may be im­prov­ing. In the past, per­for­mance­based mea­sure­ment was cen­tered around ab­so­lute or in­ter­nal mea­sures with­out ref­er­ence to other com­pa­ra­ble hos­pi­tals or sys­tems, ex­perts say. But the trend now is on com­par­ing hos­pi­tals and sys­tems to their peers.

“We can mea­sure how they’re pay­ing rel­a­tive to a peer group, but also how they’re per­form­ing rel­a­tive to their peer group,” Flan­nery said. “It’s go­ing to give a tremen­dous boost to the cred­i­bil­ity of to­tal com­pen­sa­tion pro­grams.”

In help­ing health­care or­ga­ni­za­tions re­cruit for ex­ec­u­tives, Mark Mad­den, se­nior vice pres­i­dent of ex­ec­u­tive search at B.E. Smith, has also wit­nessed changes in the way boards dis­cuss and de­sign com­pen­sa­tion. “It’s be­com­ing more of an im­por­tant topic where boards have to al­ways be eval­u­at­ing it,” Mad­den said.

Fol­low­ing trends in other in­dus­tries, not-for-profit hos­pi­tal boards are turn­ing more to vari­able-based pay. And as com­pen­sa­tion in health­care be­comes more de­pen­dent on per­for­mance, the climb in salaries has slowed, Mad­den said.

The flat­ten­ing ef­fect on salaries is ev­i­dent in this year’s sur­vey re­sults. Last year, the av­er­age base salary for ex­ec­u­tives at hos­pi­tals rose 3.3%, and for ex­ec­u­tives work­ing at sys­tems, it rose 3.4%. This year, the weighted av­er­age base salary at the hos­pi­tal level rose 2.3% over­all for the 26 ti­tles ex­am­ined and 2.9% over­all for the 54 sys­tem ti­tles an­a­lyzed.

While hos­pi­tals and sys­tems strive to pay com­pet­i­tive base salaries, “they don’t typ­i­cally look to op­ti­mize pay through base salary,” Perl­mut­ter said. For one thing, ev­ery ad­di­tional dol­lar of base salary cre­ates a ripple ef­fect, since in­sur­ance and other ben­e­fits are tied to that fig­ure.

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