Falling flat

Hospitals have long been called the most complex businesses on Earth, and the job of running them is about to get much more difficult.

So that means salaries are rising to attract nimble, complexity-minded leaders who can balance sophisticated hospital operations and the financial wizardry required to manage large, cash-intensive businesses with uncertain payment sources. Right?

Wrong. Executive salaries at all levels of hospital and health system management showed only modest growth in 2010 for the second year running, according to the Modern Healthcare 30th annual Executive Compensation Survey. Average base salaries across all executive positions increased 2.8% in 2010.

Looking at a single job title—CEO of health systems—median total compensation increased by 2.6% in 2010 according to the annual report produced by compensation firm Sullivan, Cotter and Associates. That same group saw just a 0.2% increase in 2009, but received a 9.7% boost in 2008.

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Podcast: The Hay Group's C.J. Bolster discusses trends driving executive compensation in healthcare

Observers offer numerous explanations for the apparent contradiction between heightened demand for strong CEO leadership and pay practices at the top, but the most common one offered was the recession. That is, top executives have found it difficult to earn—or accept—the kinds of pay raises they saw during the high-flying years in the 2000s now that so many hospitals have frozen salaries or even laid off workers.

That reluctance has only been magnified by another growing trend—increased public scrutiny, both in tax records and by elected officials. In New Hampshire, Attorney General Michael Delaney is reviewing CEO pay practices at the state's not-for-profit hospitals, while in Massachusetts, Attorney General Martha Coakley announced last fall that her office was expanding enforcement efforts for CEO pay at tax-exempt hospitals and insurers.

Today anyone with an Internet connection can learn their local hospital CEO's salary and all of his or her perks through greatly enhanced federal tax disclosures that first started becoming public last year.

“Public scrutiny matters, as our world becomes flatter and more transparent,” says Dennis Stine, who serves on the board of directors and helps set executive pay and financial strategy at the board level for Irving, Texas-based Christus Health, which owns or leases 18 hospitals in the U.S., and is the majority stockholder in a company that operates seven hospitals in Mexico.

On average, base salaries across all job categories in the survey increased by 2.8%, while total compensation increased by 5.5%. Those figures, however, mask a diverse set of dynamics in play between job types and even among the various types of hospitals and systems.

On one hand, the average health system CEO took home more than $1 million in total compensation in 2010, marking the first time that job title has broken the seven-figure threshold in the annual survey. Previously, only CEOs of health systems with revenue of more than $1 billion were earning seven-figure average compensation. Yet on the other hand, CEOs of free-standing hospitals not in systems took an overall 1.4% cut in total compensation in the same year, the survey found.

“A lot of folks are continuing to perform well and are seeing good, solid incentive payments. And you've got some folks who are starting to feel the pain and their incentives are not as high. That's starting to show,” says C.J. Bolster, managing director of the healthcare practice for Hay Group, Atlanta.

The Sullivan Cotter figures are based on surveys of 4,700 executives at 850 organizations that submitted data on executive pay in 2009 and 2010. The total compensation figures only reflect bonuses and incentive payments that were actually made in the most recently completed fiscal year; compensation that was promised but not yet paid was not included.

Experts say the 2010 data show a wider split between winners and losers than previous years, as the considerable differences in hospital performance showed up in executive incentive payments for factors such as improving operating performance, increasing patient-satisfaction scores, expanding physician alignment, cutting bad debt, and heightening community-benefit activities.

More hospitals are also using longer-term incentive plans in which the goals span several years, as a way to spread out payments and discourage turnover.

“Some hospital systems and some hospitals can perform even in a down economy, and they should be rewarded for that,” Stine says. “What I've seen is that base salaries have been pretty static, and the incentive plan may be riched up.”

Judging by the figures in the latest survey, that is exactly what happened in many hospitals.

CEOs of hospitals that belong to health systems received median increases of 0.9% in their base pay in 2010, yet they took home 6.6% more in total compensation than the year before because of incentive pay. Chief operating officers at system hospitals received 0.8% base-pay increases, and yet received 6.9% increases in total compensation.

“Some organizations I think had better performance, and perhaps that could be related to how well they planned for the economics of what changed … managing costs better or anticipating a decrease in patient volume,” says Tom Pavlik, a managing principal with Sullivan Cotter.

In contrast to the figures for executives at system-owned hospitals, CEOs at stand-alone hospitals experienced opposite pay trends. Top executives at stand-alone facilities received 3.5% median base pay raises, but actually saw a 1.4% decline in total compensation from the prior year. Executives said the differences appeared to be based on lower overall performance at stand-alone hospitals. COOs at free-standing hospitals saw 1.7% base pay increases, but only 0.9% growth in total compensation.

Similar disparities between system and nonsystem executives were also reported for chief medical officers and chief financial officers, with the officials at stand-alones getting lower percentage increases in total compensation, including incentives, than in base pay; officials at system hospitals received lower base pay increases but larger incentives.

However, overall, the top executives at free-standing hospitals still tended to take home more money in total. Stand-alone CEOs earned median total compensation of $544,000 vs. $423,100 for CEOs at system-owned hospitals. COOs, CFOs and CMOs all showed the same pattern of lower pay at system hospitals, as in years past.

Meanwhile, the trend of incentive pay driving higher increases in total compensation was largely not seen within the C-suites of integrated hospital systems, where executives struggled to hit enough benchmarks to keep their incentive pay comparable to earlier years.

System CEOs received 2.6% increases in total compensation—a percentage that was identical to their median rise in base pay. System CFOs had the same dynamic, with 0.7% growth in base pay and a 0.8% rise in total compensation.

System COOs received 2.9% base pay increases but then showed a 0.9% decrease in total compensation.

One of the largest percentage drops in median pay on the list went to CEOs of smaller health systems (those with less than $1 billion in revenue), where the top executives overall took a 3.5% decrease in total compensation in 2010, even though their base pay rose by 3.4%. Their median total compensation dropped to $647,400 from $671,200 the year before.

In contrast, one of the largest percentage increases in pay went to CEOs of smaller stand-alone hospitals (those with less than $250 million in revenue), where the top executives received 9% median increases in total compensation. Including the 3.6% raise in base pay, that group's median total earnings rose to $425,000 from $390,000 the year before.

Several other job categories showed similarly large swings in pay, both positive and negative, but Sullivan Cotter officials say many of them are difficult to ascribe much meaning to because sample sizes were smaller. The largest single swinger on the list was the category of ambulatory-care executives at health systems, whose total compensation dropped by 9.5%. But only 35 such executives responded to the survey.

However the largest percentage gainer on the list, nursing executives at the health system level, showed a 9.4% gain in median total compensation based on 61 responses—a gain that observers say is not only actual, but logical. On the hospital-based side, nursing executives saw a 6.6% increase in total compensation, based on 178 responses. Hospital nurse executives earned a median $218,700 in 2010, up from $205,100 the previous year.

Observers say the salaries for nursing executives were not surprising given all the focus in recent years on quality and the patient-service aspect of healthcare, which nurses have a large influence on. Jim Nelson, who became a managing principal with Sullivan Cotter earlier this year, says high-performing nursing executives can also be hard to find, which affects their salaries.

“They are being asked to do more, and there is a dearth of talent,” Nelson says. “They are, now more than ever, equal members of the executive team, and in some cases they're just catching up” on the salary scale.

Similarly, another category of executive positions receiving more attention—and compensation—is information technology executives.

Take a look at the tax filings of your average healthcare system. Chances are that the system's health IT vendor is listed as one of the five highest-compensated vendors for the organization. In many cases, it's the highest. Naturally, experts say, CEOs want someone with an office near theirs to make sure that investment is paying off and being managed well.

The problem is, like nurses, executive-level health IT managers tend to be scarce, which is why health systems are willing to pay them more to stick around. Chief information officers at health systems received median total compensation increases of 5.2%, which put their total pay at $326,600 for 2010, up from $310,400 in the previous year.

“The CIOs of these organizations, who have been through some of the early installations, are in high demand,” says Kevin Reddy, a vice president at executive search firm Furst Group, Rockford, Ill.

Twenty-five systems paid medical informatics executives median compensation of $291,000, an increase in total compensation of 4.6%, and 11 systems reported having a C-suite-level chief network/system development officer with median total compensation of $399,200.

“If I was thinking of putting an electronic health record in place, the last thing I would want is to lose that person midstream,” Reddy says.

But while the systems placed a premium on health IT talent, the hospitals themselves were not following suit. Hospital CIOs saw median total compensation increases of just 0.1%, and total pay of $208,300.

Going forward, experts say it's tough to predict where executive compensation is headed in the next year or two, but already this year consultants say they've seen signs that the picture is going more in the direction where the executives would like to see it.

For example at academic medical centers, many executives saw their salaries frozen last year along with the rest of the staff at their affiliated universities or medical schools, as higher education endowments took a hit in the marketplace. Bolster, of Hay Group, says executives at university-affiliated hospitals are arguing this year that their salaries should be treated differently because they have completely different business models.

“This year so far that idea of being part of a family and therefore having the same kinds of things happen to you is not happening, and as you can guess, those are relatively intense conversations,” Bolster says.

Experts say they've already seen other signs of a thaw in executive salaries this year, as performance has turned out better than boards had expected.

But what of the “lost” income from years in which pay was slowed, frozen or even reduced for a year or more? “Is that trend going to be baked in? Or over time … will they in fact catch up to the rest of the market?” Nelson says. “No one can predict what will happen … but I believe that those freezes or decreases, unless they're designated as temporary, are going to be baked in going forward.”