Healthcare Business News
Top healthcare executive pay

Keeping executive compensation in check

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

By Ashok Selvam
Posted: August 11, 2012 - 12:01 am ET

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 not-for-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.

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Efforts to keep salaries in check continued this year, according to Modern Healthcare's 32nd annual Executive Compensation Survey. Sullivan, Cotter and Associates, a Chicago-based 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.

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-for-profit 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, federal 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.

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

Valley Regional Hospital, Claremont, N.H.
The board of trustees at Valley Regional Hospital, a critical-access hospital in Claremont, N.H., ties executive compensation to achievement of certain performance goals.
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.

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