A new national survey to be released this week has found no statistically significant relationship between the total compensation of top healthcare executives and the financial performance of their hospitals.
The finding contradicts earlier studies by other accounting and consulting firms, probably because different samples or methodologies were used, the authors said.
However, it did show that better-performing hospitals were more likely to use incentives and bonus plans than poorer-performing hospitals. As a result, executives in better-performing hospitals have a higher percentage of their total compensation at risk. Executives at higher-performing hospitals get lower base salaries, but when bonuses are added, their total compensation is similar to colleagues at low-performing hospitals.
As the nation moves toward health reform, "you're going to see more and more of the total compensation pool put at risk," said William O. Cleverley, a professor of hospital and health services administration at Ohio State University and a founder of the Center for Healthcare Industry Performance Studies in Columbus, Ohio. The center conducted the survey with Ernst & Young's Actuarial, Benefits and Consulting Services division in Atlanta (See related story, p. 44).
MODERN HEALTHCARE obtained an advance copy of the study last week.
The idea of linking pay to performance is in its infancy in the tax-exempt healthcare industry, said Lee Ann Early, a principal with Ernst & Young. Hospital compensation committees, boards and senior executives can use the data as a baseline for establishing links between pay and performance, she said.
A hospital's size, measured by net revenue, remains the single most important factor in the level of executive compensation, according to the Ernst & Young and CHIPS report.
After adjusting for the effects of size, the compensation of hospital executives who run more profitable institutions is no different from that of their colleagues in poorer performing hospitals, the survey found.
The report provides compensation data for 15 top healthcare management positions at 175 hospitals and health systems. Salaries were in effect as of July 1, 1993; bonuses reflect actual amounts paid in the prior 12 months. Executive compensation data are presented for three separate categories of providers: stand-alone hospitals, hospitals within multihospital systems and corporate offices of multihospital systems.
To remove regional differences, the Ernst & Young and CHIPS study uses wage index-adjusted data.
The survey differs from past Ernst & Young compensation surveys because it uses return on investment to measure and compare financial performance within executive compensation levels. The authors considered return on in-vestment, rather than operating margins, the better measure of financial performance because it reflects "the critical effects of investment decisions."
Hospitals with good operating margins aren't in a good financial position if their level of investment in assets, such equipment and receivables, is excessive, Mr. Cleverly said.
In the report, hospitals are grouped into low-, middle- and high-performance categories based on whether their return on investment ranked among the lowest 25%, middle 50% or top 25% of hospitals.
The average compensation, including base salary and bonus, for a CEO at a stand-alone hospital was $209,700 at a middle-performance hospital. That compares with $186,500 at a low-performance hospital and $184,000 at a high-performance hospital. Compensation levels for CEOs at multifacility systems and corporate headquarters also had no relationship to financial performance.
Similar results were reported for almost all of the 15 job categories. For example, the top finance executive at a stand-alone hospital earned an average of $132,400 at a middle-performance hospital, while colleagues at low-performance and high-performance hospitals earned an average of $120,800 and $114,700, respectively.
For a few job categories, the survey did show a rise in compensation for executives at better-performing hospitals. However, such links weren't consistent throughout all the positions, and the degree of the correlations wasn't statistically significant, Ms. Early said.