Propelled by soaring bonuses, average total compensation for healthcare executives rose 5.5% in 1993, according to MODERN HEALTHCARE and Management Compensation Services' 1994 Executive Compensation Survey.
MCS, a division of Lincolnshire, Ill.-based Hewitt Associates, also found a growing reliance on variable pay/incentive programs in response to the influence of managed care. As healthcare organizations evolve into integrated delivery systems, compensation will reflect performance outcomes such as cost containment, quality assurance and patient satisfaction, the survey found.
It's logical that base salary increases have slowed their growth rate, and incentive packages based on performance have forced total compensation to rise, according to Jim Freundt, healthcare compensation consultant at Hewitt Associates. "Executives are simply getting paid for doing their jobs in the face of managed-care demands and changes within their organizations," he said.
The survey measured compensation changes for those people who held the same job with the same facility in 1992 and 1993. The 5.5% average total compensation increase reported in the survey narrowed the gap between salary increases and the consumer price index, which rose 2.7% in 1993. Last year, healthcare executives' total compensation increased 6.5%, according to Hewitt Associates, while the consumer price index rose 3.2% (See chart below).
Total compensation for executives at long-term-care facilities rose 7.2%, 6% at hospitals and 7.3% at multihospital systems. Some 11.5% didn't get a base salary increase.
Executives who received bonuses saw those bonuses soar by an average of 19.3% in 1993. Bonuses at multihospital systems increased an average of 19%, while they were up 19.6% at hospitals and 21.5% at long-term-care facilities.
Overall, the percentage jump in bonuses for system chief executive officers and hospital administrators reflected the trend of hospital boards putting a larger share of their total compensation at risk.
Many not-for-profit organizations believe that pay-for-performance plans are foreign to their corporate culture and are hesitant to develop such programs. "There have been modest increases in the not-for-profit sector in incentive programs, but the real increases occur in the for-profits," said Mr. Freundt.
Total compensation packages for executives in the not-for-profit sector lag behind for-profits' in surveys because there are no stock options or other equity compensation in their pay packages (See related story, p. 52).
Presidents/CEOs/administrators. Many system CEOs are receiving approximately 50% more in base salary than a CEO running a stand-alone hospital, analysts say.
"The strategic demands placed on hospital executives today are probably more than ever before," according to Mr. Freundt. Executives are expected to maintain open communications with the internal medical staff, create cost efficiencies within the hospital, network with regional providers and ensure that each facility delivers the highest level of quality care.
Some 65% of the 37 responding multihospital system presidents and 43% of the 235 responding hospital administrators were eligible for bonuses in 1993. Of those multisystem presidents receiving a bonus, average total compensation (including bonuses) was $400,800, compared with $206,800 for administrators at hospitals.
Total compensation for administrators at stand-alone hospitals was significantly higher than that of administrators at affiliated hospitals. Administrators eligible for bonuses at stand-alone hospitals reported average total compensation of $243,100, while those at affiliated hospitals reported receiving $183,500. Forty-seven percent of administrators at affiliated hospitals are eligible for bonuses, compared with 38% at stand-alone hospitals.
In fact, all executive compensation averages at stand-alone hospitals were 5% to 20% higher than the average for all hospitals, while affiliated hospital averages were 5% to 20% lower.
Mr. Freundt said this may be due to the large percentage of religious-affiliated organizations that responded to the survey.
Chief operating/financial officers. Large bonuses for chief operating officers and top financial officers at multihospital systems caused a widening gap between base salary and total compensation. For example, COOs eligible for bonuses reported an average base salary of $245,200, but their average total compensation was $369,900.
Average total compensation for bonus-eligible COOs of hospitals was $133,700, 176.7% less than that of COOs at multihospital systems.
There were 16 respondents for system COOs and 136 respondents for hospitals COOs in the survey.
Although the position of COO is more prevalent at hospitals than at system headquarters, system COOs are burdened with the demands of a complex job and are paid accordingly. Some 69% of system COOs are eligible for bonuses, compared with 43% of hospital COOs.
COOs at stand-alone hospitals fared better than those at affiliated hospitals. Those eligible for bonuses reportedly earned $141,200 in average total compensation, 11% higher than that of their affiliated counterparts.
Those eligible for bonuses make up 66% of all system chief financial officers reporting, compared with 40% of hospital CFOs.
Some 21 system CFOs who are eligible for bonuses reported an average total compensation of $221,300, 79% greater than the average of hospital CFOs at $123,500. However, only 38 system CFOs reported, compared with 197 hospital-based CFOs.
"Hospital boards are beginning to realize the complexity of jobs other than the CEO," said Jay Justice, human resources manager at BJC Health System in St. Louis.
Incentives up.While 10 years ago bonuses rarely were linked with financial performance, the MODERN HEALTHCARE and MCS survey revealed that practice is now more popular.
As a method of measuring individual performance for calculation of bonuses, respondents-many of whose companies use more than one determinant-reported that 63% of plans use achievement against predetermined objectives; 25% use performance of the overall multihospital system; 57% use performance of the individual's operating unit; 41% use performance of the individual's area of responsibility; and only 5% use board/CEO discretion.
Hewitt Associates surveyed 223 general industry companies with Total Quality Management programs in the summer of 1992. Participants reported three types of quality measures: production/service results (87%), financial performance (82%) and customer satisfaction (80%).
These measures now are being used for variable pay/incentive programs to reward executives who are able to improve the facility's quality of service and/or financial performance, analysts say.
For example, healthcare organizations are:
increasing the number of employees eligible for bonus/incentive plans or stock options;
strengthening the link between pay and group performance;
changing salary administration bureaucracies, such as reducing the number of salary grades (See story, page 48);
implementing the use of team appraisals and peer review;
and increasing the use of results-sharing/gain-sharing programs.
"There is no doubt that financially sound hospitals have implemented pay-for-performance plans more often than lower-performing hospitals," said Mr. Freundt.
Because variable pay structures are becoming more popular, financial performance of a hospital is often a factor in the annual percentage increases for executives.
For example, John Millard, CEO of Bethany Medical Center, Kansas City, Kan., saw his compensation fall from $203,361 in 1991 to $185,256 in 1992, according to the Kansas City Business Journal. This was after the hospital's net income tumbled to $594,400 from $3.9 million. While no exact figure was available, the medical center's continued lower earnings in 1993 left Mr. Millard with approximately the same salary in 1993.
This scenario might sound familiar to those in corporate America, but it's a new concept in healthcare. "Healthcare employees are used to concentrating on quality-of-care measures, and some find it hard to adjust or disagree with the issue of pay for financial performance," said BJC's Mr. Justice.
Healthcare organizations began looking to financial performance as a pay criterion because quality outcomes measurement is still hard to determine, analysts say.
While not all facilities establish salary levels in tune with financial performance, most facilities are in the process of evaluating a variety of salary tiers and incentive programs.
John Eiden, vice president and chief of human resources at Lutheran General HealthSystem, Park Ridge, Ill., said the reform of pay structures in healthcare will reflect this diversity. "The work culture of the future will be multidimensional teams with multiple types of pay systems, including highly leveraged variable programs, step- and grade-type pay structures, and skill-based programs," he said.
However, as the salary gap between hospital executives and executives in other industries narrows, public scrutiny that has hounded corporate America is now influencing the healthcare industry. In particular, the publicity surrounding healthcare mergers only makes the compensation levels of executives more apparent to the public.
A legal problem involving executive compensation almost delayed the completed acquisition of Epic Healthcare Group by Healthtrust-The Hospital Co. One of Epic's employee-owners filed a lawsuit on behalf of all Epic employee-stockholders that alleged the sale would result in excessive compensation agreements with Epic's directors and officers.
Attorneys did reach a settlement the day before the May 5 sale that allowed the deal to proceed. Epic's officers and directors will receive nearly $60 million in severance and payment for stock appreciation rights as a result of the merger, the lawsuit alleged. Epic Chairman Kenn George will receive $23 million as a result of his compensation agreements.
"The scrutiny should be openly addressed," said Lutheran General's Mr. Eiden. The system reported $464.1 million in total revenues for 1993 and recently switched from a total merit-pay system to an organization-wide cost-of-living-adjustment-type incentive system.
"It allows us to give slight recognition to all employees and reflects a decent risk opportunity in pay," he said.
As reform brings mergers, consolidations and the increased demand of networking, top executives want to increase their security with their own jobs and their severance benefits. "Control mechanisms are on the rise, with executives ensuring that they will be taken care of financially should their company be acquired, merge, move or departments become obsolete," said Mr. Freundt.