With the latest surveys showing executive pay far outpacing compensation of other healthcare workers, it's not surprising that critics continue to perpetuate the image of healthcare leaders as high-paid prima donnas who are raising the value of their own stock at the expense of their organizations.
It's an easy, yet overly simplistic assumption. Certainly there are overpaid executives. But there are many exceptional ones who are worth every cent they earn and more. The fact is, with many hospitals and healthcare systems cutting management ranks and creating more complex executive roles through mergers and alliances, attracting and retaining individuals with the skills and style to successfully lead is more critical than ever.
"You have to do things differently to be effective," said John Hicks, president and chief executive officer of the recently merged Baptist St. Anthony's Health System in Amarillo, Texas. "The challenge is making the shift from a command-and-control function to a visionary, empowering one. The leadership role becomes one of preparing and encouraging, pushing and pulling, and moving the organization to change, sooner rather than later."
Unfortunately, the continuing brouhaha over executive pay detracts from the bigger issue of how well executives perform these new skills and roles. Indeed, boards of directors and CEOs must first make certain they have the right leaders with the competencies to move the organization forward and that the right measures are in place to assess their performance. Only then can a reward strategy be created that is fair, competitive, drives performance and is highly defensible.
While major change is the order of the day for the healthcare industry, most organizations find it painfully difficult. Few hospitals or systems change quickly. Although a variety of excuses are made, the difference between success and failure frequently boils down to leadership. Those organizations that achieve rapid, sustainable change typically have leaders who take command of the change initiative and work as a team to support it.
That may sound simple, but it's not. Today's healthcare leaders, like those they are leading, frequently have to shift their behavior if they and their organizations are to succeed. As CEO Hicks notes, the salad days of commanding and controlling from the boardroom are past. Executives must not only create viable strategies, but also act on them.
Not surprising, the competencies needed to be an outstanding leader in this new and more complex environment are quite different than in the traditional organization. Such was the case when Chicago's Evangelical and Lutheran General health systems merged. The new organization, Advocate Health Care, found it necessary to not only re-examine its core values and create a common culture but also to identify critical leadership competencies.
"Both organizations had good leadership," says Ben Grigaliunas, senior vice president of human resources. "But when two meteors collide, it begs a lot of questions. We put together two organizations which had very strong cultural heritages and modes of operation. We had to make sure that everyone was on the same wavelength."
Boards and CEOs, in addition to having the right leaders, also need to make sure they have the right performance measures in place. Much continues to be made about the importance of rewarding performance. Unfortunately, far less attention is placed on how performance is measured.
For the executive, it usually is based on traditional financial indicators. Such measures are no longer enough. As other customer- and service-intense industries have learned, early indicators of success are found not in revenues or profits but in quality, customer service and employee satisfaction. It's critical that organizations use a mix of measures, perhaps linking short-term incentives to nonfinancial results, while continuing to use financial outcomes to determine long-term success.
It's also good to reassess on what basis results are measured. Too often, organizations still depend on traditional indicators without questioning whether they accurately represent their strategic intent.
To that end, many organizations are beginning to develop more appropriate measurement models. Such models not only help accurately assess executive performance but also force organizations to decide what's really important, isolate those key variables and better predict long-term results.
One organization taking this approach is Texas Children's Hospital, Houston, which is creating an organizationwide measurement model. It has identified several broad but critical success factors, such as achieving an optimal financial position and improving the health of children and families. It's also in the process of determining measures that can accurately track these factors.
Only after the right leaders are in place, along with the right measures to assess their performance, can a board really begin to determine whether its compensation program is effective and defensible. While pay strategies vary depending on the organization, there are some common issues that should be addressed, including:
The mix of performance measures. To be effective, executive compensation must be tied to real results. Organizations must determine the best mix of short- and long-term incentives.
The degree of risk. A growing number of organizations are wisely moving away from executive pay programs that focus primarily on base pay. Those organizations that truly want to "raise the bar" are putting more money at risk through incentives linked to the achievement of strategic results.
The focus on total remuneration. Executive pay should encompass a total reward package. The mix of base pay, long- and short-term incentives, and benefits and perquisites sends a powerful message about the values and strategic intent of the organization, and the role of its leaders. To develop such a mix, the board should establish a clear compensation philosophy tailored to its mission, culture and strategic objectives.
There's no doubt that executive pay will continue to be a lightening rod for industry criticism. Much of that criticism can be defused through the creation of a performance-based compensation program that is fair, competitive and truly represents the values and goals of the organization.