Richard Knapp considers healthcare executive compensation a balancing act.
Knapp, who is executive vice president of the Association of American Medical Colleges, is also the board chairman of the four-hospital Inova Health System in Fairfax, Va., and of its compensation committee.
At Inova, incentive compensation is a critical part of executives' compensation packages.
The system's top executives can expect their base pay to increase by 4% to 6% per year, and any additional increase they receive is based on the entire system reaching incentive targets, Knapp says. If financial targets are not met, which has happened once in the past few years, incentive payments are not made.
"What we like to see is that people reach a target seven out of 10 years, or 70% of the time," Knapp says. "We don't want the target so far away that there isn't a good chance of hitting it, but we don't want it so easily met that it's not a stretch and they get it every year."
Combine the responsibility of devising the appropriate long-term and short-term incentive targets with making sure that Inova can compete with other northern Virginia health systems, and Knapp and other members of the compensation committee have their hands full.
"There is increasing pressure on systems, but at the same time, when things are tough, that's when you need the best people," he says. "There's always that tension."
Hard times, big rewards
Many hospitals and systems appear to believe their top executives need to be rewarded for their management effort in hard times. A study by Hewitt Associates, a compensation and benefits consulting company in Lincolnshire, Ill., also indicates that fatter paychecks are being used by hospital boards as an inducement to draw better trained and more experienced management.
According to the Hewitt study, cash compensation increases this year for the top executive positions in hospitals, including chief executive officers, chief operating officers and chief financial officers, outpaced average increases for most other executive, managerial and department director positions in healthcare systems.
"Once again, it's a difficult management environment, and the highest-quality talent is being rewarded," says Jim Freundt, a Hewitt partner who works on healthcare compensation. "I think it's a talent issue, particularly for these senior people. Whether we like it or not, the fact is that these people are in demand."
Because of a decline in the number of respondents to this year's survey, however, some of the compensation increases for specific positions may be somewhat overstated, Freundt says. The sample size of the survey has been declining for several years, and the 2001 survey covers 139 healthcare organizations with 168 hospitals, compared with last year's 186 organizations and 401 hospitals.
This year's survey sample also is more heavily weighted with hospitals that have larger annual revenue bases, he says, which may account for some of the unusually large percentage increases in compensation for some of the top executive positions shown in the chart on pages 28 and 30. Because of this discrepancy, Hewitt provided additional data this year focusing on the compensation changes among only those respondents who participated in both the 2000 and 2001 surveys (See chart, p. 27).
According to the Hewitt survey, the median hospital CEO cash compensation rose 20% in 2001 to $270,000, although the increase among survey respondents who participated in both years was only 12.6%, a more reliable figure, Freundt says. The same can be said of COOs, whose 52.2% compensation increase drops drastically to 13.9% when the smaller sample is used. Even so, these executives are winning considerably higher compensation increases than most other healthcare managers.
Overall, healthcare managers' cash compensation rose an average of 6.8% this year, up slightly from 6.7% last year and 3.5% in 1999. This percentage is derived by taking the average of all of the 2000-2001 percentage increases for the job titles listed in the chart on pages 28 and 30.
There seems to be an overall shift in the number of healthcare management jobs experiencing strong raises, according to the Hewitt study. Fewer categories are experiencing strong compensation increases, and slightly more categories are experiencing small or no increases, or actual decreases. This year, 36 job categories enjoyed raises of more than 5%, a drop from last year's 43 categories, and six categories had compensation increases of less than 1%, up from last year's four categories that experienced such small raises.
"Since we're looking at cash compensation, which includes bonuses paid, in addition to salary amounts, I suspect bonuses paid for 2001 were not as great relative to the 2000 performance," Freundt says. "That could be a factor as well."
To put the data in broader perspective, healthcare executives are enjoying more robust salary increases than the average U.S. corporate executive. Average officers and executives can expect a 4.4% salary increase in 2001 and a projected 4.3% increase in 2002, according to preliminary results of a survey conducted by WorldatWork, of Scottsdale, Ariz., a national association of compensation, benefits and human resources professionals. These results, which also show executives receiving smaller salary increases than some of their employees for the first time in 19 years, reflect the slowdown in the U.S. economy, according to WorldatWork.
Another executive compensation study, conducted by Witt/Kieffer, a nationwide executive search firm, buttresses the Hewitt results pertaining to healthcare salaries. According to the Witt/Kieffer study, health system CEOs are the leading wage-earners in healthcare, outranking even physician executives and typically earning annual base compensation of $318,000.
"Historically, compensation in healthcare has been behind the trends in industry, generally because of its not-for-profit nature," says Jordan Hadelman, chairman and CEO of Witt/Kieffer. "I think we're seeing a recognition of the complexity of the job, the toughness of the market for hospital CEOs and the shortness of talent."
Compensation decisions can send a strong message to a community about a hospital's priorities, though. That's why executives at New Hanover Health Network in Wilmington, N.C., last year opted to forgo merit raises while the system was considering the termination of some hospital programs and services, says Ron Moore, vice president of human resources at New Hanover.
Some 12 of the hospital's managers and staff were eligible for the merit increase, which Moore did not quantify.
"There was so much pressure on the budget, and we weren't able to do all the things we wanted to do," he says. "That was clearly a choice and a statement."
It does not come as a surprise to Moore that the salaries in hospitals' executive suites seem to be growing at a faster pace than those of most other healthcare managers.
"We're clearly seeing faster growth in the CEO salaries," Moore says. "You have to have the talent, and you're going to have to pay for it, and the organization has to find ways to make that happen."
Among other hard-to-fill positions, pharmacy directors and patient financial services employees are two job categories that compensation experts are focusing on. According to the Hewitt study, pharmacy director salaries rose 9.4% this year to $94,300.
"Hospitals are competing with the commercial chains, trying to get those pharmacists in the hospitals," Moore says. "You've got to have the right numbers there for them."
Boomers and incentives
Charles McDowell, corporate vice president of human resources and organizational development at six-hospital ProMedica Health System, in Toledo, Ohio, says that the aging of the baby boomer generation could put an additional strain on the availability of talented hospital executives.
"I think people are concerned, and rightfully so, about what you are doing today to fill your anticipated positions and to grow your group or groom your group for five, 10 years from now," he says.
McDowell says he expects more healthcare organizations to try to find ways to offer incentives to people to work into what many would consider their retirement years, perhaps on a part-time basis.
Even now, incentives are playing a greater role in compensation packages, says John Merriwether, director of financial relations at Health Management Associates, a for-profit rural hospital chain based in Naples, Fla. Merriwether says HMA relies heavily on performance-based compensation in hospitals it purchases.
The incentives are based both on financial performance and quality measures in HMA's case.
According to another recent Hewitt study, sponsored by the National Committee for Quality Health Care, 71% of 63 healthcare organizations that responded to a survey said they have such incentive plans in place.
Most of the incentive plans-89%-are tied to patient satisfaction and loyalty, while fewer are linked to clinical quality performance and outcome measures, according to the quality committee.
The survey found that such incentive plans can have a positive impact on business results. Most organizations that reported having incentive plans reported improvement in net operating income, cost management, patient safety, patient satisfaction, employee satisfaction and market share, according to the study.
On the not-for-profit side, incentive-based compensation is growing in popularity, says Stephen Hanson, president and CEO of Appalachian Regional Healthcare, a nine-hospital system based in Lexington, Ky. The 5,000-employee health system is shifting a greater percentage of compensation to reward meeting financial, quality and physician-satisfaction targets, Hanson says.
"The trend I see is a greater proportion of a CEO's total compensation is on the incentive side, at risk, and I see that starting to occur at the vice president level or the department-head level," he says. "Even in the nonprofit world, we have to act like a business."