As governing boards face scrutiny for how much -- and increasingly how -- executives get paid, healthcare executives can expect dwindling guarantees on their compensation, with more bonuses linked to strategic and financial goals. And little by little, the industry is starting to equate pay-for-performance with pay-for-quality.
Incentive pay appears to be gaining favor and growing as a share of executives' overall compensation, say consultants and executives interviewed for Modern Healthcare's 25th annual Executive Compensation Survey.Click here for the 2005 survey chartsFor this year's survey, Chicago-based Sullivan, Cotter & Associates included compensation data for 141 executive, management and professional roles from 855 organizations, up from 731 in 2004. This year's survey includes responses from 185 health systems and 670 hospitals, compared with 150 and 581, respectively, in 2004. Too few responses -- 10 or fewer -- in about two dozen job categories this year made year-over-year comparisons for those jobs unreliable.
None of the 2005 five highest-paid hospital executive positions, ranked by median total cash compensation, saw a double-digit increase in cash compensation or median base pay. Median base-pay increases ranged from 8.2% to 3.3%, and median total cash compensation varied from a 6.5% increase to a decline of 0.3% in one category, the only negative number in the top five.
The category of president and chief executive officer of a hospital within a health system saw a decline in median total cash compensation to $334,000 in 2005 from $335,000 in 2004. Jim Freundt, a Sullivan, Cotter principal in Chicago, says the drop indicates there was no real change in compensation for the position. The same job category saw a 3.3% increase in average -- rather than median -- total cash compensation, to $345,400 in 2005 from $334,400 in 2004.
The president and chief executive officer category at a freestanding hospital earned a 3.6% increase to $364,500 in 2005 from $352,000 in 2004 in median total cash compensation, according to the survey.
Among the highest-paid executives at health systems in 2005, also ranked by median total cash compensation, two titles saw double-digit gains in either base pay or total cash compensation, after excluding job categories with 10 or fewer respondents.
Median base pay for health system presidents and CEOs increased 13.7% to $617,000 in 2005 from $542,500 in 2004. Meanwhile, median total cash compensation for chief information officers grew 11.5% to $281,500 in 2005 from $252,600 in 2004.
What other titles saw big gains in 2005? Among health system executives, the top reimbursement executive made a substantial increase -- 25.4% -- in median total cash compensation. The top facility executive saw median total cash compensation increase 13.7%. Public affairs and materials management executives both saw 11.9% gains in median total cash compensation.
Freundt notes that three categories among hospital leadership -- reimbursement and budget, construction and information network department heads -- also enjoyed significant increases in median base pay and total cash compensation. Such compensation increases might indicate the increasing importance within healthcare of all three management jobs, he says. Supply and demand for talented executives also could be driving up compensation. "A good reimbursement executive is worth his or her weight in gold," he says.
Among the 103 hospital executive, management and professional positions surveyed, director of reimbursement and budget ranked No. 25 with $110,000 median total cash compensation; information network directors came in at No. 50 with $93,000 median total cash compensation; and construction directors' $83,200 ranked 75th.
Head of reimbursement and budget saw median base pay and total cash compensation increases of 11% and 11.9%, respectively. For head of construction, median base pay increased 16% and total cash compensation rose 12.1%. Both median figures for head of networks rose 13.4%.
Also among hospital titles seeing double-digit gains is the top executive for ambulatory services, which enjoyed a 21.7% gain in median total cash compensation to $163,500 in 2005 from $134,400 in the previous year.
Healthcare directors and trustees continue to face mounting pressure from investors, regulators, lawyers and the public to openly account for how and how much executives get paid. "Good governance put the focus on how the board arrives at compensation," says Michael Peregrine, a partner in Chicago for the law firm McDermott, Will & Emery who specializes in healthcare issues.
Although Sarbanes-Oxley, the 2002 law that strengthened executive and governing board accountability, applies only to publicly traded companies, many not-for-profits are adopting its tenets. More healthcare organizations -- roughly 80% of U.S. hospitals are not-for-profit -- now consider Sarbanes-Oxley a standard to be widely adopted, regardless of a company's ownership, Freundt says.
"The overriding gorilla in the middle of the floor is good governance by boards," he says. Intense scrutiny by trustees is likely a contributing factor to this year's largely single-digit gains among the survey's highest-paid executive positions, Freundt adds.
In May 2004, the Internal Revenue Service launched an initiative to audit how not-for-profit boards determine a top executive's pay, incentives and bonuses (May 31, 2004, p. 6). The IRS, Congress and state attorneys general want to be sure boards make well-informed, independent compensation decisions, Peregrine says.
In Congress, Senate Finance Committee Chairman Chuck Grassley (R-Iowa) has said he plans to introduce legislation to improve not-for-profits' transparency. And in late June, a coalition of tax-exempt organizations released to Congress a report with 120 suggestions to improve not-for-profit accountability (June 27, 2005, p. 6), including several that targeted executive compensation. The report advised Congress to require more detailed public disclosure of the chief executives' total compensation. It also recommended tightening IRS oversight to make it harder for directors and trustees to plead ignorant to signing off on excessive compensation for officers.
Governing boards appear to rely more heavily on incentive pay to ensure that their executives earn their compensation, Freundt says. Not only do incentives put a greater share of an executives' salary at risk -- 30% to 40% of base pay in some cases -- but hospitals are adding new measures to determine executives' rewards, he says.
Healthcare governing boards also are becoming increasingly savvy when it comes to tools for gauging executive performance, says C.J. Bolster, a vice president and general manager of the Hay Group, a Philadelphia-based consulting firm. "It's not that it's unique, it's that it's getting increasingly sophisticated," he says. Governing boards are responding to IRS scrutiny and are generally more comfortable with setting goals and financial rewards, Bolster says.
The overall percentage of total cash compensation that's derived from incentives has increased slightly, he says, though it may not be the result of newly structured benefit plans that put more pay at risk, such as boosting incentives from 15% to 20% of base pay. Instead, incentives may have held steady, but improved hospital or health system performance may have boosted executive payouts.
Financial performance -- measured by parameters such as operating margin, cash flow and bond ratings -- remains critical to executives' performance, Freundt says. But boards also are seeking to measure gains in strategic initiatives and, increasingly, improvements in healthcare quality and safety.
Linking executive compensation to quality goals has symbolic value, says James Reinertsen, director of the Institute for Healthcare Improvement's Executive Quality Academy. "It signals very clearly that quality and safety are mainstream responsibilities, not just work to be delegated to `the quality people.' "
But incentives aren't the primary reason CEOs and executives make changes to improve patient safety, he says. Instead, it's executives who grasp their moral obligation to improve care and prevent errors. The Executive Quality Academy has not issued a formal policy or recommendations on executive pay-for-quality approaches, he says. Too little is known about what works and what doesn't work when compensating executives for quality improvements, Reinertsen says. "That said, pay-for-performance for quality has crept higher on the radar screen," he adds.
That's mostly because more quality data is becoming public, raising board awareness of how their healthcare organizations are performing. Trustees have responded by seeking to incorporate more safety and quality measures in executive performance appraisals, Reinertsen says. Improved quality measures make it easier to monitor progress, he says, and that's allowed for "more focused and disciplined" bonuses or incentives for executives.
Thomas Dolan, president and chief executive officer of the American College of Healthcare Executives, called incorporating quality into executives' at-risk pay a logical and positive step, but he cautioned that such incentives need to be linked to measurable, reasonable goals. Dolan says organizations such as Cambridge, Mass.-based Institute for Healthcare Improvement, run by quality guru Donald Berwick, can help boards establish achievable, quantifiable safety and quality measures.
"I understand the concern on quality; it's just that it's so darn hard to measure," says Robert Marquardt, president and CEO of Memorial Medical Center of West Michigan, Ludington. The hospital overhauled its compensation less than a year ago, linking greater shares of the CEO's and vice presidents' salaries to performance measures. Under the previous system, incentives were linked to two measures -- costs and patient satisfaction -- and everyone had up to 15% of their base salary linked to performance, he says.
Now 20% of base pay for vice presidents is at risk and 25% of the chief executive's salary, Marquardt says. Incentives are tied to five measures: operating margin, cost, patient satisfaction, market share and employee satisfaction, he says. Marquardt, who has been at the head of the 85-bed hospital for 20 years, says pay-for-performance has succeeded in getting everyone's attention and aligned management's goals. Still, he adds, managers don't always heed the financial incentives. "Admittedly, our experience is something of a mixed bag," he says. "I'm probably a lousy one to ask, because this doesn't change my performance one bit," adding that he's motivated most to do what's right.
G. Mark O'Bryant, CEO of Tallahassee (Fla.) Memorial HealthCare, called pay-for-quality incentives among executives a "relatively novel thing" as the healthcare industry works on building a common language of quality. The hospital doesn't explicitly link incentive pay to safety and quality, he says, "but that's going to change." Incentives are linked to Tallahassee Memorial's strategic plan; quality is critical to the 558-bed hospital's goal of becoming a recognized, world-class facility, he says.
Safe, high-quality patient care saves lives and cuts expenses, he says. "I've come to believe that quality healthcare is lower-cost healthcare."
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