Feeling the squeeze

Five years ago, if you had told a hospital CEO that he should feel thankful to receive a 3% pay raise, the executive might have called you crazy.

Welcome to 2011. Today's healthcare executives are operating in a world where a long recession has been displaced by a long-sputtering recovery, and C-suite officials' paychecks have been cut in the same spirit of austerity as everyone else's for four years running.

But in that time, the top executive jobs have only gotten tougher, experts say. Government bureaucrats have piled on new regulatory schemes that require multiyear projects and vexing 21st century questions, such as how should providers transition into a pay-for-performance world or will they ever create their own medical home or accountable care delivery model.

So the 3% average increases in base compensation that hospital and health system executives in more than a dozen categories received in 2011 were the result of conflicting forces—continued shared-sacrifice balanced against a desire to keep experienced executives on board in the post-reform age.

Modern Healthcare's annual Executive Compensation Survey found that executives in the 24 categories tracked at hospitals posted average salary growth of 3.1% in 2011, while their colleagues in 44 job categories tracked at health systems received 3.3% increases, according to calculations from the data done by Tom Pavlik, managing principal for Chicago-based Sullivan, Cotter and Associates, the consulting firm that provides the annual survey data to the magazine.

Pavlik says the 2011 salary figures, which were drawn from responses from about 1,200 healthcare providers across the country, fulfilled his salary predictions heading into the year, even though the raises in the range of 3% were lower than historical trends.

“That's certainly more conservative than the last 10 years, prior to the downturn,” he says. “Pay increases were better than 4% for the rest of the decade.” Indeed, past surveys showed much larger annual increases that sometimes stretched into double-digit territory during more prosperous years.

Governing boards' most recent decisions on executive pay seemed to answer one question that had lingered from previous surveys: whether CEOs would eventually make up the “lost” compensation when they took pay cuts and freezes along with the rest of their staffs.

“Organizations have lower budgets, and I just don't see anyone trying to catch up on an overall basis,” Pavlik says. “I think there is still a strong demand for highly skilled executives. Especially when you start looking at the strong challenges we have with ACOs, pay-for-performance. There is still strong demand.”

One factor that experts say continues to exert negative pressure on executive wages is widespread public disclosure.

In recent years, much of the attention on compensation transparency has focused on employer-provided country club memberships, generous transportation benefits and other perks that had to be specifically outlined in Internal Revenue Service Form 990 tax disclosure starting in tax year 2008.

But in the context of a long-lasting economic downturn, the CEO's publicly reported salary and especially raises or bonuses can become a public-relations liability for a hospital board of directors, not only in relation to lawmakers and the public, but also in hospitals' relations with their own workers.

“Executive compensation is kind of a political football,” says Lindalee Lawrence, president of Wellesley, Mass.-based compensation consulting firm Lawrence Associates. “We see this in other not-for-profit organizations, not just healthcare, but the unions are not hesitant to look at the (IRS Form) 990 and bring that to the fore as part of their negotiation strategy.”

Although the increases in compensation may look modest, the total take-home pay figures for healthcare CEOs can still seem large on the whole—especially to community members serving on the hospital compensation committee who find they are voting to approve salaries larger than their own.

Healthcare system CEOs in 2011 remained the only group of executives in the survey to average more than $1 million a year in total cash compensation, with cash compensation pay climbing 4.3% to $1.05 million in 2011, the survey data show.

(Similar to other executive compensation surveys, one year's compensation is defined in the Sullivan, Cotter data as the current year's base salary plus all incentive payments in the most recent prior year.)

A closer examination of system CEO figures shows that the recipients of the biggest compensation gains were top executives of smaller health systems, whose 14.4% median total compensation growth rate was the highest of any job category.

CEOs of smaller systems, defined in the survey as those that recorded less than $1 billion in revenue, earned median total compensation of $631,300 in 2011—but all of that increase came from incentive pay and other kinds of cash contributions. Smaller-system CEO base pay did not change from the $600,000 median between 2010 and 2011.

Meanwhile, CEOs at larger systems—those with more than $1 billion in annual revenue—saw more balance in their pay packages. Large-system CEOs took home median total compensation of $1.2 million in 2011, which was a 3.2% increase. That percentage growth nearly matched those CEOs' 3.9% growth in base pay, to $924,700 from $890,000.

Turning to free-standing hospitals, median total compensation for CEOs grew by 8.5% to $571,000 in 2011 from $526,500 last year, even though their base compensation rose 3%, the survey data show.

“Hospitals were quick to respond (to the recession) and make cutbacks in executive wages, and are now finding more need to have stability in executive leadership and are responding more quickly,” says Ron Seifert, a vice president and the healthcare executive compensation practice leader for Philadelphia-based consulting firm Hay Group.

However, similar to the CEOs of healthcare systems, dividing the CEOs of hospitals into categories of larger and smaller revenue shows that all of the compensation gains for the top executives are at smaller hospitals, which were classified as having net revenue of less than $250 million.

CEOs at smaller-revenue hospitals saw 7.4% growth in median total compensation, to $445,000 in 2011, including a 7.7% rise in their $433,100 median base compensation.

But at hospitals with more than $250 million in revenue, CEOs actually lost ground in total compensation and base pay. Median total compensation fell 1.5% to $665,000, while base pay dropped 0.8% to $605,000.

Large-hospital CEOs, including those at many urban academic medical centers, were the only job category in the survey that saw declines in base and total pay in 2011.

Looking at differences in pay between various types of C-suite executives at free-standing hospitals versus hospitals within systems revealed that top executives at stand-alones had larger total paychecks and more substantial increases.

CEOs at free-standing hospitals saw a median 8.5% increase in total compensation, to $571,000, while chief operating officers in the survey received 4.5% increases and $337,000 in total cash compensation. The same pattern was seen for chief medical officers and chief financial officers, whose median total compensation packages grew faster at stand-alone hospitals.

Examining differences between the various C-suite positions at hospitals versus health systems, the survey found that CMOs earned more than COOs at hospitals, but not in systems, in their respective categories.

At systems, CMOs earned median total compensation of $472,100 in 2011, compared with the $535,800 earned by system COOs. But at hospitals, CMOs earned $343,200 at stand-alones and $329,300 at system-based hospitals—both of which were higher than their COO colleagues, who earned $337,000 at stand-alones and $274,400 at system-based hospitals.

“It's not uncommon for a CMO, particularly at smaller organizations, to make more than the COO,” says Kevin Talbot, executive vice president and practice leader for executive compensation and governance at Minneapolis-based human resources consulting firm Integrated Healthcare Strategies. “Physician executives in general are in high demand. Whether it's in the CMO world or the leadership of a medical group that is owned by a hospital, those jobs are important now.”

Talbot says the physician leader is frequently at the center of a hospital or health system's planning process for longer-term strategies such as achieving physician-alignment goals.

“The question is, will we see an increase in long-term incentive plans to bring about these longer-term strategies?” Talbot asks.

For CEOs, experts say there's no question that long-term incentive plans are becoming more popular.

Although 85% of hospitals have annual performance incentives for their executives, most are year-to-year goals such as financial performance and patient satisfaction.

As many as 25% of healthcare providers also use long-term incentive plans, which are intended to encourage retention and performance on more-ambitious priorities, Talbot says.

The impetus behind many of the newest such plans is the Patient Protection and Affordable Care Act, which not only created reams of new rules for providers but also put healthcare-delivery organizations on a path toward greater efficiency, cooperation and consolidation.

For example, the new Medicare Shared Savings Program mandates the establishment of a complex multidisciplinary new entity called the accountable care organization, which requires hospitals to work directly with physicians and other parties, sometimes even payers, to reduce patient care and then split the cost savings as profit.

“We're seeing more emphasis on areas like physician-alignment strategies, (and) increased use of metrics that align the organization with becoming a value-based purchasing organization,” Talbot says. “If one of the underlying messages (of the ACA) is changing how we deliver healthcare … how do we change the delivery of care and have compensation programs that accomplish that?”

Another common long-term goal is the establishment of an enterprise-wide electronic health record, spurred by carrots and sticks in the American Recovery and Reinvestment Act of 2009. Such systems are expensive and potentially frustrating for clinicians, and failure can mean financial penalties against the healthcare provider.

Yet in an era when the average tenure of a hospital CEO still hovers around four years, embarking on a multiyear project to change the digital workflow for every hands-on clinician in a hospital or system can be a daunting prospect.

Other long-term incentive metrics might include standardization of care processes or other performance relative to industry benchmarks, Seifert says.

And then there's the ultimate long-term question: whether to merge with a larger partner, as forces in the reform law seem to encourage, or to continue enjoying the benefits and expenses of provider independence.

“These hospitals are struggling to make a go of it, and they're in the middle of these debates where they wonder, do they go it alone?” Seifert says. “The boards are struggling, and they're saying they don't need to lose key leaders in this period.”