Increasingly, the work of setting and evaluating a hospital CEO's salary and bonuses is done by a board compensation committee, a subset of the board entirely composed of independent directors or trustees—those without financial ties or potential conflicts of interest.
Sixty percent of all hospital governing boards surveyed by the Governance Institute in 2011 operated a compensation committee, up from 54% in 2009 and 48% two years earlier. Results are not yet available for this year. Also more prevalent are governance or nominating committees, which identify the balance of skills needed by the board and recommend or select those who may be best suited for various committees such as finance, strategic planning, quality, investment and compliance, as well as compensation. The 2011 Governance Institute survey found nearly three out of four boards included a governance or nominating committee, compared with 67% four years earlier.
Faye Hummel, a University of Northern Colorado nursing professor, joined the Platte Valley Medical Center's compensation committee four years ago and was named chairwoman this year. She says committee members at the 70-bed hospital in Brighton, Colo., must recruit and retain talented executives in a competitive market while also meeting the local community's culture and expectations.
“We are community members,” Hummel says. “We live here. We use this hospital. Our friends use this hospital. We absolutely believe that we are up for any of that public scrutiny.”
Platte Valley wants its compensation committee makeup to reflect a balance of members from its overall board, she says, and its committee charter does not call for specific skills.
But regulators want compensation work by boards to be limited to independent board members. Review and approval of the board's compensation process by independent board members is one standard that boards must meet to satisfy the IRS' criteria for good governance oversight of executive compensation. That policy is “as strict as it gets,” says Accord's Knecht.
Sean Patrick Murphy, senior vice president and corporate general counsel for Solaris Health System, Edison, N.J., says executive compensation is one area where boards have clear regulatory guidance. Still, questions arise with variations in board practice or executive compensation. “If they're doing what they are supposed to be doing, it should be defensible, legally and morally,” says Murphy, a governance expert.
Boards must disclose to the IRS and the public their performance on the IRS' good-governance criteria, which include whether the board compared compensation to other similar organizations and whether the board documented its work as it went through the process.
That greater transparency should focus boards' attention, Murphy says. “If board members weren't vigilant about this in the past, they have good reason to be now.”
Experts in compensation provide the Platte Valley board with compensation data from comparable organizations, which the board can then analyze and apply to their hospital, she says. “We have to be very thoughtful and strategic about ensuring our organization remains healthy,” Hummel says, and executive recruitment is one avenue to do so.