Package deals

With not-for-profit healthcare systems facing growing scrutiny of their executive compensation, median total pay for the top 25 highest paid chief executives climbed 12% while base salaries grew 3% year over year, according to Modern Healthcare's analysis of recent public information available on not-for-profit compensation.

According to Form 990s filed by not-for-profit systems to the IRS for 2011, median total compensation was $3.8 million with median base pay of $1.1 million. Data for 2011 were not available for all 25 because all 990s were not available through Guidestar.org by June, when Modern Healthcare closed its survey. In 2010, median total compensation for the top 25 executives was roughly $3.8 million, with median base compensation of $994,709, according to 990s filed for 2010.

The top paid, actively employed executive on the list was George Halvorson, the outgoing chairman and CEO of Oakland, Calif.-based Kaiser Permanente, who received total compensation of $7.9 million in 2011 with $1.2 million in base salary and $5 million in incentive pay. His total compensation increased 2.5% in 2011. Kaiser, which operates a giant health plan, 32 hospitals and more than 600 medical offices, ended 2011 with revenue of $47.9 billion and operating income of $1.6 billion.

Kaiser spokesman Won Ha, in a written statement, said Halvorson's pay falls short of the average compensation of $14 million, not including option exercises, earned by CEOs of the 12 largest for-profit healthcare systems, which had average 2011 revenue of $37 billion.

“Compensation paid to senior management is substantially less than that of many for-profit health (plans), and less than would be expected when compared to nonprofit healthcare organizations, once the size and complexity of Kaiser Permanente is taken into account,” Ha said.

The highest-paid executive identified by Modern Healthcare was Donald Faulk, CEO of Central Georgia Health System, which operates a 659-bed hospital in Macon, Ga. That was largely due to a big retirement payout. Faulk earned a total of $8 million in 2010 with a base salary of $705,046. His hospital system reported annual revenue for the year ended in September 2010 of $738.5 million, with operating revenue of $46.4 million.

Modern Healthcare's analysis of not-for-profit executive compensation comes as pay in that healthcare sector continues to receive close public scrutiny. Lawmakers, state attorneys general, the media and watchdog groups seek more transparency from not-for-profit hospitals, while demand grows for them to increase their provision of services that benefit their communities in return for the big tax breaks they receive.

In interviews, health system directors and executives at the systems where these top-paid executives work defended the compensation packages as necessary to remain competitive and in compliance with good governance standards set by the Internal Revenue Service, which regulates not-for-profits to prevent abuse of the organization's charitable status. Not-for-profits receive certain tax breaks in exchange for operating in the community's benefit, and organizations must adhere to limits on compensation to prevent abuse of that status and the organization's assets.

One outside expert defended paying not-for-profit healthcare executives market rates. “People can't be overpaid,” said Jill Horwitz, a law professor at the University of California at Los Angeles who specializes in not-for-profit healthcare. Legal rules for the not-for-profit sector require that CEOs earn no more than a competitive market rate, she said. “There is a reasonable interest to ensure that charitable assets aren't used for inappropriate purposes,” she said.

She also noted that not-for-profit systems have to compete with the for-profit sector for top talent. “This idea that people should be donating their labor is a misunderstanding of charity,” she said.

Next after Halvorson on the list is Jeffrey Romoff, president and CEO of UPMC in Pittsburgh. He earned total compensation of $6.1 million in 2011 with a base pay of $958,992. His total compensation increased 1.6% from 2010. UPMC spokeswoman Susan Manko described his pay as competitive for an institution of UPMC's size and complexity. “This is a $10 billion organization with more than 55,000 employees, encompassing nonprofit, for-profit and international operations,” she said. UPMC closed its books for 2011 with $9 billion in revenue and $454.3 million in operating income.

Following Romoff on the list was Gregory Beier, who retired in 2012 as executive vice president and president of operations of the 12-hospital Novant Health, based in Winston-Salem, N.C. The $3.5 million retirement payout to him in 2011 boosted Beier's total compensation to $5.1 million, with a base salary of $622,574. His total compensation grew by 61% from 2010 while his base salary increased by only 1%. Novant finished 2011 with revenue of $3.5 billion and operating income of $20.2 million.

Novant spokeswoman Kati Everett said Novant follows IRS rules that call for pay to be compared against the market and approved by board members with no potential conflicts of interest. Novant also ties executive pay to performance on quality, employee and patient satisfaction, financial performance and community benefit. Beier's 2011 salary was doubled by incentive pay that totaled $649,505 based on performance, she said.

“At Novant Health, we recognize (that) our responsibility to serve our community depends on the caliber of talent in our workforce, our leadership group and our clinical faculty,” Everett said in a prepared statement.

At Central Georgia Health System, Bernard Price, interim head of human resources, said his system complies with IRS rules for compensation. “I can understand very clearly why you and other folks would have their eyebrows significantly raised,” he said about Faulk's total compensation. “It is extreme when you look at it on the surface.”

But Price noted that $5.6 million of Faulk's 2010 compensation was a retirement payout that accrued since he began working for the system in 1974. Another $1.3 million was reported for 2010 tax purposes but not paid to Faulk until 2012.

Accounting rules for deferred compensation skewed the figures for some of the top 25 executive compensation packages. That was the case for Dr. Steve Safyer, president and CEO of the 1,418-bed Montefiore Medical Center in New York, whose total compensation was

$5 million in 2011 with base pay of $1.4 million. His total payout included $2.8 million earned during Safyer's 30-year tenure with the hospital, said Kathryn Hastings, a managing director and head of executive compensation for Sullivan Cotter, who works with Montefiore Medical Center. That helped increase his total compensation by 23.6% from 2010.

Of Safyer's total compensation, $2.5 million had been reported as compensation during prior years as well under accounting rules, she said. Safyer's compensation falls between the median and 75th percentile for top executives at other health systems in major cities or academic medical centers, she said. Montefiore reported roughly $3 billion in revenue and $33.4 million in operating income for 2011.

Accrued retirement accounted for one-quarter of the $4.6 million in compensation that Norfolk, Va.-based Sentara Healthcare paid President and CEO David Bernd in 2011, an increase of 11.3% from 2010. The system, with $3.9 billion in annual revenue and operating income of $244.5 million that year, operates 10 hospitals.

“Mr. Bernd's compensation takes into account his 40-year tenure of leadership at Sentara, with nearly 20 serving as the organization's top executive,” spokeswoman Cheri Hinshelwood said in a written statement. “His pay reflects his experience, expertise and the performance of Sentara as measured by clinical quality outcomes, patient satisfaction and financial performance.”

Sutter Health, a Sacramento-based system with two dozen hospitals in California and Hawaii, paid $5.2 million in total compensation to President and CEO Pat Fry in 2011, an increase of about 9% from 2010. His base pay of $1.6 million, including some adjustment based on an evaluation of his individual performance, increased 7.2% from 2010 to 2011. Sutter reported 2011 revenue of $9.1 billion and operating income of $697 million.

Andy Pansini, a San Francisco real estate executive who has served as chairman of the compensation committee of the Sutter Health board of directors, said no one has asked him to justify Fry's pay. But he is aware of regulators' intense interest in how tax-exempt healthcare organizations pay their executives.

Pansini said the Sutter board set the CEO's salary halfway between the lowest and the highest amount he could earn elsewhere. He defended Fry's compensation as reasonable and necessary to meet Sutter's strategic goals by hiring a skilled executive team. “In order to do that, we have to be competitive and we have to be fair,” he said.

He said Sutter's board relies heavily on consultants to compare Fry's compensation against the market. That comparison includes other executives of similar not-for-profit health systems, and, to a lesser degree, of for-profit systems. “We would recruit from the entire pool,” he said. Separately, two consulting companies review the Sutter CEO's final package of salary, benefits and bonuses.

That allows the board to pay competitively, but also signals to regulators that Sutter did not overpay its CEO. Sutter's board adheres to steps laid out by regulators that, if followed, make it more difficult to challenge CEO pay as excessive. For example, no board members with financial ties to the system approve Fry's pay, Pansini said.

Sutter ties Fry's bonus pay to performance on a half-dozen strategic priorities: quality, employee and patient satisfaction, profit, affordability and community benefit. It's mostly heavily based on performance on reducing Sutter's costs and increasing efficiency. One-quarter of the bonus is based on meeting cost targets; 20% is based on quality; patient satisfaction, 15%; community benefit, 10%; employee satisfaction, 10%; and profit performance accounts for 20%.

Sutter is seeking to slash the cost of its operations by $1 billion over five years and is halfway to the goal. “We had to reduce the costs in order to survive,” Pansini said. “That's true of any organization these days.”

Follow Melanie Evans on Twitter: @MHmevans