Let's start paying CEOs for quality

The exponential growth in the pay packages of top corporate officials, as prevalent in healthcare as it is in the rest of corporate America, is stoking significant public unease.

Soaring CEO pay helped create an avid audience for French economist Thomas Piketty's book, Capital in the Twenty-First Century, which is creeping up the best-seller lists by focusing public attention on the supersalaries of the superrich. Timing is everything. Spring is annual meeting season for most of America's publicly traded corporations, a time when the proxy statements sent to shareholders divulge the salaries, bonuses and other incentives given to top corporate officials.

Every journalism organization worth its salt spends proxy season delving into the data to paint a portrait of how much top CEOs make. We're no different, except that we limit our analysis to healthcare.

This week's By The Numbers reveals a new man atop the standings: John Hammergren, CEO of McKesson Corp., who earned a $51.7 million total compensation package in 2013, a 30.4% raise over his 2012 pay plan. All of the increases came in the form of retirement bonuses, stock options and other incentives. His base salary remained the same at $1.68 million.

However, Hammergren is an outlier on the list. Most CEOs making a repeat appearance on our top 25 list saw their total pay slide year over year.

The downward trend was widespread. The executive near the median on this year's list (No. 12 CEO Richard Bracken of HCA Holdings, now retired) earned $16.5 million in 2013. That was significantly below the $46.4 million he earned in 2012 and well below the median earner on last year's list, whose pay package came to $25 million.

So is the era of supersalaries starting to wane? Piketty says that won't happen as long as the return on capital exceeds the growth rate of the overall economy, a long-standing trend. Given the national aversion to raising taxes, not to mention using the tax system to redistribute income and wealth, the top managers who engineer that return on investment are well-positioned to continue convincing their boards of directors to allow them to hive off a substantial share of growth for themselves.

As long as that's the case, it is fair to ask whether corporate and not-for-profit boards (Modern Healthcare will publish the salaries of top executives at not-for-profit hospital chains in August) should begin attaching different strings to these outsized paydays. Financial performance must always be part of the mix, of course. No margin, no mission, as they say in the not-for-profit sector. Boards at for-profit companies have a fiduciary responsibility to protect the interests of shareholders.

But they are only one stakeholder, especially in healthcare. What about quality? What about outcomes? What about affordability?

As Melanie Evans reports this week, board compensation committees are beginning to take quality and outcome metrics into account when designing their CEO pay plans. But those moves have barely scratched the surface.

At the for-profits she surveyed, 25% or less of the bonuses—and that's just part of the overall compensation scheme—came from meeting quality performance indicators. Some of the bonuses depended on performance on metrics such as value-based purchasing and avoiding infections, which now have a direct financial payoff through Medicare. Some depended on performance on softer measures such as physician and employee satisfaction and workforce turnover, which aren't always linked to higher quality and better outcomes.

Use of such measures is proliferating in the not-for-profit hospital sector, too, where salaries, while well below those of colleagues in the investor-owned sector, can still range as high as $8 million a year. Two-thirds of not-for-profit board compensation committees now include quality incentives in top executives' compensation, up from 45% five years ago, according to a Sullivan Cotter & Associates survey.

Quality incentives are often subordinate to financial goals. That portion of the bonus gets paid only if the CEO meets the financial benchmarks.

Boards need to incorporate more far-reaching quality and outcomes metrics into the bonus portion of CEO pay, make those metrics a more important component of the overall package and delink the rewards from financial performance. They can even begin tying bonuses to improvement in population-health management metrics such as blood pressure and diabetes control, or to community outcomes measures such as reduced asthma admissions and obesity rates.

Since sky-high CEO pay—even if its rate of increase slows or stops—isn't going away, It's time to start redefining what constitutes CEO pay-for-performance.

Follow Merrill Goozner on Twitter: @MHgoozner