Another year of pay hikes for non-profit hospital CEOs

(This article has been updated with a correction.)

Despite the ongoing public ire aimed at executives at not-for-profit healthcare systems because of their multimillion-dollar pay packages, their salaries and total cash compensation continued to rise at a far faster clip than average worker salaries in 2012—the most recent year with full data available.

Boards and compensation consultants continue to cite market forces—the need to keep up with peers to hold onto skilled healthcare leaders—as the main reason for the increases.

Total cash compensation grew an average of 24.2% from 2011 to 2012 for the 147 chief executives included in Modern Healthcare's analysis of the most recent public information available for not-for-profit compensation. Of those 147 CEOs, 21, or 14.3%, saw their total cash compensation rise by more than 50%.

Another 51, or 35.7%, received total cash compensation increases of 10% or higher. The data came from Form 990s filed by not-for-profit systems to the IRS for 2011 and 2012.

Hospital systems, their boards and outside compensation consultants justify these raises as adjustments necessary to keep pace with what the market dictates and to compete for talent that might flee to more-lucrative for-profit positions. At Dignity Health, a 37-hospital system based in San Francisco, the total compensation of its executives was established “to approximate the prevailing market conditions for companies of similar size and revenues,” according to a written statement.

Similarly, at Rochester, Minn.-based Mayo Clinic, a market assessment for compensation purposes is conducted annually, “but we have a continual review as we see shifts in the competitive landscape,” said Jill Ragsdale, Mayo Clinic's chief human resources officer. “We want to make sure we can recruit and retain the highest quality of staff.”

Mayo Clinic evaluates and sets its compensation through the work of its board, an independent committee and third-party compensation consultants. And many consultants agree that salaries have to be high to attract the kinds of people who can lead a healthcare organization.

“Not everyone can step up and step into running a healthcare system with 25 to 50 hospitals,” said Tom Flannery, a partner with consulting firm Mercer. “It's a heck of a complex job.”

But critics of the high-dollar payouts argue the high salaries paid to not-for-profit hospital executives undermine the message that their core business is mission-driven. “It is somewhat unique in the nonprofit sector that you have a class of CEOs that are working for public charities that are becoming millionaires,” said Ken Berger, president and CEO of Charity Navigator. “An average CEO salary for a mid- to large-size public charity is around $125,000. When it comes to not-profit hospitals, it's off the scale.”

Berger contrasts those salaries with the $400,000 paid to the president of the United States. “How big and complicated is the structure that (he) manages?” Berger said.

The average 2012 cash compensation for the CEOs was $2.2 million in 2012. But that figure masks a wide disparity in packages.

At the low end of that range was Tom Sebastian of Compass Health, a mental health and chemical dependency services provider in Everett, Wash. Sebastian's 2012 total cash compensation was $178,810.

On the other end stood Joseph Trunfio of three-hospital Atlantic Health System in Morristown, N.J., whose total cash compensation was $10.7 million in 2012, a 201.9% increase over his prior year compensation. That was largely due to payouts for a retention bonus and other deferred compensation.

A similar scenario took place at another system in New Jersey, where Barnabas Health CEO Ronald Del Mauro received $21.6 million in deferred retirement compensation in 2012 even though he no longer worked at the system. Del Mauro was excluded from Modern Healthcare's analysis to avoid skewing the overall calculations. The former CEO at the West Orange, N.J., system reported total compensation of about $3 million, much closer to the group average.

“Only $8 million were employer contributions,” said Scott Mariani, tax partner and co-practice leader of healthcare services at WithumSmith & Brown. “The rest were investment gains over time.”

Other top CEO earners for 2012 included George Halvorson, then in his last year as CEO of Oakland, Calif.-based Kaiser Permanente, who received $9.9 million in total compensation in 2011, up 24.6% from the prior year; William Petasnick, CEO of Milwaukee-based Froedtert Health, who received $6.6 million in total compensation, a 227.2% hike from 2011; and Patrick Fry of Sutter Health, who still runs the Sacramento, Calif.-based system and received $6.4 million in total compensation, up from $5.2 million in 2011.

Fry also topped the list when looking only at base compensation—the core salary before bonuses and retirement set asides. He received a 53.5% raise in 2012, bringing his base to $2.4 million. Sutter, which owns 23 hospitals in California and one in Hawaii, reported 2012 revenue of $9.8 billion and operating income of $549 million.

A spokesperson for Sutter was unavailable for comment regarding either Fry's salary or total cash compensation. But previous inquiries into Fry's compensation have been defended as reasonable and necessary in order to attract and keep skilled leadership, again echoing the mantra repeated by other hospital systems and boards.

He wasn't alone. The average increase in base salary in 2012 was 7.4% over 2011 pay, bringing the average to $825,991. The 143 CEOs in Modern Healthcare's base compensation survey excluded those who served partial years and several retiring executives.

The survey results suggest hospital system CEOs received increases in their base compensation that was about four times greater than average workers, who have gotten annual pay hikes of less than 2% in recent years. Of the 143 analyzed, 37, or 25.9%, received raises in their base compensation that were 10% or higher; another 69, or 48.3%, had raises between 2% and 9.9%; and just 23 of the group, or 16.1%, saw a decline in their base compensation, according to Form 990s.

As the pay gap between hospital CEOs and average workers widens, the maxim about the need to hold on to top talent remains the same. “Dignity Health's executive compensation philosophy is designed to attract and retain the caliber of executives required to fulfill its mission of care,” according to a written statement. It is particularly important, they say, because of the breadth, complexity and scope of the system and its services.

And the way hospitals and health systems and their boards are attracting the right people to fill those top jobs seems to be increasingly through top dollars. It's necessary, they say, to be competitive.

“We want to make sure we can recruit and retain the highest quality of staff, while balancing benefits and the salaries that are reasonable as compared to other organizations,” Mayo's Ragsdale said.

Dignity Health and Mayo Clinic both do that with the help of their boards, an independent committee and legal counsel, while using third-party compensation consultants to perform market assessments.

“It's a balance of making sure we're in a position to recruit and retain but also to be good stewards with our fiduciary responsibility,” Ragsdale said.

Compared to comparably sized organizations in the for-profit arena, CEO compensation at not-for-profit health systems lags considerably, other experts argue. “The compensation ratio of a CEO in major corporations is 250 to 300 times the average worker's compensation in that company,” said Ken Ackerman, chairman of Integrated Healthcare Strategies.

But when you compare even large not-for-profit enterprises, you don't see those kinds of multiples, he said.

“Peter Drucker, recognized as the No. 1 management consultant in the world, always referred to healthcare as being as complicated as any business he's ever worked with. He even made the point that a small hospital is very complicated,” Ackerman said.

“I don't have any trouble with my colleagues that are handsomely paid. They're earning every penny of what they're making,” he said.

Correction: The chart "Biggest Core Salary Winners - 2012" indicates that Orlando Health CEO Sherrie Sitarik received a 40% increase in base compensation between 2011 and 2012. Sitarik was executive VP/chief strategy officer for the first three months of the fiscal year before assuming the role of CEO on Jan. 1, 2012. Her 2012 base salary reflected a full 12 months as CEO.

Follow Rachel Landen on Twitter: @MHrlanden