1. Declines in base salary increases
Most hospital executives can still expect salary increases, although they will likely not see increases as high as in the past. The average salary increase for health system and hospital executives was 3.5 percent in 2009, down from 4.0 percent in 2008, according to Integrated Healthcare Strategies, a healthcare human resources consulting firm.
The 2009 median base salary for a health system CEO is $657,000, according to Integrated Healthcare Strategies. The median salary for an independent hospital CEO is $434,500, and the median salary for a subsidiary hospital CEO is $300,000. It is important to note, though, that salaries vary greatly, beginning at around the low six-figure range and increasing upwards to a million dollars.
Although most executives will experience slight increases, some hospitals and health systems are freezing or cutting salaries as a result of financial strain. According to Integrated Healthcare Strategies, one-third of organizations froze executive salaries for 2009. Another 6 percent of organizations reduced base salaries for executives, according to David Bjork, senior vice president & senior advisor for Integrated Healthcare Strategies.
2. Sensitivity to internal parity
Hospital boards seeking internal parity in the compensation of all C-level executives is another trend affecting CEO compensation.
“This is probably one of the the biggest trends we’ve noticed in terms of compensation,” says Greg Zoch, partner, Kaye/Bassman International, an executive recruiting and search firm. “In the past, if a system wanted to bring in a CEO at $300,000 and the CEOs in their system were making considerably less, say around $250,000, it wasn’t an issue. Now, that same system might be more sensitive to finding a CEO that would fit into $250,000 or $275,000 to be more in line with the other salaries.”
3. Performance-based bonuses
In addition to base salary, most hospitals offer bonuses to their top executives based on organizational performance.
“About 80 percent of the industry uses an annual performance incentive and about 25 percent also have long-term incentives,” says Mr. Bjork. “Long-term incentives, such as a bonus tied to the performance of the organization over maybe three years, are much more common in bigger organizations, such a multi-hospital health systems.”
These long-term bonuses could be as high as 30 percent of salary and are sometimes paid out over a multi-year period, according to Mr. Bjork.
Kathy Noland, PhD, senior vice president for B.E. Smith and a former healthcare CEO, says that these pay-for-performance bonuses are a win-win for healthcare organizations, local communities and patients. In these pay-for-performance arrangements, CEOs should be compensated for meeting a number of objective, measurable goals that are determined by the organization’s strategic plan. These goals may include improving measures such as national quality or customer satisfaction ratings by a certain percent and meeting specific growth and service line goals, she says. “Tying compensation to performance gives the board the assurance that executive performance is driven by a strategic plan and is fairly rewarded,” says Dr. Noland.
James Brophy, vice president of B.E. Smith and a former member of several hospital boards, recommends that organizations make these performance metrics transparent to organization members so that employees and medical staff can track the performance of the organization and its leadership team. “The key is that the board aligns executive compensation with achievement of the hospital’s strategic plan and goals. Compensation should be based on performance, and performance must be measured in quantifiable terms, not subject to someone’s personal opinion,” he says.
Mr. Bjork expects that bonuses, like salary increases, will also generally be smaller this year than in years past due to the effect of the recession on the financial performance of hospitals and health systems. In fact, a survey of hospitals found that roughly 20 percent reported plans to reduce 2009 incentive opportunity levels, and another 10 percent planned to eliminate their executive incentives for 2009, according to Integrated Healthcare Strategies.
4. Disappearing perquisites
Perquisites or “perks” that were once commonplace, such as car allowances, country club memberships, financial planning allowances and other expense accounts, are disappearing as line items in many CEO compensation packages.
Some hospitals and health systems are instead giving a single allowance to encompass all the perquisites that used to be single line items. “Instead of giving [the CEOs] a dollar amount for every perquisite, the board may give them $10,000 and say ‘do what you want,'” says Mr. Bjork.
Many organizations have stopped providing these perquisites and instead try to roll an additional allowance into the CEO’s base pay if need or perhaps add a signing bonus to bridge the gap. This method seems to be more common for CEOs with less experience. “The next generation CEOs are often coming in at a higher salary with lower benefits and perquisites than the last generation CEOs,” says Mr. Zoch. “Most newer CEOs never had a car allowance.”
The recession is causing boards and compensation committees to reconsider the traditional CEO compensation package, says Mr. Bjork. “They are looking to cut costs everywhere. They start to think, ‘Are we paying executives too much?'” he says.
Mr. Brophy says that hospital and health system boards need to be sensitive to the current economic climate and public scrutiny of executive compensation. “The board needs to undergo a very thorough process to determine a competitive salary and benefit package,” he says. “A number of factors go into determining what a competitive package is, but in today’s environment, boards must be sensitive to the scrutiny of its employees, medical staff and community.”
5. Improved relocation benefits
Recent changes in the housing market have also changed the type of relocation benefits offered to CEOs. Traditionally, employers would pay for relocation costs, but now additional benefits, such as housing allowances, are more commonly being offered.
“One of the biggest challenges facilities face in getting top talent at the C-level is in dealing with relocation issues. The CEOs are thinking, ‘Can I sell my house in this market?'” says Mr. Zoch. “The smart employers are taking the housing issue off the candidate’s back. They are offering company-paid condos or housing allowances for anywhere from 6-12 months or longer if needed. This allows the CEO to maintain two homes if necessary.”
6. Move to defined-benefit supplemental benefits
Because of government regulations regarding maximum contributions to retirement plans, such as 401(k)s, many hospital and health system CEOs have long been afforded supplemental retirement benefits. In the past, these supplemental retirement benefits would have been defined-benefit plans, meaning the CEO could expect the benefit to have a certain value upon retirement. Now, many CEOs are receiving supplemental retirement benefits, and often their qualified retirement benefits as well, in the form of defined-contribution plans, meaning that the ultimate value of the benefit is dependent on the performance financial markets and how the benefit is invested. This is a trend in compensation that is affecting all levels of healthcare employees and employees in many other industries as well, says Mr. Bjork.
“New regulations are changing the way supplemental retirement benefits are being delivered. It used to be much easier to figure out how to design deferred-benefit plans. Now, some boards are throwing up their hands and just giving the CEO cash now to invest for their own retirement,” says Mr. Bjork.
Determining CEO compensation
How much compensation a hospital or health system board should offer a CEO is determined by a number of factors, including the size, profitability and payor structure of the organization as well as the experience of the CEO.
“Asking what CEOs are being paid is kind of like asking how much a car costs,” says Mr. Zoch. “A hospital district that is struggling to make budget is not going to be as competitive as a facility with tremendous cash flow.”
The compensation that a hospital or health system should offer to a CEO will be dictated by the market, says Mr. Zoch. “What you paid to the last person in the position may be a starting point, but it’s usually best for a third party to do a salary survey for the hospital’s specific marketplace that takes into account the range of CEO experience in that market,” he says. “Ultimately, though, it really doesn’t matter if the CEO you really want has an ‘above market’ compensation package now. If you want that individual, the market rate just changed. And if you want or need them enough, you will have to acquiesce to the market and pay it. Or keep looking.”
Mr. Brophy recommends that hospital boards seek peer group comparisons of compensation and a third-party opinion from a person or firm with expertise in healthcare executive compensation. However, he warns that this type of data and expertise is not all that is needed. “[Survey data and third-party opinions] can guide the board but they cannot be the only factors considered. Ultimately, the board is accountable for the decision,” he says.
Any survey data or benchmarks should be put in context of the unique community environment of the hospital or health system, the challenges that face the organization and the expertise needed by the executive to successfully meet these challenges, says Dr. Noland. “The level of experience does impact compensation, so planning for that upfront will be beneficial,” she says.
Hospitals and health systems currently recruiting CEOs should be prepared to meet the demands of the market if they want to be successful in their efforts.
“It doesn’t do [hospitals] any good to pay just enough to get the best candidate but not enough to keep them. If you think you’ve gotten a really good deal on a candidate, you probably aren’t paying them enough to keep them from accepting a counteroffer or from being recruited later by another organization,” says Mr. Zoch. “You will spend effort, time, money and emotion searching for this person. If you find the one you want, pay them well, even if it’s slightly above market value. Good people will make you money.”
Contact Lindsey Dunn at lindsey@beckersasc.com.
