Becker's Hospital Review

Special Compensation Section 24 Hospital and Health System Executive Compensation in 2013: 8 Trends to Monitor (continued from page 1) on market-based salary data to construct executive compensation contracts. In July, New Hampshire shined the magnifying glass on non-profit hospital CEO pay. The independent New Hampshire Center for Public Policy found that average compensation of state non-profit hospital CEOs grew by roughly 18 percent between 2006 and 2009, which was much higher than the growth of private sector wages. For-profit hospital companies also made news after public records showed CEOs at the largest operators made anywhere between $3.7 million and $21.6 million in total compensation in 2011. Hospitals and health systems have a lot on their plates, from healthcare reform initiatives to ensuring their balance sheets will be black in the next quarter. Adjusting executive compensation packages has made its way into those discussions as well, and innovative organizations are continually assessing whether and how to incorporate the latest practices. As hospitals and health systems look to stay at the forefront of innovative and reasonable compensation packages for their executives, here are eight trends regarding healthcare executive compensation based on expert analysis within the field. 1. Executive compensation arrangements will be simpler. Several years ago, it was common for hospital and health system executives to have elaborate compensation agreements, which were built and constructed by the board's compensation committee. However, organizations are ditching contracts with confusing language and complex bonuses, incentives and benefits. "Hospitals are getting away from 'smorgasbord' compensation," says Tom Flannery, PhD, partner with consulting firm Mercer. "The reason is the design of those types of compensation programs can be very complex, making administration cumbersome." Dr. Flannery explains there is another reason why compensation arrangements no longer look like labyrinths: Hospitals have to explain their rationale for compensating executives, and having straightforward contracts with easy-to-discern goals makes their community or investor relations job much simpler. "It's easier to explain a simpler program than a complex program," Dr. Flannery says. "Quite often, organizations have to explain their compensation program to one, or even all, of four parties: the IRS, the attorney general, the newspaper or their own employees. The simpler the program, the more efficient and effective the explanation is." 2. Performance, not just market data, will influence pay levels. Similar to last year, hospitals and health systems are no longer relying solely Salary and total cash compensation are still largely determined by market percentiles, comparisons to similar-sized institutions and other factors shown in compensation firm studies and surveys, but "pay-for-performance" data are also becoming more inculcated into routine. For example, CEOs may be paid in part for achieving certain patient satisfaction scores or maintaining physician relationships. "The essential structures of executive compensation have not changed substantially," says Deedra Hartung, senior executive vice president and managing director of Cejka Executive Search. "But healthcare reform is changing the goals and objectives that incentives are tied to as the system moves away from volume-based to value-based payment models. For example, metrics based on the degree of physician alignment would play a greater role." Dr. Flannery adds that hospitals must also justify how they choose their market data for executive compensation. For example, if a hospital wants to pay the CEO in the highest compensation brackets, the performance must justify decision. "If you're going to be paid at the 75th percentile, you have to demonstrate 75th percentile performance," Dr. Flannery says. "There is much more pressure on making sure there is a causal relationship between pay and performance." Consequently, boards are more likely to have clearer expectations in their compensation meetings, and objectives are more likely to be focused on quality of care, safety, patient satisfaction, physician satisfaction, employee satisfaction, reputational image and cost of care efficiency. 3. Compensation for health system CEOs will routinely hit seven figures. According to Mercer's 2012 integrated health networks compensation survey, hospital and health system presidents and CEOs continue to record the highest salaries and cash compensation totals in the industry. Health system presidents and CEOs continue to make the most of any C-level position. Health systems that want to pay their CEOs in the 75th percentile are looking at a total compensation package around $1.46 million. Health system CEOs in the 25th percentile are making just shy of seven figures at $982,800, according to the survey. Standalone hospital CEOs are also seeing high pay totals, but their total compensation usually does not exceed the $1 million benchmark. Standalone hospital CEOs at organizations with more than $500 million in annual revenue — some of the highest earners at standalone hospitals — earned roughly $962,600 in the 75th percentile for 2012. Across all-sized organizations in Mercer's survey, standalone hospital presidents and CEOs still made $480,000 in the 25th percentile. Job Title Organizational Number ofMarket base salary percentile Market total cash compensation percentile ScopeIncumbents 25th50th75th 25th50th 75th System President & CEO All Organizations 78 $787,300 $917,500 $1,028,100 $912,300 $1,131,600 $1,405,700 Standalone Hospital President & CEO All Organizations 64 $480,000 $613,500 $750,800 $518,500 $620,000 $872,400 Chief Nursing Officer All Organizations 553 $146,400 $171,700 $210,300 $155,000 $187,500 $233,800 Chief Information Officer All Organizations 152 $239,500 $296,100 $362,400 $250,700 $324,400 $415,400 Chief Financial officer All Organizations 622 $160,600 $204,900 $306,400 $171,800 $227,700 $335,000 $1,464,300 System president & CEO Net Revenue: > $1B 52 $823,700 $946,800 $1,060,600 $982,800 $1,207,800 Net Revenue: >$500M 43 $593,100 $663,900 $783,900 $593,100 $751,800 $962,600 Chief Nursing Officer Net Revenue: > $1B 78 $196,300 $236,600 $296,300 $222,800 $282,800 $340,300 Chief Information Officer Net Revenue: > $1B 70 $296,300 $348,300 $382,800 $333,400 $396,900 $501,600 Chief Financial officer Net Revenue: > $1B 119 $250,900 $428,500 $510,900 $310,800 $482,000 $649,300 Standalone Hospital President & CEO

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