Issue link: https://beckershealthcare.uberflip.com/i/417381
108 Executive Briefing: Executive Compensation Governing boards recognize that the transformation in healthcare will occur not overnight but over time. To provide competitive com- pensation with broader labor market peers and to increase focus on long-term outcomes that are aligned with new strategic priori- ties, more not-for-profit organizations are considering and imple- menting long-term incentive plans for executives, a common for- profit executive compensation component. For example, according to data from SullivanCotter's 2011 annual "Manager and Executive Compensation in Hospitals and Health Systems Survey," just 36 percent of large health systems pro- vided a LTI plan. By 2014, this percentage grew to 46 percent, and is likely to continue to increase. While nonprofit health systems cannot offer the stock or equity- based arrangements that for-profit companies can offer, adding an executive LTI plan to the compensation package places a greater emphasis on outcomes aligning closely with the orga- nization's long-term business strategy. LTI plan measures are typically multiyear, enterprise-wide strategic measures linked to increases in market share or fundamentally improved perfor- mance. In addition, LTI plans for nonprofit healthcare executives may ultimately evolve to include measures of value creation. Approaches to measuring long-term value creation among non- profits could include discounted cash flow analysis, change in net assets or comparisons to the market values of similar public companies. Measuring the alignment of pay levels against performance Driven largely by shareholder activism and regulatory compliance, for-profit health systems have long ensured that pay is aligned with performance via financial and operating metrics, relative per- formance metrics and total shareholder return. Given that the fi- nancial incentives under healthcare reform require a certain level of performance to avoid penalties and earn reimbursement, along with the continued scrutiny of healthcare executive compensa- tion packages, nonprofit governing boards and compensation committees have grown increasingly interested in measuring the alignment of pay, performance ratings and performance improve- ment based on benchmark data covering financial, quality, patient safety, patient satisfaction and system integration and alignment measures. Measuring the alignment of pay and performance pro- vides valuable information as to whether pay levels are commen- surate with the performance necessary to drive success. If so, this is a great message to share with stakeholders. If not, it is an opportunity to recalibrate and reassess. Highly skilled executives capable of effectively leading today's health systems are hard to find, challenging to retain and even tougher to replace. Nonprofit health systems must be able to of- fer a competitive executive compensation package that can at- tract, retain and reward these leaders. While governing boards and compensation committees still must ensure that executive pay is "reasonable," which requires adherence to a compliant governance framework and process, they are increasingly look- ing to the pay and practices of for-profit companies (both within and outside of healthcare) for ideas. This trend is just beginning, but given the rapid change occurring in healthcare and the fierce competition for proven executive talent, it is not likely to end any- time soon. n LTI Plan Prevalence –Large Not-for-Profit Health Systems (Revenue Greater Than $3 Billion) 2011 2012 2013 2014 36% 39% 41% 46% Source: Sullivan, Cotter and Associates, Inc. 2011-2014 Manager and Executive Compensation in Hospitals and Health Systems Survey SullivanCotter is the leading independent consulting firm in the assessment and development of tailored total compensation and reward programs for tax-exempt, not-for-profit organizations. For more than 20 years, the firm has provided executive, physician and employee compensation and governance counsel to a wide variety of health care and higher education organizations, public charities, associations and foundations. A recognized leader in compensation benchmarking, trends and analyses, SullivanCotter has developed the most widely recognized physician and health care executive compensation surveys in the United States. Building from this unparalleled data, the firm works closely with executives, boards and compensation committees to devise innovative solutions to attract and retain talent while satisfying not-for-profit missions and regulatory requirements. SullivanCotter has offices in Atlanta, Boston, Chicago, Denver, Detroit, Minneapolis, New York, Parsippany, Philadelphia, Pittsburgh and San Francisco. While governing boards and compensation committees still must ensure that executive pay is 'reasonable,' which requires adherence to a compliant governance framework and process, they are increasingly looking to the pay and practices of for-profit companies (both within and outside of healthcare) for ideas.