Issue link: https://beckershealthcare.uberflip.com/i/417381
106 Executive Briefing: Executive Compensation Sponsored by H ospital and health system executives have always dealt with change. But today's executives are responsible for leading their organizations through unprecedented trans- formational change that will fundamentally alter the way health- care is delivered. Changes in payment models, from volume based to value based, are leading to new patient care delivery models in order to accomplish the new healthcare Triple Aim: de- liver a better patient experience, improve the health of a defined population and reduce care costs. Nonprofit hospital and health system providers must also con- tend with the increased emergence of for-profit health systems that have greater access to capital for meeting these challenges. To compete, both for-profit and not-for-profit hospitals and health systems have been consolidating (including the creation of "mega systems") or entering into strategic affiliations or other arrange- ments to grow market share, expand service lines or revenue streams and realize efficiencies. The result: health systems that now resemble the size and complexity of Fortune 500 companies. Governing boards of nonprofit hospitals and health systems are reexamining their executive compensation programs to ensure they can attract, reward and retain the right executive talent re- quired to lead the new healthcare enterprise. These programs must reflect the new competitive environment, support the evolv- ing business strategies and include the appropriate mix of pay fo- cused on outcomes, while still adhering to the charitable mission and the requirement to pay no more than reasonable compensa- tion. This is no easy task. For ideas, governing boards and com- pensation committees have begun to look at the pay practices of for-profit companies, including the following: • Evolving use of for-profit companies as peer organizations. • Increasing adoption of executive long-term incentive plans. • Measuring the alignment of pay levels against performance. Evolving use of for-profit companies as peer organizations This new healthcare landscape requires leaders to be more skilled, experienced and adept at dealing with change. Attracting, reward- ing and retaining executives with the skills necessary to lead an organization through this period of change is a critical task for to- day's governing boards. According to a report from the American College of Healthcare Executives, hospital CEO turnover is at an all-time high: It rose from 17 percent in 2012 to 20 percent in 2013, the highest rate recorded since 1981. The competition for proven executive talent is fierce and is now coming from both within and outside of healthcare, including the for-profit sector. New executive roles are emerging (e.g., physician integration, population health, medical informatics), and existing roles now require executives to have new skills for building and managing under shared risk ar- rangements, providing quality outcomes in a safe environment for reduced costs and improving population health. To address the changing and evolving executive talent market and the increased sourcing of talent from the for-profit market, governing boards are beginning to include a mix of nonprofit and for-profit organizations, as appropriate, in their peer organizations for cash compensation benchmarking. Given the diversity of the roles and the rapidly changing industry, it is important to ensure that peer group data match the executive's specific role and the organization's situation. Governing boards and compensation committees should ensure compliance with applicable regulatory guidance (e.g., intermediate sanctions regulations) regarding ap- propriate comparators. With the inclusion of for-profit companies in the peer groups, it is unlikely that nonprofits will be able to match the total compensa- tion packages of those given to for-profit executives because of their inability to offer stock or equity-based compensation, which is a major component of for-profit executive pay. However, for cer- tain roles and under certain situations, the gap in cash compensa- tion paid by for-profits compared to not-for-profits may decrease. Increasing adoption of executive long- term incentive plans Nonprofit executive compensation packages have traditionally focused on providing annual incentives structured around a bal- anced scorecard approach. Common measures include financial, quality, patient safety, patient satisfaction, employee engagement and community metrics. In recent years, these have been refined to focus more on outcomes than on process and have expanded to include population health measures. The Growing Influence of For-Profit Pay Practices on Nonprofit Executive Pay By Sally LaFond and John Collins, Sullivan, Cotter and Associates, Inc.