Kathy Noland, vice president of board and CEO services at B.E. Smith, discusses five changes that will affect hospital CEO compensation over the next year.
1. Base salary will increase slightly in 2011. Ms. Noland predicts that 2011 will see a 2-3 percent increase in CEO salaries over 2010, following several years of compensation flattening. She says that while an increase is expected, the increase is very slight compared to previous years.
2. Bonuses will constitute more of total direct compensation. CEO bonuses are more closely tied to the concept of pay-for-performance as the healthcare industry focuses on the achievement of measurable goals, Ms. Noland says. "As we look at healthcare reform and that healthcare organizations will be held accountable for payment based on metrics and quality measures, so too are we seeing that CEO bonuses are being tied to those same performance indices," she says.
She says the bonus percentage differs somewhat between for-profit and non-profit healthcare organizations, with for-profit awarding a higher percentage bonus. "At the same time, we're seeing an increased percentage in not-for-profit, so we're seeing things from 20-35 percent as an accepted range for performance bonus," she says.
She says that while base salary may experience only a slight increase in 2011, bonuses based on performance should give CEOs the opportunity for compensation increases. "Often, that top percentage is tied to some real stretch goals," she says.
3. Boards will use long-term incentive plans to increase retention. Unlike short-term incentive plans, which provide a payout once a year for accomplished goals, long-term incentive plans can span 3-5 years and reward more ambitious goals. These goals might include building a children's hospital, expanding a hospital service line or developing an ACO model.
Long-term incentive plans benefit boards who want to ensure CEO retention, Ms. Noland says. "You really get commitment long-term to the overall progress of the organization," she says. For example, if a CEO agrees to a three-year long-term incentive plan for building a new cancer center and then leaves after one year, the effort spent on the cancer center for that year would not result in a payout.
4. Hospitals will minimize perks. While the healthcare industry has never offered the exorbitant executive perks seen in other industries, Ms. Noland says the perks that do exist — for example, country club membership or use of a vehicle — will continue to decrease over the next year. Those perks will be replaced with more reasonable accommodations. "Rather than providing a vehicle, CEOs will receive [established] reimbursement of standard mileage compensation," Ms. Noland says.
She says perks such as conference attendance will also persist because of the necessity for CEOs to stay current on contemporary healthcare trends. "That is very acceptable, and I think will continue to be something that the public will not question," she says. She adds that perks may experience a greater decline in for-profit institutions, which often publicize CEO compensation to shareholders and thus receive more criticism.
Transitioning CEOs will continue to receive temporary housing because of the housing market. She says this perk may extend to director-level positions as hospitals struggle to recruit quality talent.
5. Severance agreements will continue to provide compensation for 12-24 months after termination. Ms. Noland says if a CEO is severed from the hospital without cause, the standard remains to provide compensation for 12-25 months. "The principle behind that is the board of directors wants the CEO to make prudent decisions for the mission and values of the organization," she says. "[The severance package] gives the CEO a confidence level to make those decisions. If for any reason they are terminated without cause, there is that extension of salary until they are engaged in their next employment." She says a significant severance package gives assurance from the board that necessarily risky CEO decisions — in some ways, an inevitable part of contemporary hospital leadership — will not be penalized.
Learn more about B.E. Smith.
Read more on compensation:
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1. Base salary will increase slightly in 2011. Ms. Noland predicts that 2011 will see a 2-3 percent increase in CEO salaries over 2010, following several years of compensation flattening. She says that while an increase is expected, the increase is very slight compared to previous years.
2. Bonuses will constitute more of total direct compensation. CEO bonuses are more closely tied to the concept of pay-for-performance as the healthcare industry focuses on the achievement of measurable goals, Ms. Noland says. "As we look at healthcare reform and that healthcare organizations will be held accountable for payment based on metrics and quality measures, so too are we seeing that CEO bonuses are being tied to those same performance indices," she says.
She says the bonus percentage differs somewhat between for-profit and non-profit healthcare organizations, with for-profit awarding a higher percentage bonus. "At the same time, we're seeing an increased percentage in not-for-profit, so we're seeing things from 20-35 percent as an accepted range for performance bonus," she says.
She says that while base salary may experience only a slight increase in 2011, bonuses based on performance should give CEOs the opportunity for compensation increases. "Often, that top percentage is tied to some real stretch goals," she says.
3. Boards will use long-term incentive plans to increase retention. Unlike short-term incentive plans, which provide a payout once a year for accomplished goals, long-term incentive plans can span 3-5 years and reward more ambitious goals. These goals might include building a children's hospital, expanding a hospital service line or developing an ACO model.
Long-term incentive plans benefit boards who want to ensure CEO retention, Ms. Noland says. "You really get commitment long-term to the overall progress of the organization," she says. For example, if a CEO agrees to a three-year long-term incentive plan for building a new cancer center and then leaves after one year, the effort spent on the cancer center for that year would not result in a payout.
4. Hospitals will minimize perks. While the healthcare industry has never offered the exorbitant executive perks seen in other industries, Ms. Noland says the perks that do exist — for example, country club membership or use of a vehicle — will continue to decrease over the next year. Those perks will be replaced with more reasonable accommodations. "Rather than providing a vehicle, CEOs will receive [established] reimbursement of standard mileage compensation," Ms. Noland says.
She says perks such as conference attendance will also persist because of the necessity for CEOs to stay current on contemporary healthcare trends. "That is very acceptable, and I think will continue to be something that the public will not question," she says. She adds that perks may experience a greater decline in for-profit institutions, which often publicize CEO compensation to shareholders and thus receive more criticism.
Transitioning CEOs will continue to receive temporary housing because of the housing market. She says this perk may extend to director-level positions as hospitals struggle to recruit quality talent.
5. Severance agreements will continue to provide compensation for 12-24 months after termination. Ms. Noland says if a CEO is severed from the hospital without cause, the standard remains to provide compensation for 12-25 months. "The principle behind that is the board of directors wants the CEO to make prudent decisions for the mission and values of the organization," she says. "[The severance package] gives the CEO a confidence level to make those decisions. If for any reason they are terminated without cause, there is that extension of salary until they are engaged in their next employment." She says a significant severance package gives assurance from the board that necessarily risky CEO decisions — in some ways, an inevitable part of contemporary hospital leadership — will not be penalized.
Learn more about B.E. Smith.
Read more on compensation:
-24 Statistics on Specialty Physician Compensation
-5 Points on Designing a CEO Incentive Compensation Plan
-6 Statistics About ASC Administrator Compensation