5 Critical Factors Affecting Hospital CEO and CFO Compensation

As top executives at hospitals and health systems deal with increasingly complicated financial and operational challenges, their compensation levels and structure are evolving with the times. Here are five factors affecting both the levels and composition of compensation for hospital and system CEOs and CFOs. (Note: To see hospital and health system CEO and CFO compensation from 2005-2009, click here)

1. Boards more engaged in challenging the status quo. Historically, hospital boards have relied on third-party data and peer comparisons to set competitive compensation levels for CEOs and CFOs. However, with greater transparency required by the IRS on the Form 990 and increased media and constituent scrutiny, boards are taking a closer look at compensation philosophy and strategy, and are challenging the data and their past practices. "Board members and even executives are more sensitive to that and therefore are digging deeper into what's happening in the marketplace," says Jim Nelson, a managing principal at Sullivan, Cotter and Associates, an independent compensation and human resources management consulting firm.

To set pay levels, boards are asking for more than the traditional national peer comparison data. They are increasingly using regional and local comparison data as a matter of course. Perhaps most significantly, boards want to examine peers based on their performance data — paying special attention to peer groups performing at their level or better — to set compensation levels, Mr. Nelson says. "We expect that to continue," he says.

2. Executive salary increases aligning more with those of general workforce. In the past, salary increases for top executives have risen more sharply than increases for the general workforce, but this gap may be narrowing. Historically, salary increases for CEOs were in the 4-5 percent range, while other employees might have seen 3-3.5 percent average annual raises, Mr. Nelson says.

Beginning in 2009, however, and expected to continue in 2010, salary increases for CEOs and CFOs have leveled off a bit. Last year, some 28 percent of nonprofit healthcare organizations did not give their executives any salary increase. And on average in 2009, executive salaries rose only 2-2.5 percent, according to Sullivan Cotter's data. Preliminary data for 2010 is showing average salary increases of between 2.8-3.1 percent. "More and more executive increases are tied to what the increases are for the general workforce," Mr. Nelson says.

On the CFO side, salaries rose 7 percent over the past two years, or about 3.5 percent each year, says Richard Gundling, vice president of healthcare financial practices for the Healthcare Financial Management Association.

Some, however, contend that the rate of increase of executive compensation will soon rise again thanks to simple supply and demand pressures, as well as the increasing complexity of the job. Thomas Dolan, PhD, president and CEO of the American College of Healthcare Executives, believes the first wave of Baby Boomer retirements is beginning to contribute to greater turnover among hospital CEOs. The next generation replacing the Boomers in these executive roles is much smaller, and as the supply of hospital executives declines and demand increases, salaries will likely go up, Dr. Dolan says. "The challenges of aligning the medical staff, the nursing staff, other employees, the community, all of these challenges are bigger than they've ever been," he says. "For all these reasons, the people doing it can command higher salaries."

3. Incentive portion of pay takes a hit. Roughly a third of nonprofit healthcare organizations did not pay incentives to their executives in 2009, says Mr. Nelson. This reflects operational and financial challenges partly connected to the overall economy. But the expectation is that in 2010, organizations will continue to face some of these challenges, and while some facilities will continue to exceed expectations, overall incentive awards will again miss targets, Mr. Nelson says.

4. Boards continue to raise the bar on CEO and CFO performance. Financial criteria aside, hospital boards have also been raising their expectations of top executives in non-financial criteria such as quality outcomes, patient satisfaction and employee satisfaction, says Mr. Nelson. This kind of analysis is likely to get more sophisticated as organizations seek continuous improvement in the face of payment pressure from insurers and the federal government, increasing competition and a genuine interest in improving the health of the communities they serve.

"Executives are supportive of this," Mr. Nelson says. "Executives for the most part understand and expect that boards will continue to raise the bar, that they're going to have to improve not only financials in this challenging environment, but they'll also have to improve from a quality perspective."

For CFOs, that means incorporating skills beyond accounting and working more closely with the clinical staff to derive quality while reducing costs, says Mr. Gundling.

5. Perquisites being phased out. In today's environment of increasing transparency, it is becoming more difficult for nonprofit healthcare organizations to justify traditional perquisites for top executives, such as country club memberships, automobile allowances, first-class travel and spousal travel. While there may be sound business reasons for offering these perks, constituents and the media are questioning whether they are appropriate uses of charitable assets. "There's no tax advantage, and then when you compound that with scrutiny of executive pay and the high profile of perquisites on the Form 990, boards are saying it's not worth it," Mr. Nelson says.

The same holds true for supplemental retirement and insurance plans for top executives because of changing federal tax rules on tax-deferred compensation. Because of the way deferred compensation must be reported on the Form 990, many organizations and boards are opting to make substantive changes such as rolling benefits into salaries or staggering the tax payments instead of deferring them altogether.

Contact Barbara Kirchheimer at barbara@beckersasc.com.