As of late, there has been heightened scrutiny around the salaries and compensation packages of non-profit hospital executives. After a report was released on the pay packages of Cleveland-based MetroHealth System's top executives — ranking it in the top 25 percent of similarly sized health systems — county officials and board members showed concern about the high compensations. Hospital officials defended the raises, but MetroHealth also announced it plans to cut 450 jobs.
Even New York Gov. Andrew Cuomo has delved into the details of pay for non-profit executives, recently creating a task force to review executive and administrator compensation at non-profits that receive taxpayer support from the state. "There's always been fire around executive compensation at non-profit hospitals," says Kathy Hastings, managing director at SullivanCotter and Associates. "Special executive benefits and perquisites, such as dependent tuition reimbursement and housing, get a lot of criticism and may in fact deserve that kind of criticism. With healthcare reform and with states struggling with their budgets and Medicaid funding, you're going to see a lot of scrutiny around executive compensation." With that in mind, here are seven trends she has seen evolving with non-profit hospital executive compensation.
1. Base salary increases hovering around 3 to 4 percent on average. A 3 to 4 percent increase in base salary is in line with market prices and projections, Ms. Hastings says. Salary increases for executives typically will not jump out of this range unless the hospital drastically outperforms its performance projections or if there is a hiring battle to try to recruit or retain a highly sought-after executive. Most non-profit organizations are providing some sort of increase this year because a lot did not provide increases last year due to economic uncertainty, she says.
2. Executive salary increases generally coincide with salary increases for all. With hospital layoffs growing and hospital budgets shrinking, Ms. Hastings says a raise for executives may not occur unless all employees get an across-the-board raise as well. "That's just a social justice issue," she says. There have been a few examples as of late, however, involving public outcry of executive raises at the expense of stagnant or decreasing rank-and-file employee compensation. Executives at non-profit Lifespan in Providence, R.I., received raises last year, and that caused criticism from the Rhode Island Hospital Union, which voiced anger at the increases as Lifespan announced it was cutting the matching contributions to the employee's 403(b) Fidelity plans for 2011 and will be eliminating the matching contribution for 2012.
3. Disclosures lead to competitive pay packages. All non-profit 501(c)(3) healthcare organizations fill out Form 990s to the federal government, which disclose all financial information, including executive compensation. Ms. Hastings says these disclosures are important for transparency and reviewing executive pay. The ability to compare and contrast what others are making based on the fully disclosed information sets the market rates. "Some [hospitals] are billion-dollar corporations, and you have to be able to pay for talent that can run these types of enterprises," Ms. Hastings says. "A for-profit company is able to offer stock and company ownership to executives, but non-profit hospitals — they don't have that type of vehicle."
4. Incentive programs include yearly and more often long-term objectives. Most non-profit hospitals have some type of annual incentive program for its executives, and incentives hinge on several different factors, such as financial, quality, patient satisfaction and community benefit goals. However, healthcare reform is forcing hospitals and health systems to adapt toward more accountable care, and this is leading to longer-term objectives in executive compensation incentive programs, Ms. Hastings says. Long-term objectives include integrating hospital services, amplifying physician alignment and improving patient satisfaction and quality core measures.
5. Board of directors becoming more involved in how executive compensation is set. Ultimately, it is up to the non-profit hospital's board of directors on how much to pay the top executives, and they are taking the role a lot more seriously, Ms. Hastings says. They are looking at Form 990s and collecting competitive market data because they want their decision to be based on all available research. "They are responsible, and they are the ones that have to respond when the media calls," Ms. Hastings says. "All of this information is public, and they have to take their job seriously."
6. Transparency is greater. Ms. Hastings says setting executive pay at non-profit hospitals is much more transparent than five or 10 years ago. The public and government have insisted on more accountability from all types of non-profit and for-profit institutions, a result of the economic downturn. "If you look at what happened on Wall Street [during the financial crisis], the public now demands that kind of transparency, and the government does, as well," Ms. Hastings adds.
7. Changes in compensation may also reflect an active merger and acquisition market. Non-profit hospitals have stayed active in the M&A market, and several hospital and health system executives find themselves managing more operations. Some hospital CFOs used to run one hospital's finances, but after acquisitions, they might be operating five, Ms. Hastings says. Corporate offices are growing, and several executive positions are more complex because there is more to manage. These developments certainly are affecting how much they are getting paid, she says.
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Even New York Gov. Andrew Cuomo has delved into the details of pay for non-profit executives, recently creating a task force to review executive and administrator compensation at non-profits that receive taxpayer support from the state. "There's always been fire around executive compensation at non-profit hospitals," says Kathy Hastings, managing director at SullivanCotter and Associates. "Special executive benefits and perquisites, such as dependent tuition reimbursement and housing, get a lot of criticism and may in fact deserve that kind of criticism. With healthcare reform and with states struggling with their budgets and Medicaid funding, you're going to see a lot of scrutiny around executive compensation." With that in mind, here are seven trends she has seen evolving with non-profit hospital executive compensation.
1. Base salary increases hovering around 3 to 4 percent on average. A 3 to 4 percent increase in base salary is in line with market prices and projections, Ms. Hastings says. Salary increases for executives typically will not jump out of this range unless the hospital drastically outperforms its performance projections or if there is a hiring battle to try to recruit or retain a highly sought-after executive. Most non-profit organizations are providing some sort of increase this year because a lot did not provide increases last year due to economic uncertainty, she says.
2. Executive salary increases generally coincide with salary increases for all. With hospital layoffs growing and hospital budgets shrinking, Ms. Hastings says a raise for executives may not occur unless all employees get an across-the-board raise as well. "That's just a social justice issue," she says. There have been a few examples as of late, however, involving public outcry of executive raises at the expense of stagnant or decreasing rank-and-file employee compensation. Executives at non-profit Lifespan in Providence, R.I., received raises last year, and that caused criticism from the Rhode Island Hospital Union, which voiced anger at the increases as Lifespan announced it was cutting the matching contributions to the employee's 403(b) Fidelity plans for 2011 and will be eliminating the matching contribution for 2012.
3. Disclosures lead to competitive pay packages. All non-profit 501(c)(3) healthcare organizations fill out Form 990s to the federal government, which disclose all financial information, including executive compensation. Ms. Hastings says these disclosures are important for transparency and reviewing executive pay. The ability to compare and contrast what others are making based on the fully disclosed information sets the market rates. "Some [hospitals] are billion-dollar corporations, and you have to be able to pay for talent that can run these types of enterprises," Ms. Hastings says. "A for-profit company is able to offer stock and company ownership to executives, but non-profit hospitals — they don't have that type of vehicle."
4. Incentive programs include yearly and more often long-term objectives. Most non-profit hospitals have some type of annual incentive program for its executives, and incentives hinge on several different factors, such as financial, quality, patient satisfaction and community benefit goals. However, healthcare reform is forcing hospitals and health systems to adapt toward more accountable care, and this is leading to longer-term objectives in executive compensation incentive programs, Ms. Hastings says. Long-term objectives include integrating hospital services, amplifying physician alignment and improving patient satisfaction and quality core measures.
5. Board of directors becoming more involved in how executive compensation is set. Ultimately, it is up to the non-profit hospital's board of directors on how much to pay the top executives, and they are taking the role a lot more seriously, Ms. Hastings says. They are looking at Form 990s and collecting competitive market data because they want their decision to be based on all available research. "They are responsible, and they are the ones that have to respond when the media calls," Ms. Hastings says. "All of this information is public, and they have to take their job seriously."
6. Transparency is greater. Ms. Hastings says setting executive pay at non-profit hospitals is much more transparent than five or 10 years ago. The public and government have insisted on more accountability from all types of non-profit and for-profit institutions, a result of the economic downturn. "If you look at what happened on Wall Street [during the financial crisis], the public now demands that kind of transparency, and the government does, as well," Ms. Hastings adds.
7. Changes in compensation may also reflect an active merger and acquisition market. Non-profit hospitals have stayed active in the M&A market, and several hospital and health system executives find themselves managing more operations. Some hospital CFOs used to run one hospital's finances, but after acquisitions, they might be operating five, Ms. Hastings says. Corporate offices are growing, and several executive positions are more complex because there is more to manage. These developments certainly are affecting how much they are getting paid, she says.
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