C-Suite Compensation Remains Taboo

Compensation is usually a taboo conversation in every industry. Interestingly, healthcare leaders don't mind talking about how they calculate physician salaries, but don't ask them to chat about how they calculate their own. That conversation quickly runs dry.

When I landed my first job as a teenager, my father, a business owner, instructed me not to talk to any of the other employees about how much I earned.

"Why not?" I inquired.

"It's no one else's business but your own," he responded. "And it can cause a lot of problems if people are earning drastically different wages."

I had my father's advice in mind when I began querying hospitals for a HealthLeaders magazine cover story on how healthcare reform is influencing C-suite compensation structures. I began with an advantage: the HealthLeaders Intelligence Report on executive compensation was under way at the same time. More than 250 healthcare leaders responded to that survey, alerting us to new trends and compensation forecasts.

I thought perhaps I'd find some willing sources from our survey, but that was not the case.

I contacted 10 of the nation's largest and most prestigious hospitals, and received 10 "No, thank you" responses. Except for unusually transparent organizations, it's definitely not something they want to talk about.

Or even necessarily act on—many healthcare organizations haven't yet made adjustments to their executive compensation models. Yet the shift toward incentivizing executives to meet quality and patient satisfaction goals must take place in the near future in order for true healthcare reform to take hold throughout an organization.

"[Hospital] boards are now weighting incentive goals for the CEO and other members of the team. However, we're not seeing the move away from annual incentive goal-setting; rather, we're seeing the board take an additional interest in how to structure and add in long-term performance planning goals," says Sally LaFond, a senior consultant with Sullivan, Cotter and Associates.

LaFond notes that she is seeing new compensation measures in some healthcare organizations, such as quality, safety, and patient satisfaction being added throughout the C-suite incentive structure. Still, these incentives are being applied annually instead of long-term. 

One organization that is approaching executive compensation with an eye on the future is Cincinnati-based The Christ Hospital, a 555-bed, nonprofit acute care facility with more than 90 outpatient and physician practice locations. The hospital changed its leadership compensation structure five years ago in anticipation of healthcare reform. Instead of targeting only physician compensation plans, however, the organization began making structural changes to how everyone was compensated, starting with the CEO and on down to the rest of the staff.

The Christ Hospital's board decided to restructure its compensation plan to incent quality outcomes and patient service, along with strong financial performance. The specific measures were based on annually revised critical success factors and metrics tied to the incentive plan for the executive team.

"Our value chain begins with having executive leadership define our strategy and goals and setting our incentives around it. Having that information also helps us attract great leaders, physicians, and employees that can help us grow the business in a positive way—that want to help the organization achieve financial performance and advance the enterprise overall," says Tolson.

To encourage clinical improvements, for instance, Christ Hospital uses metrics to look at overall outpatient ratings from Press Ganey and inpatient metrics for HCAHPS. Each area is weighted 10%, or a total of 20% out of 100%. In order for any incentive to be paid out, the executives must reach predetermined targets. That's a sharp contrast to how most organizations structure their executives' incentives, based solely on overall financial performance. Of course, it would be foolish for any organization—regardless of its tax-exempt status—to think it could survive without encouraging its team to strive to keep a strong bottom line. The Christ Hospital didn't ignore that fact in its structure. No incentive bonuses are paid unless the organization reaches its financial performance goal.

Not unlike many other hospitals, The Christ Hospital has endured some tough economic times, and during those years the organization did not pay incentive bonuses. Even then, the organization's compensation structure still acted as a catalyst for employees to pursue quality and patient satisfaction goals, Tolson says.

Also in contrast to many of its healthcare peers, The Christ Hospital's compensation structure moves away from using only annual incentives. The idea is to encourage the C-suite to think long-term and not undercut the organization's future performance while trying to hit the current year's targets. To do this, it established a three-year rolling incentive plan tied to its 7-10-year strategic and financial plans.

"Our [compensation] approach was to find a way to more tightly align our people and our goals by rewarding for quality, patient satisfaction, and financial performance. I think in the future more hospitals and health systems will need to do this, too. In the past, compensation has been about sustainability and maintaining the status quo. Now it's about much more; we all need to row in the same direction to succeed," Tolson says.

For organizations to succeed with population health management, physicians are not the only healthcare leaders who must move away from fee-for-service and toward pay-for-performance. Ultimately, for an organization to continue to achieve financial success in the reform era, the compensation of its leadership must also change.