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Balancing Compensation Amid Economic Woes

 |  By John Commins  
   July 19, 2010

From all indications, the nation is emerging—however slowly—from the worst recession since the Great Depression. Although the brightening economic outlook will be welcomed, it also creates a new set of challenges as nonprofit hospitals and health system struggle to retain top-level executives.

Providing top talent with hefty pay hikes or bonuses at a time when 15 million people are out of work could prove to be a public relations disaster for a nonprofit hospital, especially if rank-and-file workers have received modest (if any) pay hikes.

On the other hand, the market for top healthcare talent is competitive. Nonprofits that don't provide executives with fair market compensation risk losing them, which is a far more expensive proposition.

Ron Seifert, executive compensation practice leader for Hay Group's healthcare practice, says that compensation increases in the last year were below historical trends, partly because many executives understood the market realities and "took one for the team." However, in the coming year, if the economic recovery continues, Seifert says, those same executives might not be so willing to wave the pom poms.

Seifert says most nonprofit hospital boards—well aware of the economic realities, political climate, and public perception—have done a good job exercising discretion with executive compensation packages over the last year.

The Hay Group's 2010 Healthcare Compensation Study, which looks at data from more than 120 integrated health systems, and 1,268 hospitals, found that pay hikes for healthcare employees decreased in 2010 to a rate of 2.5%, compared with a 4% increase in 2009.

For the C Suite, the newly released survey found that:

  • Turnover decreased at the executive level: CEO (5.2% in 2009-2010 from 14% in 2008-2009), the COO (4.1% from 11.6%), and the CFO (5% from 12.2%).
  • Executives faced a drop in salary increases: all executive groups experienced a decrease in both the most recent and next planned salary structure increases from the 2009 report. For instance, in 2010, the number of CEOs receiving at least a 6% increase in base salary has dropped to 22%—its lowest level in 10 years.

 

"People have been hunkered down," Seifert says. "They have been fully committed to seeing their organizations and healthcare through this very difficult time, but these are executives and they are not blind to opportunity. These hospitals need to be run by capable leaders and if you have high-performing individuals, the reality is you shouldn't mess around with their retention if they are that critical for you."

So, what will the next year bring? Seifert expects that more health systems will turn to long-term incentive plans as a retention tool for top executives. He notes that 24% of survey participants have a long-term incentive plan in place in 2010, up from 19% in 2009.

Of the organizations with LTI plans, performance units are the most commonly used vehicle, with 95% offering such a plan.

Beyond specific tools, Seifert says he anticipates "continued temperance in decision making" and a more focused approach to designing compensation packages.

"We will likely see an uptick, but it's more a demand for talent—not opening the floodgates," he says. "If you want to keep people retained, it's going to be selective, but you are going to need to do something. Boards are going to struggle more with pay decision-making going forward. and it is not going to be across-the-board type of budgeting. It's more likely to be focused on individuals. Going forward, the reality is they will have to think carefully if they want to retain key leaders."

John Commins is a content specialist and online news editor for HealthLeaders, a Simplify Compliance brand.

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