As Economy Rebounds, Cost of Healthcare Workers Rises

Riding with that recovery, says Ron Seifert of the Hay Group, is the expectation that healthcare organizations that want to keep quality staff should be prepared to pay more.

Seifert says a Hay Group survey shows planned median base salary increases of 3% this year for employees of large integrated health systems, up from a 2.4% increase in 2010.

“One of the things driving this is the conservatism of prior years,” Seifert tells HealthLeaders Media. “A little bit of angst gets built up in the system. There is a backlog of need for compensation adjustments. We are finding that healthcare organizations are recognizing that need and feeling the need to address it.”

Tellingly, independent community hospitals are reporting lower median base salary increases of 2.3% in 2011, Seifert says. That could make recruiting and retention efforts all the more difficult.

“This is a reflection of those organizations still operating in fairly challenging situations,” says Seifert, Hay Group’s healthcare sector vice president and executive compensation practice leader. “It’s not that integrated health systems are doing that much better, but they are a little further along in their journey and they have a stronger position in their negotiations and performance and success in creating a fully integrated care environment. Community hospitals don’t have that leverage. They will run the risk of not being able to recruit and retain the best and the brightest, at a time when they need to be offering a compelling value proposition to their employees.”

Oddly, the exact opposite trend is developing this year for senior leadership compensation. CEOs at not-for-profit integrated systems received a median 4% hike in base salary for 2010, while independent hospital CEOs saw an increase of 5%. The variation in total cash compensation (base salary plus annual incentives) is even wider in 2011: CEOs at integrated systems saw an increase of 3.1%, while independent hospital CEOs saw an increase of 6% in total cash.

“I would read that as a very quirky statistic. I would interpret that as an exaggeration of that pent up demand,” said Seifert, adding that hospital boards understand that the skills required to lead complex organizations like hospitals or health systems come at a premium.

Community hospitals in particular are loosening the purse strings. “They paid less than their counterparts in the integrated systems in prior years and in light of the current environment they really can’t afford executive turnover. We saw them making bolder adjustments, generally speaking.”

Boards and trustees are also warming to the idea of long-term incentive pay for senior executives. The Hay Group 2011 survey found that 79% of not-for-profit integrated health systems still offer annual incentive plans, but that number has fallen from 89% in 2007. Meanwhile, the use of long-term incentive plans among integrated systems has increased from 14% in 2006, to 25% in 2011.

“This is not an executive-driven change. It is a strategic shift in the thinking of boards and trustees,” Seifert says.

“These organizations are making significant investments now, whether it’s through their IT structures or their integrated network of physicians and ambulatory surgical centers,” he says. “These investments are not things that pay off in one year. These organizations are looking to the future. They have grappled with the management on a year-to-year basis and what these boards are recognizing is that an annual incentive plan doesn’t measure transformation.”

And while it wasn’t covered in the Hay Group survey, Seifert says healthcare senior leaders better get used to public scrutiny of their compensation. “Don’t expect it to wane until the economy picks up,” he says. “The average person can’t appreciate how much value an executive brings to an organization in a way that would cause them to be paid $400,000 or $500,000. It is something we could not explain to them no matter how much logic we use.”