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Healthcare Exec Compensation Models Play Catch-up

Karen Minich-Pourshadi, for HealthLeaders Media, December 11, 2012

"We were interested in understanding how to arrive at a reasonable base pay, but also in incentive compensation both annual and long-term and creating a beneficial structure. We wanted to ensure market competitiveness to retain the best talent, but we also didn't want to be placed in a position where our compensation could be viewed as being excessive," Tolson says.

The board took a forward-facing look at how PPACA would change the delivery of care and restructured its plan to incentivize quality outcomes and patient service, along with strong financial performance. To that end, each year the compensation committee develops critical success factors or metrics that tie to the incentive plan for the executive team.

"We start with the strategic plan and we look at our clinical portfolio and the quality outcomes; patient, physician, and employee satisfaction; growth; medical staff; and facilities. We select metrics to focus on that to drive our initiatives," says Tolson. For instance, to encourage clinical improvements it uses metrics to look at overall outpatient ratings from Press Ganey and inpatient metrics for HCAHPS. At 10% each, the total for these categories is weighted at 20% out of 100%, and for the incentive to be paid, they must reach predetermined targets.

Nevertheless, the percentage of incentive paid out still depends on where the organization lands overall, along with where the critical success factors land on meeting its targets. There are seven metrics the organization tracks, and no incentive bonuses are paid unless the organization reaches its financial performance goal.

"If we don't achieve the performance in our cash flow, then we don't have the resources to fund and sustain the organization for the future," says Tolson, and some years the organization has not paid incentives. Though financial goals are important, Tolson says the organization acts to motivate employees to pursue the quality and patient satisfaction goals, as that is the means to the financial ends.

"When you have a compelling strategy as an organization, you attract great physicians, employees, and leaders; everyone wants to be on a winning team. Then, to deliver a great product—in our case, healthcare—you must provide great service and quality, and the outcome of that is financial performance," he says.

While most organizations continue to use annual incentives, Tolson says, The Christ Hospital added a three-year rolling incentive to encourage long-term thinking by its executives.

"We have strategic plan for 7–10 years and a long-range financial plan for 7–10 years, so if we get off track, then we're not going to be able to deliver on those plans.
We found that long-term incentives are a vehicle for performance acceleration," says Tolson. "We realized early on if we are to succeed with this plan, we couldn't isolate incentives to yearly performance or we may find that some executives might cannibalize the next year's performance to hit this year's targets."

As a result, all members of the executive team have both annual and long-term incentives, and all members of the team have the same core goals, in addition to individual goals. For instance, the CEO has an annual incentive plan with exactly the same goals as the vice presidents under him—with two differences, Tolson says; one is the amount of award potential and the other is 100% of the CEO's annual incentive plan is based on the network's overall performance, which includes meeting all of the network's critical success factors (patient satisfaction, quality, growth, and cash flow
from operations).

By comparison, the rest of the C-suite's incentive payout is based on 67% of the network's critical success factor performance and 33% of the individual's critical success factors. A similar incentive structure is used with the rest of the system's employees, so directors and managers are on annual incentive plans tied to the same strategic metrics, with 50% of their incentive payout based on network performance and 50% on individual performance.

Critical success factors for the organization are determined by teams led by the organization's vice presidents. For instance, when looking at patient satisfaction, one team would look at historical internal and external performance data and make recommendations on threshold, average, and maximum targets for this area and propose a weight for inpatient and outpatient goals. Then the recommendation is taken to the appropriate board committee to vet and discuss the metric.

"We have an incentive plan for everyone in the organization, and so the target level performance and the percentage of potential payout is also calculated. We accrue that potential liability as we go on through the year. If the plan triggers, we have the money to pay out, and if it doesn't, the money goes back into the network," Tolson explains.   

Using organizationwide and individual quality and satisfaction metrics to spur the payment of incentives from the CEO on down to the rest of the staff is proving successful at aligning the entire organization toward achieving its goals, Tolson says. Net operating revenue surpassed its goal by 11.3% in 2010, 8.6% in 2011, and 6.8% as of July 2012. Moreover, for 2010, 2011, and through July 2012, adjusted admissions—a core strategic goal—rose 5.9%, 7.3%, and 1.1% respectively.

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