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Healthcare Exec Compensation Models Play Catch-up

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

"Historically we had a system policy that defined our compensation philosophy at a system level, but that allowed for a significant amount of variability among the regions in terms of pay. We liked what that regional approach achieved from an accountability standpoint, but we found that as we moved toward better efficiency it was impeding us," says Joe Gage, senior vice president of human resources for CHP. "By aligning executive compensation structures and policies across the system we feel we can retain talent and improve mobility of executives throughout the system."

Gage says the organization is highly metric-based, so it made sense to incorporate consistent measures into senior management's compensation structures and scorecards. CHP uses a balanced, or equally weighted, incentive model to encourage improvements in quality, physician partnership, growth, stewardship, and human potential.

"For over a decade we've derived benchmark metrics based on achieving our strategic plan, which is set and approved by the board and incorporated into the CEO's compensation model. We use these metrics to maintain strategic direction," Gage says.

For instance, if CHP wants to improve upon patient experience, then it is puts that metric into the quality goals. But if the organization as a whole doesn't achieve the minimum level of improvement predetermined by the board, then none of the executives is eligible to earn an incentive payout.

"We all use the same metrics to create alignment, but we measure specific results at the appropriate level to achieve accountability. For example, system leaders are accountable for achieving system results for patient experience, while region leaders are accountable for achieving region results on the same metric. Regional results roll up into the system total," says Gage. To keep the compensation plan measurement relatively simple, it limits the metrics it tracks to 21 across the five core areas.

"To make sure that no one is tempted to short-end the quality goal or stewardship goal in order to achieve the financial goal, we made them all of equal value. After the CHP board determines if the threshold metrics have been achieved, the board uses CHP's independent internal auditor to audit performance before assessing overall results; the board then makes a judgment on whether to award an incentive payment," Gage notes.

CHP's strategic plan has five key result areas: quality, human potential, physician partnership, stewardship, and growth. Metrics in these areas are selected by the board annually. In 2012, for instance, CHP selected these scorecard metrics:

  • Quality: preventable harm, inpatient mortality, inpatient readmission rate, length of stay, inpatient experience, patient-centered medical homes, behavioral health
  • Human potential: associate engagement, diversity of senior leadership team formation and development, associate health
  • Physician partnership: primary care employment/affiliation, net patient revenue/provider FTE
  • Growth: net operating revenue, emergency department quality and efficiency
  • Stewardship: operating margin, strategic plan development

The organization tries to limit the annual scorecard to approximately 10 operational metrics; in 2012 it has 11 equally weighted ones and an additional 10 measures that are either strategic or owned personally by the CEO.

Gage says CHP did look at the compensation structure last year with an eye on whether to add in long-term incentives, but with the move toward centralizing the process the organization decided it wasn't the right time.

"When we want to add emphasis to a strategic initiative, we can still add it as a goal; those become the annual goals for the executives," he says. "CHP's five-year strategic plan does have metrics, but our experience is that long-term metrics can be difficult to identify, elusive to benchmark, and often overlap with our annual metrics. So we use our annual scorecard metrics to measure and reward progress toward attaining our five-year plan in incremental, measurable steps."

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