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Taking Advantage of 'Motivation': A Way to Improve Executive Compensation for Nonprofit Providers

Analysis  |  By Jack O'Brien  
   November 14, 2019

To attract future leaders, change is needed in an industry that has relied on a 'conservative approach' to executive compensation, says one healthcare consultant.

As health systems continue to face the pinch of tight margins, looming health policy overhauls, and the creep of nontraditional players to the market, hiring executives to lead nonprofit healthcare organizations requires the right incentives and compensation plans to retain them.

"I think that a lot of times when [providers] finally recruit [executives] and actually hire them, they're only able to do so because they're able to show that they have a compensation and benefits program [that is] appropriately positioned [for the executive]," according to Steven Sullivan, a managing director at Pearl Meyer, a consulting firm based in Wellesley, Massachusetts.

Nonprofit provider organizations are under pressure to offer salaries to prospective executives that are comparable to other industries' wages. At the same time, health systems must account for the extrinsic and intrinsic motivations of leaders when offering executive compensation packages.

Related: Erlanger Gives Departed CEO Kevin Spiegel 12 Months' Salary, Names His Successor

Motivations influence compensation plans

Motivations to work at nonprofit health systems are complex and intertwined. Intrinsically motivated leaders are driven by their commitment to the mission of the organization and healthcare. However, extrinsically motivated leaders are driven by outside influences, such as sizable salaries and performance-based incentives, Sullivan says. 

Sullivan says that nonprofit health systems and hospitals often have executive board volunteers who are intrinsically motivated to work for the mission of the organization and expect their leaders to do the same. But this arrangement has contributed to a "conservative approach" to executive pay by providers, he says. 

"A big part of the battle is becoming aware of the fact that you've got people working for you who might be more intrinsically or extrinsically motivated to be there," Sullivan says. "Try to be creative in thinking ways of connecting with them and taking advantage of that motivation."

Sullivan adds that health systems are at "the beginning of a period of change" that focuses on retaining leaders with variable pay programs.

Given the cross-pollination of executives who have been recruited into healthcare roles from other industries such as tech or banking and who might have more extrinsic motivations, healthcare organizations have had to change the way they've approached executive compensation. This includes offering compensation and benefit packages that are more consistent with what is standard in those other industries and appeals to extrinsic motivations, Sullivan says.

Retaining your leaders

Executive compensation strategies should take into consideration how benefits packages entice executives during the recruiting process and how to keep leaders once you have hired them.

"[Executives] who are running multihospital systems are leaving and taking jobs with insurance companies or taking jobs with Amazon or Google and leading their healthcare initiatives," Anthony Guaccio, CEO of Swedish Covenant Hospital, a Chicago-based nonprofit hospital, tells HealthLeaders. "That's where all these Fortune 100 companies are getting their talent from these days. They're poaching from big hospital systems or individual hospitals because they can offer a compensation that's tenfold."

Like Sullivan, Guaccio says nonprofit organizations can offer appropriate executive compensation to leaders by aligning pay with both the organization's mission (intrinsic motivation) and performance-based incentives (extrinsic motivation), such as responsibility for the health system's revenue growth.

He suggests that organizations offer short-term incentive plans (STIP) that center on missional goals such as raising HCAHPS scores by a certain percentage over the year to improve quality patient care.

Banner Health, an Arizona-based health system, has already implemented a similar approach by tying its executive compensation to patient satisfaction scores. 

In addition, implementing long-term incentive plans (LTIP) should motivate leaders to achieve multiyear goals, Guaccio says, such as raising the organization's market share and revenues by a certain percentage.

Related: Millionaire CEO of Nonprofit Hospital That Sues the Poor Promises Review of Policies

Executive compensation, by the numbers

Executive pay has changed at health systems in recent years, but this also depends where leaders are working. 

Median base salaries for senior executives at independent health systems have grown at an annual rate between 3.5% to 4%, outpacing the rate of salary increases for executives at system-owned hospitals, according to a SullivanCotter report released earlier this month.  

The study also found that performance-based incentives have overtaken base salaries in terms of growth. Executives at independent systems have seen compensation growth outpace system-owned hospitals in both median base salaries and performance-based incentives. 

The SullivanCotter study also found that the use of LTIPs have grown in popularity. Forty-seven percent of health systems with more than $5 billion in revenues utilize LTIPs. Thirty percent of health systems with more than $1 billion in net revenue also use LTIPs.

Related: Outgoing HCA CEO Made 383-Times as Much as Median Employee

Jack O'Brien is the Content Team Lead and Finance Editor at HealthLeaders, an HCPro brand.

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