Governance
Executive Pay for Performance
By David L. Bernd
Performance, teamwork, accountability and transparency. These four core principles provide the basis for Sentara Healthcares executive incentive structure. While some health care boards are only beginning to explore pay-for-performance systems, Sentara Healthcare, based in Norfolk, Va., has incorporated such incentives into its compensation packages for more than 20 years.
The incentive structure is designed to align the organization strategically, retain key executives and drive clinical, human resource and financial results across the entire health care system.
The organization's performance incentives for executives are structured around annual and long-term goals. The long-term goals are developed every three years to align and reinforce strategic initiatives. The board asks for goals that are rigorous yet achievable.
The development and justification of the goals for the board of directors' approval are based on three key components: relevant, historical and comparative performance data; definable industry benchmarks; and appropriately aggressive performance targets. For accountability purposes, the goals must always be realistic, transparent and results-driven.
Two factors have traditionally made Sentaras senior executive compensation package unique.
First, the percentage of an executives pay that is at risk in relation to base salary is higher than that of most organizations. We believe in leveraging compensation to get results. The more senior ones position in the organization, the more of his or her taxable salary is driven by variable pay.
This structure attracts leaders who are willing to take risks in order to enhance the organization's performance. It should be noted, however, that the board must then balance meeting its goals and financial incentives to drive behavior while retaining exceptional leaders.
Second, a high proportion of executives' variable pay is based on the success of reaching systemwide goals, as opposed to divisional or individual performance measures.
All are critical pieces in an executive's compensation package; however, this mechanism fosters team dependence and accountability in the C-suite around performance. This method not only reinforces Sentara's integration strategy but also aligns the entire organization around common initiatives.
Sentara is committed to the philosophy that employees succeed and fail together. All of the divisions--whether it is the system's hospitals, medical groups or its health plan--support all of the goals.
As the system's chief medical officer, Gary Yates, M.D., often says, "When the CFO has as much skin in the game as the chief medical officer on clinical improvement, it is helpful in getting the organization to focus on safety and quality performance."
Sentara originally used a phantom stock plan, which drove executive variable compensation.
However, these metrics were driven strictly by the system's financial growth indicators, a compensation philosophy that did not reflect the company's culture. In the mid-'80s, Sentara became one of the first health care systems to incorporate quality metrics into performance incentives.
Throughout the history of the incentive program, the weight of various components has been continuously evaluated and adjusted to reflect the organization's values and strategic imperatives.
For example, in this current cycle, safety and quality initiatives comprise 40 percent of the total long-term goals, which are 10 percent greater than operating margin goals.
This sends a clear message to the entire organization and the board about what Sentara considers important and where it chooses to focus its priorities.
Employee retention has been a long-term goal since 2006. Although retention has always been important, the board and management understand that becoming an employer of choice requires that retention be an organizational priority.
Although core strategic priorities rarely change, targets associated with them evolve with Sentaras ability to quantify relevant behaviors. And although the compensation structure has proven its ability to help drive performance, challenges remain. Establishing targets that have the right amount of "stretch" to satisfy the board's expectations of the executive team requires a delicate balancing act.
The board has high expectations for the leadership of Sentara to be self-challenged, so while the executive team develops the goals for the board's approval, the board can and does adjust the targets.
Another challenge is predicting external factors that will inevitability impact one's ability to achieve goals, those that are easily susceptible to environmental factors, such as governmental regulation and reimbursement cuts.
While we acknowledge that these challenges will always exist, we believe they do not outweigh the positive impact we have seen in our organization as a result of this compensation structure. The key is developing a common-sense, balanced approach that meets our corporate objectives while properly rewarding our executive leaders.
Communication, education, and trust are critical for a solid relationship between the board of directors and the executive team around the issue of pay for performance.
Sentara executives understand the importance of establishing credible goals that help drive the behavior of 18,000 employees.
As leaders of a not-for-profit system, our goals must reflect our mission "to improve health every day."
David Bernd is CEO of Sentara Healthcare in Norfolk, Va. He can be reached at (757) 455-7100.
This article 1st appeared in the February 2008 issue of Trustee Magazine.
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