Within the health care community, the last several years have witnessed a surge of change that affects how independent trustees manage their relationship with top executives — and especially how those executives are compensated.
Most broadly, the impact of the 2007 recession led to intense scrutiny of executive compensation by the press, in Congress and in municipalities. Pressure for reform mounted as unions and activists prodded government to more strongly legislate everything from nurse-to-patient staffing ratios to the capping of executive pay.
Then, the Affordable Care Act was passed and the transformation of health care kicked into gear. So far, there is more complexity than clarity. But it should be abundantly clear to providers that only top-performing organizations will last: They will qualify for certain additional provider payments, while new market benchmarks will determine government and private insurance rates, and outcome-driven performance will drive patient and insurance provider preferences.
These new realities will strongly influence chief executive compensation in health care, but the use of external benchmark data in executive-compensation decisions typically has been shortsighted. Trustees' looking at peer organizations for market comparison purposes must consider more than revenue. Yes, comparative revenue is important, but, more than ever, other factors complicate the decision: mission and sponsorship, geographic spread, clinical pathways, centers of excellence and alignment with physician and community needs.
Indeed, a notable trend is the increasing desire of hospital boards to seek an outside point of view in their next CEO. In a recent survey of human resources officers and health care trustees by Black Book Rankings, two-thirds of hospital CEOs hired in 2014 will have little or no health care experience, up from 19 percent in the 2009 survey. But broad business experience is no panacea, so it can be heartening to note that more physicians are rising to leadership roles as well.
That said, third-party payers will be evaluating health care organizations on two key metrics: performance and price. Those organizations with the best outcomes at the lowest price points will be the long-term survivors. As a result, trustees must take the long view, with a strong focus on regulatory compliance, the right compensation formulas and accurate performance measurement — not just a reliance on market comparisons or internal performance standards.
Competition and Communication
Still, performance and price are only the tip of the iceberg. Reform is driving integrated delivery systems to rationalize their leadership and organizations' structures.
The number of executives required to lead the organization will decrease, and those at the top, because of a scarcity of talent, will continue to be highly compensated. Meanwhile, the emphasis on wellness, prevention and ambulatory care will decrease the demand for hospital beds; and, as the continuum-of-care concept continues to be refined, primary care, home health care and hospice will continue to evolve to support the emphasis on "most appropriate setting" to achieve the best, most cost-effective outcomes.
The result will be fewer bricks-and-mortar hospital administrators and more executives focused on building service lines, which is a dramatic shift in leadership roles. Indeed, health care organizations will have to find executive talent that can deliver on the strategy of new service models, and competition for these executives will continue to challenge trustees.
There will be a greater demand on health care organizations to document and explain their executive compensation program. The demand for transparency will give organizations the opportunity to define their messages rather than letting others — especially the media — define it for them. Contemporary reporting standards, similar to those mandated by the U.S. Securities and Exchange Commission in the Compensation Discussion and Analysis documents required of public companies, also are needed.
Such mandates and the pressures brought by stakeholder advocacy groups will become more prominent in health care executive compensation. For example, the use of clawback provisions in executive contracts began in the publicly traded company sector and is now common in health care contracts.
If anything, health care organizations must look toward the simplification of executive pay programs and elimination of potentially problematic practices such as tax gross-ups; large "other compensation" amounts that go unexplained (for example, deferred compensation); excessive perquisites and "special reward" practices. Double criteria (the amount of time in the job, plus performance) in retention agreements and deferred compensation agreements are now called for, in addition to appropriate severance and change-in-control periods.
All about Accountability
As the pressure for change and accountability continues to build, these new, consensus- and communication-driven standards of leadership, performance and compensation will replace the internal standards that had been the norm. Trustees must embrace this new way of thinking and operating at the system, delivery unit and individual performance levels to make good on the promise of performance that is implicit in health care reform.
Viewed in this transformed social climate, executive compensation is no longer a straightforward reflection of market forces and trustee discretion. Rather, it's a tool for performance and sustainability, a means of ensuring sharp focus on achievement, and a means of enforcing commitment to organizational mission, community benefit, enhanced quality of care, efficiency, safety and, ultimately, employee engagement in the best, and most caring, sense.
Thomas P. Flannery, Ph.D. (tom.flannery@mercer.com), is a partner in Mercer's talent business, Boston.
