Hospital and system board compensation committees are vindicated by new research that links CEO pay to better organizationwide performance.
Members of board compensation committees are finding themselves in the spotlight as hospital chief executive compensation comes under scrutiny. National and trade media, and federal and state lawmakers are criticizing compensation levels, calling for restraints on pay and arguing that trustee compensation committees are failing to set compensation based on objective performance.
Criticism of trustee compensation committees arose from a frequently cited 2013 Harvard University study that found that CEO compensation was significantly associated with hospital teaching status, facility size, technology and patient perception of care, but not associated with quality, financial performance or community value. The article questioned whether trustees are basing CEO compensation on meaningful measures of goal achievement, especially given the magnitude of public funding hospitals receive from Medicare and Medicaid. To assess the relationship between CEO performance and compensation, the Harvard researchers used 2009 Hospital Compare individual measures of performance and 2009 Internal Revenue Service Form 990 financial statements.
In contrast to that study, we have observed that trustees are acutely aware that their CEO is responsible for the whole organization’s performance, not just one facet. Boards charge the CEO with executing the organization’s mission and implementing agreed-upon strategies. So, to incentivize and reward success at this level, we wanted to test whether a measure of overall organizational performance is associated more strongly with executive compensation than individual measures like providing aspirin on arrival or a complication rate. When we compared hospitalwide performance scores and compensation data, we found that many boards appear to be rewarding CEOs with higher compensation for higher organizationwide performance.
A Better Way to Measure
Most boards in other industries use a balanced scorecard to monitor leadership effectiveness in executing responsibilities, because it facilitates an evenhanded review of all key performance areas, not just financial outcomes. A balanced scorecard offers a complete picture of a CEO’s success in achieving all strategies and goals — essentially, managing and growing a healthy organization.
Many hospital and system boards have recognized the value of the balanced scorecard and have developed internal versions. But most boards do not have access to objective comparisons of hospitalwide performance. Some hospitals use the Truven Health Analytics 100 Top Hospitals national balanced scorecard to set improvement goals for specific measures, but only a few boards have incorporated the hospital’s composite performance score (calculated by adding the national rank of performance for each measure) into an executive compensation program to increase objectivity. Truven Health developed the scorecard in 1993 to enable performance comparisons. A hospital can compare its own performance to the national hospitalwide performance benchmarks to assure high performance and value to the community. Those hospitals with the best facilitywide performance are named to the annual Truven Health 100 Top Hospitals list.
The board can determine whether the hospital or system is lagging behind or exceeding the performance of peer organizations. These comparisons can enhance credibility with the IRS. The board and C-suite also can review objectively whether they have successfully incented key performance areas or new initiatives without sacrificing performance in other areas.
Incentive plans are common in hospital and system executive compensation packages. A recent compensation survey from Integrated Healthcare Strategies finds that 80 percent of organizations have annual incentive plans and approximately 20 percent also use long-term incentives. Integrated’s National Healthcare Leadership and Compensation Survey, which includes data on 175 executive positions and 39 manager positions from more than 1,350 facilities, also revealed that incentive opportunity is generally greater at larger hospitals and systems. Among hospitals that use incentives, opportunity levels for CEOs can range from as little as 20–30 percent of base salary at smaller organizations to 80–100 percent at larger systems.
To determine if CEO compensation is associated with a composite score of the 100 Top Hospitals national balanced scorecard, Integrated and Truven Health conducted a preliminary test. Integrated contributed total direct compensation data from 487 hospitals and 89 health systems from its compensation survey. Truven Health matched the Integrated data with the corresponding 2014 100 Top Hospitals and 15 Top Health Systems composite scores for overall organization performance on the national balanced scorecard as well as the individual metrics. Financial data were not available for health systems.
The preliminary results of this research demonstrate that hospital and system CEOs tend to be rewarded with higher compensation for better organizationwide performance. These results were highly significant statistically. Additionally, as performance levels increased on the balanced scorecard, compensation increased in consistent increments. For example, we found that compensation increased by an average of 1.46 percent per each unit increase in 100 Top Hospitals performance percentile, and performance at the system level was associated with an average increase in compensation by 1.14 percent per each unit increase in 15 Top Health Systems performance percentile [see The Study’s National Representation chart].
Additionally, these preliminary findings suggest that CEO compensation is associated with high performance on certain individual metrics within the scorecard. The analysis of individual components of the 100 Top Hospitals scorecard showed that better performance on profit from operations and expense per adjusted inpatient discharge were significantly associated with higher compensation [see Hospital and Health System CEO Compensation chart].
Finally, the research showed that higher-performing and lower-performing organizations compensate CEOs for better performance in similar ways. For the lowest 50 percent of hospitals, there was an increase in compensation by 2.24 percent per each unit increase in scorecard performance percentile. At the system level, the increase was 1.14. For both the highest 50 percent of hospitals and health systems, there was an increase in compensation of 1.67 percent and 1.78 percent per each unit increase in scorecard performance percentile for hospitals and systems, respectively.
Focused on Performance
The results of this preliminary study strongly suggest that compensation of both hospital and system CEOs is highly aligned with objectively measured overall performance of the hospital or health system, based on 2012–2013 data. Hospital boards appeared to have weighted financial performance more strongly than other metrics in that period. Given the requirements of the Affordable Care Act to change the entire hospital business model, reduce inpatient costs dramatically and shift care to lower-cost settings, board focus on financial performance in relation to CEO compensation is understandable. For health systems, the analysis of individual metrics showed no associations. No individual metrics were statistically associated with health system CEO compensation. A much larger study of more than 2,000 hospitals is underway to validate and better understand these preliminary results.
Ultimately, boards are correctly focused on meeting their obligation to review the performance of their whole organization. At the same time, they understand the imperative of financial stability during the transformation of the hospital business model.
For a copy of the Integrated Healthcare Strategies/Truven Health Analytics preliminary compensation study or the full 100 Top Hospitals or 15 Top Health Systems studies for 2014, go to www.100tophospitals.com.
Jean Chenoweth (firstname.lastname@example.org) is senior vice president and David Foster, Ph.D., MPH (email@example.com), is chief scientist of Truven Health 100 Top Hospitals Program, Truven Health Analytics, Ann Arbor, Mich. Kevin Talbot (Kevin.Talbot@IHStrategies.com) is executive vice president, Integrated Healthcare Strategies, Minneapolis.
Data Sources and Research Methods
Truven Health 100 Top Hospitals study databases were used to assess hospital performance. The databases include:
• The Centers for Medicare & Medicaid Services MEDPAR data for federal fiscal years 2011 and 2012
• CMS Hospital Compare data from 2013 for 30-day mortality and readmission rates, Core Measures and HCAHPS
• Integrated Healthcare Strategies hospital-level data on total CEO compensation for 2013
The initial analysis evaluated the association between total direct compensation and the overall hospital or health system performance on the 100 Top Hospitals national balanced scorecard. At each level, the relevant composite performance score was used:
• Hospital level – 100 Top Hospitals balanced scorecard composite score, including financial performance
• System level – 15 Top Health Systems balanced scorecard, excluding financial performance
Subsequent analyses evaluated associations between various specific measures used in the 100 Top Hospitals or 15 Top Health Systems balanced scorecards and total compensation. The distribution of hospitals by class for both 100 Top Hospitals and Integrated organizations were examined to determine that there would be sufficient volume in each class, and all analyses were adjusted for standard 100 Top Hospitals class assignment, which provides stratification on bed-size category and teaching status.
Two separate models also were conducted: one on lower-performing organizations (in the lowest 50 percent of all hospitals/health systems) and the other on higher-performing organizations (highest 50 percent) to evaluate adjusted associations between compensation and performance over two levels of performance.
The Compensation-Performance Link: Testing the Hypothesis
The hypothesis for the CEO compensation research was that CEO total direct compensation is correlated with the Truven Health 100 Top Hospitals balanced scorecard composite score. The composite score represents the performance of the hospital on all nine equally weighted measures used in the balanced scorecard. They are: (1) risk-adjusted mortality, (2) risk-adjusted complications, (3) Agency for Healthcare Research and Quality patient safety measures, (4) Centers for Medicare & Medicaid Services 30-day measures, (5) CMS Core Measures, (6) severity-adjusted lengths of stay, (7) expense per adjusted discharge, (8) profit from operations, and (9) CMS HCAHPS “Willingness to Recommend” scores.
Five of the nine measures reflect various aspects of clinical quality — inpatient outcomes, inpatient safety, post-discharge outcomes, and adherence to proxies for evidence-based medicine.
The goals of the analysis were to use Integrated Healthcare Strategies survey data and the Truven Health 100 Top Hospitals study scorecard to evaluate total direct compensation, or TDC, at the system and, separately, hospital levels to determine the association between TDC in lower-performing vs. higher-performing organizations. TDC is defined as base salary plus short-term (annual) incentive payments and the annualized value of long-term incentive payments.