CEO compensation: Boards must protect hospital interests

In a turbulent time of hospital consolidations, higher than ever CEO turnover, proposed limits on executive pay and declining Medicare reimbursements, hospitals and healthcare systems have their work cut out for them when negotiating CEO compensation. 

Hospitals must keep up with changes within the regulatory environment and document everything clearly in order to avoid excessive compensation sanctions, said F. Kenneth Ackerman Jr., chairman of Integrated Healthcare Strategies, and David A. Bjork, senior vice president and senior advisor of Integrated Health Strategies, during a presentation this week at the 2014 American College of Healthcare Executives Congress in Chicago.

Documentation and transparency are essential because the IRS will consider anything not noted on a W-2 or a 990 financial form as an automatic excess benefit, they said.   

Boards can protect the hospital, the CEO and themselves by establishing a compensation committee to improve governance. Ackerman and Bjork pointed to a report, "Great Governance," from the Alliance for Advancing Nonprofit Health Care for the following tips on creating a compensation committee:

  • Appoint independent directors who have the necessary skill sets

  • Appoint members who are willing to establish the rebuttable presumption of reasonableness to protect the organization from the IRS

  • Assign members the responsibility of creating a compensation committee charter to guide all decisions

  • Make sure they create a board-approved compensation philosophy for the hospital

  • Ask them to re-assess peer group and benchmarking measurements for compensation

  • Request that they schedule meetings with executive sessions at least two to three times a year

  • Give them time to deliberate and conduct thorough CEO appraisals

  • Ask them to perform self-evaluations and committee evaluations

  • Make sure they are prepared to address media inquiries

Panelist Glenn A. Fosdick, president and CEO of the Nebraska Medical Center in Omaha, also said successful board/CEO relationships rely on candor, trust and communication. Sometimes, that means compensation committees and board members must ask uncomfortable questions. "When you get done with the recommendations ... you ask the question, are you satisfied with what we gave you?" Fosdick said of board members.

With increasing media scrutiny on hospital spending and movements around the country to cap CEO compensation, Christine Schuster, president and CEO of Emerson Hospital in Concord, Mass., said it's essential that CEOs use current market data to compare and justify compensation plans when facing challenges from board members. "I think so much of it is about education and keeping your board educated."

But above all, she recommends that the committee and boards follow the governance and federal regulations. "You protect the organization, you protect yourself," Schuster said. "It may seem like a lot of work upfront, but after nine years into this, my compensation committee runs pretty smoothly and we pretty much know what to expect."

To learn more:
- here's the report