Health executives on average received salary increases of 3 percent at healthcare systems and 2.8 percent at independent and subsidiary hospitals, according to a recent report by Integrated Healthcare Strategies (IHS). FierceHealthcare caught up with Kevin Talbot, IHS executive vice president and practice leader of executive compensation and governance, about the current and future pay trends. Hear what he has to say about compensation increases, whether they are justified during an economic downturn, and why annual incentives may be on their way out.
FierceHealthcare: The recent IHS report indicated the average increases are 2.8 to 3 percent for healthcare executives. Are those increases in healthcare similar to other non-health-related industries?
Kevin Tablot: Yes, it's pretty similar to what we are seeing in other industries right now. On average, general salary for executives did increase about 2.9 percent last year. That's consistent with what we've seen for the past couple of years. For instance, general industry staff and management have been on average between 2.5 and 3 percent.
FH: How did the increases in healthcare executive compensation this year compare to past years?
Talbot: It's pretty consistent with what it's been the last couple of years. It's probably increased slightly in the past two years.
To put in context, if we look back to pre-recession (prior to the late 2008), the average increases were around 4 percent for a number of years. Starting in 2009, they dropped to 2 to 2.5 percent. We've seen that creep up slightly this year. It has increased slightly over the past couple of years, but it's still below what we saw prior to the recession.
FH: There's a small difference in pay increases between health systems (3 percent increase) and independent and subsidiary hospitals (2.8 percent increase). Are there pay differences also based on institution type, such as a small hospital versus a large, academic institution?
Talbot: Mostly, the differences are driven by whatever the recruiting and retention challenges of that specific organization. That varies from one community to the next, or one organization to the next.
FH: There's a lot of scrutiny that comes on hospital executive pay, particularly at nonprofit hospitals. As you suggested, times are tough with the economic downturn. Are those increases justified?
Talbot: I can't say whether it's justified or not; that's an opinion. Any increase to an executive's pay needs to take into account a number of factors and not just market data. That 3 percent certainly reflects what's happening in the market. Any organization needs to take into account their own circumstances, such as the performance of the organization, the performance of the individual, that individual's experience, and recruitment and retention issues, which certainly is a factor when it comes to an executive-level position.
In terms of the scrutiny, there is very much a heightened amount of scrutiny around executive pay in general, and for healthcare, there's an added layer of the fact that many of these organizations are tax-exempt or not-for-profit. There are different regulatory requirements, and the hospitals are viewed as part of the community so they have multiple stakeholders. They have their own employees looking at executive pay. They have their physicians, their own community members. And all of this is usually publicly available so certainly it's the hot topic for discussion.
What we've seen is that the governing bodies of these organizations, which ultimately determine pay are spending a lot more time doing due diligence , making sure they are administrating pay appropriately, that they have the right information at their fingertips so that they are making good decisions.
FH: What are the general trends in healthcare benefits for executives, and how will they change with reform and increased cost awareness?
Talbot: Benefits, in addition to salaries and incentive-based pay--so cash compensation--benefits are an important part of an executive compensation package with regards to recruiting and retaining a talent an organization needs. Having a competitive benefit program is important.
We have not seen significant increases over the past few years in what organizations are spending on executive benefits. What we have seen is a more conservative approach on things like perquisites over the last several years. A lot of organizations have moved away from certain perquisites.
A lot of the trends in benefits for healthcare executives is being driven by regulatory changes.
Overall, the expenditures that are being provided, they haven't gone up or down in the past few years; they remain pretty constant.
FH: In addition to the performance of the organization and the individual, experience, and recruitment and retention challenges, what are the other factors that determine executive compensation levels?
Talbot: At hospitals and health systems, almost all of them have a dedicated committee or their board, which reviews and approves executive pay on an annual basis. They will typically collect market information either from surveys or a consulting firm so they have adequate information for making their decision. They'll also look at the performance of the organization and the individual.
In determining pay, they usually have a set compensation philosophy that helps guide their decisions. So it'll define who their peer group is when comparing themselves to others and at what level pay is targeted to be set. The performance aspect most frequently comes into play through performance-based incentives. A vast majority of executives at hospitals and health systems have some sort of annual performance-based incentive plan that typically includes some measure of financial performance, quality metrics, and patient satisfaction metrics. So they're scored based on those results, and their pay is tied to those results.
FH: Is it common for hospitals to place caps on incentives?
Talbot: The incentive usually does have a maximum potential amount. There's almost always a maximum opportunity that they can earn to an incentive. There's not usually a cap that says, "No executive can earn more than X amount of dollars." It's typically set relative to a peer group. So they'll say, "Our philosophy is that we target pay levels at the median of a peer group of organizations," and they define that peer group. And they set a range of what they can work with within that philosophy. There has to be a detailed rationale for anyone that falls outside that range, either high or low.
FH: You mentioned organizations collect data from surveys and consulting firms. In defining their ranges, do organizations share data with each other, for instance, if they are both located in the same community so they can get that regional market data?
Talbot: Generally, no, although some of the data is available publicly through IRS tax forms, although they are a couple years old. They will collect data that way sometimes. Usually, you don't see organizations sharing information directly with each other. They'll go through a survey company or sometimes through their local or state hospital association, which may conduct surveys.
FH: What executive pay trends do you see in the future?
Talbot: I suspect that we will continue to see salary increases, at least in near future but still below pre-2008, where average increases were 4 percent or higher for some positions. I think we'll continue to see lower average increases in base salaries.
I think there will be continued emphasis--maybe an increased emphasis--on performance-based pay. The trend in recent years is more focus on performance-based incentives, being measured in things like clinical quality and patient satisfaction [rather] than in pure financial performance.
Healthcare reform is the long-term transformation of the health system. Any of these changes are several years into the future. I think you will see health systems putting more of an emphasis on long-term performance, long-term planning, and long-term performance against those plans, and potentially more organizations tying pay to long-term results as opposed to annual results. Fewer than 25 percent of hospitals or health systems have any long-term incentive plans; most of them are annual incentive plans. I think we'll see more of a trend, looking at long-term incentives.
FH: What final advice do you have for healthcare executives who feel that they aren't earning as much as they should, say if their incentive plan doesn't quite match their performance? What words do you have for them to be their own advocates?
Talbot: A successful incentive plan measures actual results and performance accurately. There are a lot of ineffective incentive plans out there because of that very issue; they're not accurately reflecting performance. The only way to get there is through good data on performance, the ability to measure accurately. That implies strong internal systems and access to external data, but all that falls short if you don't have a strong, engaged board or committee of a board that takes ownership of a pay-for-performance plan. There should be health dialogues between management and the board about "how do you define good, successful performance to warrant an incentive reward?" If that healthy dialogue doesn't exist, the incentive plan isn't going to be successful for either side.
This interview has been edited and condensed for clarity.