Executive pay is one of the last levers pulled as providers reduce costs, arguing that systemwide strategies make a bigger dent. Recruitment and retention strategies almost always trump compensation cuts.
A Modern Healthcare analysis of more than 2,000 not-for-profit hospitals via their IRS Form 990s and financial statements found that top executives earned an average of 0.36% of total payroll expenses in fiscal 2017, which has remained relatively consistent since 2013.
The complexity of healthcare and the scale of these organizations demand highly paid leaders, health systems say. Another common defense is that it’s a competitive executive market, with fewer qualified leaders available.
Executive pay is at times more reactionary than performance-based, as we enter a period where the top CEOs are starting to retire and organizations scramble to identify the next leaders.
Focusing on executive pay and not the core operating structure is often a rubbernecking issue, compensation consultants said.
“The optics are probably worth more than the underlying validity of it,” said Steve Sullivan, a managing director at executive compensation consulting firm Pearl Meyer.
The Tax Cuts and Jobs Act, implemented in 2018, imposed a 21% excise tax on not-for-profit compensation that exceeds $1 million as well as a tax on parachute payments for outgoing high-paid employees. But some health systems are using creative loopholes such as replacing traditional deferred compensation packages with loans that go toward their life insurance premiums to avoid the excise tax.
Voluntary cuts to a healthcare CEO’s pay are few and far between, experts said, even if it’s more common in other industries. As healthcare attracts more industry outsiders, that scenario is still unlikely, Sullivan said.
“It’s an open market and you get what you pay for,” he said. “If a board is serious about affordability and transparency, it will pay whatever they have to pay to get an individual.”