Average total cash compensation for health system executives rose 6.5% from 2018 to 2019, extending a consistent rise in executive pay that governance experts do not expect to slow.
Annual and long-term performance-based incentives have driven pay hikes of 4% to 7% each of the last four years, according to Modern Healthcare’s annual Executive Compensation Survey. Health systems’ ongoing expansions coupled with a highly competitive executive market will continue to drive up their base salaries and bonuses, experts said.
With more pay based on performance, there’s greater risk of poor program design, said Steve Sullivan, a managing director at executive compensation consulting firm Pearl Meyer. If you make a mistake, there is a lot of money on the line, he said.
“You don’t want to have giveaways and you don’t want to have plans so egregiously hard that they never have payouts because executives will disengage from the program,” Sullivan said. “You have to strike a balance between responsible compensation and something that is motivating and incenting.”
Incentives are typically tiered with a minimum threshold, a target, and a stretch goal. They are often based on quality, safety, and patient experience as well as financial performance.
Bonuses differ based on short- and long-term goals, the latter becoming more prominent in recent years as boards and compensation committees emphasize the entire organization’s performance.
Even if the baseline isn’t reached, there typically isn’t a penalty, experts said. It will only lower their earning potential. “In some industries there can be a negative adjustment,” Sullivan said. “I haven’t seen that in healthcare. In healthcare, if there is a modifier it is going to be positive.”
Providers rely on third-party consultants for accurate portrayals of market-based compensation reports that inform their compensation structures. But some of Pearl Meyer’s prospective clients are concerned about how their current adviser is interpreting the market, Sullivan said.
“With all the M&A [activity], you have to create larger peer groups to generate a bigger sample,” Sullivan said.