Thought leadership

Boards and the Hot Potato of CEO Compensation

Boards and the Hot Potato of CEO Compensation

Health systems increasingly must respond with strategic communication planning and execution to a wide range of public and media scrutiny. One issue drawing more board attention is confusion swirling around CEO compensation.

How should a hospital or health system board prepare for stakeholder communications related to their CEO’s compensation?

The federal securities laws require clear, concise and understandable disclosure about compensation paid to CEOs, CFOs and certain other high-ranking executive officers of public companies.[1] How will the Internal Revenue Service (IRS) expect similar reporting from tax-exempt hospitals?

Rising CEO pay reflects a nationwide "race for really, really good executive talent," as hospitals seek solutions to challenges ranging from lower reimbursement rates to consolidation.[2] But studies show median CEO pay among hospital and health systems is “stable with very modest increases in the range of 2.5% to 3% year-over-year.” That’s compared to such other industries as financial services, insurance, and manufacturing that see CEO compensation increases of between 4% and 6%.[3]  Nevertheless, the public perception in many markets is that hospital and health system CEO pay is escalating faster than the norm.

In this era of “value for money” and pricing transparency, local and national reporters are informed about trends and patterns in CEO pay. Journalists are not shy about asking board leaders questions about the levels and appropriateness of executive pay. Too many boards are not ready for those questions, and often respond in ways that disrupt relationships with staff, physicians, payers, donors, policy makers and the general public. A recent Business Journals article tees this up.[4]

A Business Journals analysis of thousands of payroll records at health care providers throughout the country found wide disparities in what top executives and physicians can earn in a given year, with some hospital and hospital-system CEOs receiving less than $200,000 in total compensation annually and others landing in the vicinity of what star athletes and Hollywood celebrities collect in a year.

The article even includes a searchable data base by state that other reporters and interested parties can access.

Other organizations scrutinize and report on CEO pay patterns. Forbes reviews and reports on nonprofit CEO pay,[5] and this publication recently observed:

Our new oversight report Investigating The Top 82 U.S. Non-Profit Hospitals, Quantifying Government Payments and Financial Assets specifically looked at large nonprofits organized as charities under IRS Section 501(c)3 with the mission of delivering affordable healthcare to their communities.

We found that these hospitals add billions of dollars annually to their bottom line, lavishly compensate their CEOs, and spend millions of dollars, which are generated by patient fees, lobbying government to defend the status quo.

Taxpayers deserve to know whether our non-profit healthcare providers, which use our laws to structure themselves as charities, are truly working for patients. After all, these non-profits pay no income taxes, or property taxes, and raised over $5 billion last year in tax-deductible contributions from donors.

The Detroit Free Press ran this article: “Beaumont CEO's compensation jumps 82%, workers outraged over low wages."

Beaumont released a statement in response to the union's claims:

Beaumont is a large, complex organization with eight hospitals, 145 outpatient locations, nearly 5,000 physicians and more than 38,000 employees. Beaumont believes John Fox’s compensation as president and CEO is reasonable based on a rigorous methodology including a review of market data, assessment of job responsibilities and evaluation of qualifications.

The Beaumont Health Board’s Organization and Compensation Committee reviews and approves executive compensation recommendations for executives with the assistance of an external, independent compensation consultant.

Leading an organization like Beaumont requires highly talented executive leadership. Like other organizations of our size and complexity, we must provide compensation and benefits that are reasonable and competitive with what employers in health care and other sectors provide.

A large portion of executive compensation at Beaumont is at risk. This means executives earn much of their income only if we achieve organizational objectives and strategic goals.

Most hospital and health system boards use a thorough, effective process to govern executive pay to ensure it is both competitive and reasonable. Fewer are as thorough, however, in their preparation to respond to such inquiries about CEO pay. How would your board react to requests for an explanation of your CEO’s pay?

Should you say nothing and hope the questions never surface, or go away if they do?

How might you best prepare for smart communications with both your internal and external audiences and stakeholders?

Our work with boards and with CEO compensation in leading health systems across the US has enabled us to develop some practical insights into three actions to avoid (The Taboos) and five strategies to help you become better prepared to manage the communications around CEO compensation (The Dos). First, however, consider the risks of poorly managing the communications.

 

The Downside of Poor Communications about CEO Compensation:

Improperly managed communications about CEO compensation are known to disrupt relationships in eight uncomfortable ways:

  1. Frontline staff can fuel unionization challenges
  2. Donors who think their gifts are no longer needed
  3. Physicians become less cooperative in their contracting agreements
  4. Payers become more assertive in their negotiation of contracting terms
  5. Reporters may be less collaborative in their articles
  6. Community health and social welfare organizations may be less cooperative in population health initiatives
  7. Board member engagement erodes
  8. Local and state tax-exemptions status may be challenged

 

Common Communications Errors to Avoid (The Taboos):

Health systems that experience the greatest degree of damage from poor communications make three large errors:

  • Error 1: They fail to recognize that internal and external stakeholders are now more sensitive about excessive executive compensation. Internal stakeholders include staff, physicians, volunteers, patients and donors. External audiences may include payers, community health partners, policy makers, the media, patients and their families.
  •  
  • Error 2: The board fails to develop an intentional communications strategy with carefully considered messaging for key stakeholder audiences.
  •  
  • Error 3: The board and CEO fail to practice their communication messages within various scenarios and with diverse media channels.
  •  

The following actions are designed to acknowledge and help overcome these errors, and position your organization to protect and nurture positive stakeholder relationships.

 

Strategic Actions to Enhance Communications about CEO Compensation (The dos):

Strategy 1: Build a policy and systems infrastructure that clearly demonstrates a rebuttable presumption of reasonableness in the CEO and executive compensation. A CEO evaluation and compensation policy should be established, based on the organization’s mission, vision and business strategy, including the goals and values the organization seeks to reward. Frame decisions around CEO pay in the context of a board-approved compensation policy that articulates how the organization pays its leaders and why such an approach supports the mission, vision and strategy.

 

Specific components of the policy should include, but should not be limited to:

  • Statement of the board’s responsibility
  • A summary of the organization’s philosophy regarding executive compensation, including an explanation of how each element of pay contributes to the recruitment and retention of talent and to the recognition and remuneration of performance
  • The organization’s major strategic objectives, and the connection of the compensation evaluation to them
  • A summary of board-approved criteria to be used in the performance evaluation
  • The process for determining the amount of incentive compensation to be awarded
  • The relationship of the performance incentive plan to the annual salary review
  • The methods and timing of incentive payments
  • Process for dealing with payment in the event of CEO death, disability or termination
  • A summary of the compensation review calendar
  •  

Strategy 2: Establish an “Executive Compensation Program Communications Toolkit” that addresses a table of such contents as:

A crisis communication guide is also available from the joint work of the American Health Lawyers Association and the AHA’s Society for Healthcare Strategy and Market Development, see here

Similar communication guidelines can be adapted from other high-risk organizations, such as the aviation industry, see here.

 

Strategy 3: Post the Executive Compensation Policy on your public website, as well as append it to your annual 990 submissions to the IRS, and to your routine reporting to GuideStar (Now Candid), see here

 

Strategy 4: Practice annual, scenario-based communications by the Board Chairperson and the CEO in videotaped learning sessions. In most regional markets, TV news anchors can be contracted to develop and provide communication guidance and videotaped practice sessions about how to transparently explain the rigor of your compensation policy, and sensible responses to challenging questions posed by diverse internal and external stakeholders.

 

Strategy 5: Continuously review and refine the Communications Toolkit to reflect the evolution of both your compensations policy and culture, as well as the demands of various internal and external stakeholders.

 

Conclusion

The health system’s Board has the ultimate responsibility for assuring that executive compensation is fair, reasonable, and represents an appropriate use of the organization’s resources. Pressure to be more transparent and diligent in defining the compensation now also demands diligence in and preparedness for challenging questions about the scope and nature of the CEO’s compensation.

Even though the board usually delegates the responsibility to the Human Resources and Compensation Committee, the board should receive a complete update on executive compensation every year from chair of the Human Resources and Compensation Committee, focusing on the following:

  • Total compensation philosophy
  • Peer group and competitive positioning within the peer group, to include all elements of pay, not just salary but also incentives, other cash compensation, benefits, deferred compensation, supplemental benefits, and severance arrangements.
  • Roles played by the Human Resources and Compensation Committee and CEO in determining executive compensation for executives
  • A description of the CEO’s total compensation package, and any changes to that package
  • Discussion of annual and long-term incentive awards in terms of how well management achieved the objectives set under the plan

The designated spokesperson for reporting executive compensation decisions to the board should also share the transparency strategy with the board and instruct board members on how to deal with questions on executive compensation.


For consultation on organization communication about executive compensation, please contact Jim Rice, PhD, jim_rice@ajg.com.

 

Marilyn Kern

INTEGRATED HEALTHCARE STRATEGIES

Marilyn Kern is a Senior Consultant with the Total Compensation and Rewards service line of Integrated Healthcare Strategies, part of the Gallagher Human Resources & Compensation Consulting practice.

As an experienced executive compensation consultant, she works with a wide variety of healthcare organizations, including some of the largest healthcare systems, academic medical centers, independent community hospitals and healthcare associations.

Ms. Kern works with health care boards and senior executives on all aspects of executive compensation ...

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James A. Rice

Jim Rice, PhD, FACHE is the Managing Director & Practice Leader with the Governance & Leadership service line of Gallagher’s Human Resources & Compensation Consulting practice. He focuses his consulting work on strategic governance structures and systems for high performing, tax-exempt health sector organizations and integrated care systems; visioning for health sector and not-for-profit organizations; and leadership development for physicians and medical groups.

Dr. Rice holds masters and doctoral degrees in management and health policy from ...

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Kevin Talbot

Kevin Talbot is a Managing Director & Practice Leader with the Compensation and Rewards Consulting service line of Gallagher’s Human Resources & Compensation Consulting practice. In that role, Mr. Talbot leads one of the country’s largest and most respected consulting groups dedicated exclusively to compensation, benefits and governance in the healthcare industry. As practice leader, he manages a national client base of over 300 healthcare organizations and approximately 25 consultants.

Mr. Talbot is an experienced consultant ...

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