In reviewing responses from the healthcare industry to our survey Looking Ahead to Executive Pay Practices in 2018, several findings warrant a deeper look.
Plan Satisfaction and Communication
Only 10% of healthcare organizations were “very satisfied” with their annual incentive plans (second-lowest of eight industry groups), while 21% of healthcare organizations were “very satisfied” with their long-term incentive plans (third-highest of eight industry groups).
It’s possible that long-term incentive arrangements are relatively new to healthcare, and that those initiating such plans may be experiencing some obvious benefit from them, whether actual or perceived.
That observation is supported by the finding that 72% of healthcare organizations responded that their annual incentive plans had either “some” or “significant” impact on executive behavior, while 95% of those organizations responded that their long-term incentives had “some” or “significant” impact.
Plan Measures
More healthcare organizations (90%) utilized growth/income/cash flow metrics in their annual incentive plans than in their long-term plans (78%), and these metrics (such as revenue, EBIT, EBITDA, net income and others) were more closely associated with annual incentives than long-term incentives with all industry groups measured.
Similarly, only 10% of healthcare organizations included ROI (return on investment) metrics in their annual incentive plans while 28% included such measures in their long-term plans. There was a higher prevalence of return metrics (return on: invested capital/assets/equity/sales) in the long-term incentives of the other industry groups.
Among the healthcare organizations, almost twice as many (60%) incorporated non-financial metrics in their annual incentive plans than in their long-term incentives (33%). It is possible that non-financial metrics such as patient satisfaction, clinical quality/safety, employee engagement, and others are more commonly measured as annual improvement programs, while some of the more common long-term incentive themes such as enterprise growth and care transformation are multi-year initiatives.
Performance Targets
Forty-two percent of healthcare organizations used annual budgets that have been approved by the board to set annual incentive performance targets, and 53% did so for long-term incentive performance targets. However, only 16% of healthcare organizations utilized goals proposed by management for annual incentive performance targets, while 42% used such goals for setting long-term incentive performance targets. As previously noted, 90% of healthcare organizations incorporated metrics such as revenue, EBIT, EBITDA, and net income in their annual incentive arrangements.
It is possible that outside board members have a much better understanding and working knowledge of their organizations’ growth, income, and cash flow performance than the performance metrics seen in many long-term incentive plans in healthcare, such as ROI, enterprise growth, and transformational goals. In those cases, the organization, including the board, may be more reliant on management to establish targeted performance levels for long-term incentives.
While 74% of healthcare organizations utilized a “simple formula” to set annual incentive threshold and stretch performance levels (e.g., threshold = 80% of target; stretch = 120% of target), only 16% used an “ad hoc” approach. Conversely, 53% of healthcare organizations used a “simple formula” for setting long-term incentive performance levels, and 32% utilized an “ad hoc” approach. As before, it is quite possible that annual incentive targets in healthcare are metrics that are more commonly used across industries and across organizations, while long-term incentive metrics in healthcare may be based on some enterprise growth or transformation goals that are specific to the organization and not well-understood by the board or others.
It will be interesting to see if there is any sizable shift in these sentiments as we progress through 2018. Please contact me if your healthcare organization would like to participate in our next survey this fall.
