Top Ways Health Executive Compensation is Changing

The transition to value-based care has put pressure on healthcare leaders to do more—and to do better—with less. But finding and retaining executives who are up to the task, especially under old compensation models, can be a struggle. That’s why more organizations are exploring alternative compensation plans.

Approving new compensation plans requires a fundamental shift in thinking among the hospital and healthcare system board members who determine executive compensation plans, says Steven Sullivan, managing director at the executive compensation consulting firm Pearl Meyer. These board members often have experience with nonprofit groups and charities and are not accustomed to rewarding executives for performance, as the for-profit or private sector is.

“Historically, healthcare executive compensation has been used in ways that have not been very effective,” Sullivan says. “The philosophy has always been that the executives were not there to get rich, but to fulfill the mission.”

When the ACA was implemented, many hospital board members were forced to consider alternative compensation models for their C-suite leaders, says Sullivan. That’s because reform presented transformational challenges that required sustained collaborative efforts. “Boards that were more forward-thinking began to establish leveraged approaches to variable compensation for recruiting, motivating, and retaining their leaders through difficult transformations,” he says.

The need to provide alternative models intensified as the Triple Aim became part of many providers’ strategic plans, says Sullivan, noting that finding executives who are qualified to take on the goals of better health outcomes, happier patients, and lower costs, is difficult. The need to advance the Triple Aim “further split the herd in terms of the relatively limited number of executives who were qualified to take on that challenge,” Sullivan says.

Many new compensation plans include a base salary, an annual incentive plan, and a long-term incentive opportunity, says Sullivan. The annual incentive may be based on a short list of goals related to addressing the organization’s vulnerabilities—often clinical quality or efficiency problems.

Since not everything can be achieved in a 12-month cycle, long-term incentive plans are also being implemented within many healthcare systems and hospitals. Often, long-term incentive plans come in the form of a performance share plan, where executives are compensated by earning stock in their organization, says Sullivan.

The types of goals included in these long-term plans depend on the type of organization and its long-term mission or strategy, Sullivan says. Not-for-profit hospitals that have a good donor base and are performing well might focus on patient experience and growing the business among commercially insured patients. Safety net hospitals that are just trying to stay in the black might focus on improving efficiency and clinical quality. “Those are the only two things they have at their disposal to control over time,” Sullivan says.

Whatever the goals, the compensation plan is created based on a consensus about the future needs of the organization and the goals that must be achieved to get there, says Sullivan.

Moving forward, Sullivan says more will have to be done beyond just adding value-based measures and compensation. The healthcare model must be changed in a way that can be sustained in a long-term manner. This means finding a way to close the space between payers and providers, Sullivan says.

“I think the biggest problem right now is provider organizations are not receiving sufficient reimbursement from insurance companies,” he says. “And the turmoil in Washington is keeping us from having a responsible and mature approach.” He says payers are struggling to anticipate the direction of the federal government, and providers are struggling to meet ever-changing criteria and performance levels. “It doesn’t match up,” says Sullivan. “We’ve got to get better consensus and alignment between the payers and providers, and hopefully that will force Congress to come to terms with the situation.”