Historically, formal executive incentive plans were few and far between among not-for-profit healthcare provider (HCP) organizations. Executive compensation packages typically consisted of base salary, benefits, supplemental retirement and maybe a few perquisites.
However, a shift began in the 1980s and 1990s as HCPs found themselves increasingly competing with for-profit companies – both healthcare and general industry – for executive talent. Candidates from these for-profit sectors were familiar with and expected an element of performance-based pay with significant upside potential.
The competition for talent intensified after the 2008 recession, as numerous for-profit companies saw an opportunity to profit from entry into the HCP sector. However, many of those companies had no in-house HCP experience, so began poaching executive talent from hospitals and health systems to help lead their new businesses. As a result, we have seen the likes of Amazon, CVS, Google and Walmart enter – and in some cases exit – the HCP sector.
As the competition continued to increase, the not-for-profit HCP sector expanded its definition of its competitive talent market to include for-profit and general industry organizations in addition to traditional not-for-profit HCP peers. Correspondingly, the sector put more focus on variable pay – both short- and long-term incentives – to compete (though long-term incentives usually are used only by larger systems). The economics of the HCP sector also made leveraged pay (i.e., pay at risk) more attractive as external influences wreaked havoc with financial performance.
With this increased focus on leveraged pay came the tendency to target total cash compensation (TCC) and total direct compensation (TDC) above the median of the blended market, often at P65 or P75. Despite targeting a higher percentile of a blended market, the degree of leverage in the not-for-profit HCP sector remains significantly below that of the for-profit sector. This is largely due to the lack of equity vehicles, which requires long-term incentives, if offered, to be paid in cash. Additionally, base salaries generally remain above those of the for-profit sector.
Recently, however, we have heard concerns from across a variety of not-for-profit HCP organizations about challenges they are encountering with a leveraged approach:
As a result of these challenges, many of our clients began examining their current pay mix, assessing whether the amount of pay at risk should be reduced. This is a significant philosophical debate, and organizations considering it should think carefully about several issues:
There is no absolute right or wrong answer to the question of whether to change the degree of leverage in your executive compensation program. However, the resulting program should align with the organization’s compensation philosophy, guided by its responses to the questions noted in this article.
Increasing the base salary target alone will not result in a significant decrease in leverage, though it may make base salaries more attractive to candidates (and current incumbents). If incentives are reduced or eliminated and pay becomes less leveraged, however, the organization should consider whether targeting pay above median remains appropriate, whether the message being sent to executives is what is intended, and how performance will be effectively managed going forward.
A version of this article appeared in Workspan on July 17, 2024. All rights reserved, reprinted with permission.
