The use of long-term incentive plans by integrated health systems continues to grow, according to the 2014 Hay Group Healthcare Compensation Study released recently. Forty-two percent of the 128 integrated healthcare systems (IHS) and subsystems surveyed have a long-term incentive plan in place. The percentage has more than doubled in the past 2 years (from 17 percent in 2012 vs. 42 percent in 2014) and is at its highest level since Hay Group starting tracking the data in 2006.
As hospitals and systems shift their focus from fee-for-service to pay-for-performance, they are also looking more closely at which actions are incentivized and reconsidering the related time horizons. Providers are rewarding very specific goals, such as improved financial ratios, and evaluating new measures that align with value-based care. They’re also increasing their emphasis on longer-term outcomes that are critical to the momentous change required of the industry. As providers become more sophisticated in their population health efforts, these measurements are also likely to increase in sophistication.
According to Hay Group’s study, systems over $1 billion in annual revenue are more likely than smaller systems (those with less than $1 billion in annual revenue) to have long-term incentive plans in place, at 53 percent compared to 21 percent. This difference points to larger healthcare systems’ decisions to incentivize both annual and longer-term, strategic efforts, while smaller hospitals continue to tend to focus on shorter-term results.
As hospitals and systems increasingly add long-term incentives to drive desired behavior, it’s important that they treat these plans as more than merely three-year measurements of what they already evaluate annually. Instead, organizations should look to incorporate long-term incentives into their compensation programs to ‘design in’ performance outcomes that require more than one year to accomplish. To have an impact, it’s crucial that long-term incentive plans are truly aligned with long-term outcome expectations.
Short-Term Goals Shifting
For stand-alone hospitals, the short-term emphasis on profit has dropped considerably over the last three years: 38 percent factored profit in their executives’ and senior managers’ annual incentives in 2014, down from 56 percent in 2013 and 67 percent (CEOs) and 68 percent (senior executives) in 2012. Hay Group’s independent hospital data includes input from 1,099 organizations covering over 569,000 incumbents.
Patient satisfaction continues to be a greater factor in annual incentives for executives than for front-line staff such as nurses and physicians. It’s a factor in 65 percent of hospitals’ short-term executive incentives, compared to 35 percent for nurses and 25 percent for physicians. This difference is largely the result of hospital boards making the connection from patient satisfaction to Medicare and commercial reimbursement rates, putting a distinctively financial spin on the measure. But the future is likely to see increased emphasis on patient satisfaction for patient-facing job titles, particularly as more physicians are employed by hospitals and systems.
Base Salaries Continue Gradual Rise Across Job Functions
Hay Group’s study also found that employees holding the same position year-over-year at large integrated health systems received median base salary increases of 2.5 percent in 2014, slightly lower than the 2.8 percent and 2.9 percent increases they saw in 2013 and 2012.
Median base salary increases for same-incumbent independent hospital employees stayed relatively level at 2.6 percent, compared to 2.7 percent in 2013. Hospital nurses saw slightly higher increases than last year, with 2.5 percent increases in both base salary and total cash in 2014, compared to 1.8 percent base salary increases and 2.0 percent total cash increases in 2013.
The largest base salary increases continue to be reported at the CEO and senior executive level. Median base salary increases were 5.0 percent for CEOs and 3.0 percent for same-incumbent senior executives at not-for-profit IHS organizations in 2014; senior executives at non-system hospitals saw base salary increases of 3.0 percent, steady with 2013, while non-system CEOs’ base salaries increased 4.3 percent, the highest of all job categories measured and an increase over last year’s 3.0 percent.
These increases are reflective, in many cases, of the significant shifts happening within healthcare organizations themselves. For example, hospitals with an insurance plan may increase pay as an acknowledgement that insurance adds a different business line, creating a more complex organization. At the same time, healthcare CEOs more broadly are being asked to work with current and former competitors as partners or affiliates. This increasing challenge and complexity of the role of the healthcare CEO is being commensurately express in the form of higher compensation levels.
Jim Otto is senior principal, Hay Group.