ceo compensation meets pay for performance: emerging trends for executive pay

©Truven Health Analytics Inc. All Rights Reserved. 1©Truven Health Analytics Inc. All Rights Reserved. 1

CEO COMPENSATION MEETS PAY-FOR-PERFORMANCE:

EMERGING TRENDS FOR EXECUTIVE PAY

©Truven Health Analytics Inc. All Rights Reserved. 2

MEDIA HEADLINES ABOUT EXECUTIVE COMPENSATION

PRESSURE BOARDS

Pay For Hospital CEOs Linked More

To Technology, Patient Satisfaction

Than Quality, Study Finds

KAISER HEALTH NEWS

Why Are Hospital CEOs Paid So

Well?There is little correlation between CEO income and hospital

quality—but there is between salary and excessive

marketing.

THE ATLANTIC

Medical millionaires: The compensation

packages of hospital heads are drawing

attentionRonald J. Del Mauro received $21.6 million in compensation in 2012,

the year he retired as chief executive of Barnabas Health, the state's

largest hospital system.

NJBIZ


IOM TRIPLE AIM RESEARCH ON BOARD EXECUTIVE COMP PRACTICES

CEO compensation at not for profit hospitals is highly variable across U.S.

Factors related to high CEO comp

Size and Teaching Status

High technology

Good HCAHPS scores

Factors NOT related to CEO compensation

Financial performance

Clinical outcomes or process of care

Community benefit

Stated Implications for Policy

Given level of tax support for not-for-profit hospitals, should boards better align

values and CEO comp based on quality of care and community benefit?

Joynt, K.E. et al, Compensation of Chief Executive Officers at Not For Profit U.S. Hospitals. JAMA Intern Med. 2014:174(1):61-67

Published online Oct 14,2013


MORE THAN HALF OF BOARD CHAIRS:QUALITY NOT IN TOP TWO PRIORITIES FOR CEO COMP

NATIONAL

AVER

LOW

PERF

HIGH

PERF

Jha, AK, Epstein, A. Health Affairs 20, No.1 (2010): 182-187

44%


BASIS FOR OBJECTIVE COMPARABLES FOR

EXECUTIVE COMP

Risk Mitigation (especially reputational, regulatory)

Tax-exempt status protection

Recruitment and retention of top talent

Federal and State efforts to impact CEO comp

Accountable Care Act

IRS Form 990 - Release of executive pay


TRUVEN-IHS PRELIMINARY STUDY

GOAL AND DATA SOURCES

Assess relationship between 100 Top Hospitals and 15 Top Health System composite scores and CEO compensation

Balanced scorecard (BSC) composite score

Balanced scorecard based on Harvard professors, Norton and Kaplan, theory of the balanced scorecard - 1992

Composite score - National rank on balanced organization-wide performance versus class peers nationally

`Calculation of composite score within class

Sum the ranks on each equally-weighted measure in BSC

Re-rank all hospital based on summed

Performance data solely from public sources

Peer reviewed methods and models only

CEO direct compensation score

Source - IHS National Healthcare Leadership Compensation Survey

1,350 facilities responding

487 hospitals and 89 health system composite scores matched to CEO compensation

Sample adjusted for national representativeness


WHY THE 100 TOP HOSPITALS NATIONAL

SCORECARD?

Credible and defensible

Uses public data to develop national hospital performance comparisons of performance, based on Norton and Kaplan’s theory

Validated by Griffith and Alexander, University of Michigan

Field tested for 22 years

Institute of Standards & Technology study: Baldrige /100 Top correlation

Strong association between Baldrige award winners and long term higher rate of improvement on 100 Top balanced scorecard composite

Strong correlation between Baldrige award winner performance on 100 Top scorecard and long term use of Baldrige practices.

Scalable to health systems and networks

Adds measures for accountability for system goals

Opens opportunity to address ACOs and health plans


PRELIMINARY FINDINGS: CEO COMPENSTAION IS HIGHLY CORRELATED WITH

BALANCED ORGANIZATION-WIDE PERFORMANCE

Boards appear to be compensating CEOs based on overall

organizational performance

Our preliminary findings strongly suggest that Boards pay CEOs

based on overall balanced, organization-wide performance

Performance on the 100 Top composite score was highly correlated

with hospital CEO direct compensation (p<0.0001)

Performance on the 15 Top Health Systems composite score was

highly correlated with health system CEO direct compensation

(p<0.0001)


STRONG ASSOCIATION BETWEEN UNIT INCREASE

IN PERFORMANCE AND % RISE IN DIRECT COMP

For each unit increase in 100 Top Hospital composite percentile performance, compensation

rose an average 1.5%

For each unit increase in 15 Top Health System composite percentile, compensation rose an

average of 1.1%

Same pattern of increase % direct pay, regardless of whether performance was in top 50% or

bottom 50%

Note – For performers in lower half of sample, for each unit increase in composite score, direct comp increased an average of

2.2% for hospitals and 1.3% for health systems.


CONCLUSION:BOARDS TEND TO PROACTIVELY USE WEIGHTS TO INCENT

IMPROVEMENT ON SELECT PERFORMANCE INDICATORS

Analysis of individual scorecard performance indicators and direct compensation of CEOs in 2012 suggests heavy focus on cost cutting

Improved operating profit margin and lower expense per inpatient discharge were highly correlated with higher direct compensation (p<0.0001)

Environment in 2012

Accountable Care Act implementation required major cost cutting, particularly on the inpatient side

Common 2012 goals

Higher weighting of expense reduction

Retention of positive operating profit margins

No harm to quality were critical goals for hospitals

Preliminary results suggest boards acted responsibly in 2012

Assure survival of the organization and respond to new delivery model in a treacherous and unpredictable environment.


Structure, charter, and compliance

Separate compensation committee - entirely independent

Committee members should be independent and have no conflict of

interest with regard to executive compensation

Charged to oversee all of executive compensation (not just CEO pay)

Required to meet two or three times a year

Required to report periodically to the whole board

Written charter, with prescribed process

Requiring thorough documentation of process and decisions

Set qualifications for membership

Requiring annual self-appraisal on process, charge, effectiveness

Establishment of a “rebuttable presumption of reasonableness” for

all disqualified individuals

11

BEST PRACTICES: GOVERNING EXECUTIVE

COMPENSATION


Taxpayers Bill of Rights 2 and Section 4958

Board members and executives can be fined for paying, receiving,

or approving an “excess benefit transaction”

Unreasonable compensation

Revenue-based compensation

Bargain sales

Unreported compensation

All benefits, deferred compensation, and perquisites must be

reported on Form 990


COMPENSATION


REBUTTABLE PRESUMPTION OF REASONABLENESS

Establishing a rebuttable presumption of reasonableness is the

easiest, most effective way an organization can protect itself from IRS

claims that it has paid its executives too much, or in an inappropriate

way

If properly established, the presumption shifts the burden of proof to the

IRS and ordinarily shields the organization, its executives, and its

directors from liability under Section 4958

13



COMPENSATION

Organizations can create a “safe harbor”

Three steps are required to establish a “rebuttable presumption of

reasonableness” under Section 4958

1. Total compensation (salary, incentives, benefits, and perquisites) reviewed

and approved by an independent board or a designated committee thereof

for all “disqualified individuals”

“Disqualified individuals” – persons in a position to exercise substantial

influence over affairs of the organization

2. Decisions based on appropriate comparability data

3. Contemporaneous documentation of board/committee’s deliberations,

process, and decisions

ceo compensation meets pay for performance: emerging trends for executive pay

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