CEO Compensation Strategies: Getting Literal about Incentives and Severance

Healthcare CEOs are used to having various incentives built into their compensation packages. Traditionally, however, these incentives related loosely to the organization’s financials, or if a measurement related to institutional quality, it tied primarily to patient satisfaction.

No longer, says Witt/Kieffer’s Andrew Chastain. Today’s healthcare executive compensation packages are about “literal outcomes,” he says. Boards use compensation strategies that involve more sophisticated short- and long-term metrics tied to meaningful performance in multiple areas. For example, improving quality of care, reducing waste, and improving integration across facilities and functions all factor in to the remuneration of a CEO.

Andrew Chastain

Andrew Chastain

The end result: There is a lot more risk/reward built into pay packages for CEOs, Chastain told Philip Betbeze of HealthLeaders Media recently, in an article titled “CEO Incentive Pay Gets a Makeover.” Packages are “much more granular than before,” Chastain says. “The quality committees of [healthcare] boards are getting with the compensation committees on a systematic approach” to compensation, he says.

A ballpark figure is that 40% of a typical healthcare CEO’s overall compensation can be tied to performance and quality incentives, he notes. Different than the past, many of the quality and safety metrics are not difficult for organizations to define. “It’s being defined for them by their payers,” Chastain says. “They can argue with [doctors] about what quality really is, but they’re being measured by these metrics.”

Severance Packages More Savvy

While healthcare organizations and their boards are fairly savvy about cash compensation and benefits, there are not always well-schooled on the nuances of severance packages for CEOs. And yet having a strong severance agreement that closely reflects market best practices is becoming more important for healthcare boards and executives—for recruiting and succession planning, as well as legal reasons.

As the industry grows more complex, so do CEO severance packages. Towards this end, Witt/Kieffer recently teamed with Mercer and Hunton & Williams LLP to conduct a survey of some 200 leading healthcare organizations regarding their CEO severance arrangements. The results are outlined in the 2013 Health Care CEO Severance Survey.

New PictureAll aspects of top leaders’ compensation and benefits are under the microscope today. Healthcare boards are responding by developing strategies that may have more risk and reward for CEOs but are clearly more acceptable to organizations and their constituents. After all, boards, too, are under the microscope for their CEO compensation strategies and how they carry them out.

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