Pay practices for tax-exempt organizations migrating toward those of for-profit companies
In an environment experiencing significant organizational change, new practices around health care executive compensation are beginning to emerge, particularly around pay for board members. According to Mercer’s Executive Compensation Policies and Practices Survey for Tax-Exempt Health Care Organizations, one-fourth (25%) of health care organizations are paying their board members and another 7% are considering doing so.
“Standards developed for for-profit organizations are migrating into the tax-exempt sector,” said Deb Bilak, Partner with Mercer specializing in board compensation. “Hospitals and health systems are facing significant challenges around health care reform, and as a result, the role and expectation of board members are changing. Similar to what we’ve seen in the private sector, as board complexity increases so does the need for specific expertise – and compensating board members has been a common practice for recruiting and rewarding competencies, vision, and time commitment.”
Mercer’s Executive Compensation Policies and Practices Survey for Tax-Exempt Health Care Organizations, which was conducted late last year, examines the executive pay programs of more than 50 health care provider, health plan, and managed care organizations across the US.
According to Mercer’s survey, incentive plans continue to be an essential component of executive compensation packages among health care organizations. Most (93%) provide an annual incentive plan for executives and almost half (45%) provide a long-term incentive plan. Of those organizations that offer an annual incentive plan, few include a clawback provision or contractual stipulation that allows for paid compensation to be rescinded based on restated financials or other factors. Although fewer organizations provide long-term incentive plans, one-fourth (25%) of those that do have a clawback provision.
“There is a major shift in the role of hospital executives from building services and partnering with physicians to creating a culture that addresses patient care and high-value outcomes,” said Tom Flannery, Partner with Mercer specializing in executive compensation. “A robust compensation package for hospital executives reflects that of executives in the private sector and helps retain qualified talent that might flee to more lucrative positions in for-profit companies.”
Pay for performance
With the continual focus on pay for performance, health care organizations have been facing increased pressure to ensure executive incentive plans are aligned with company performance. While companies use a variety of strategies ranging from discretion of compensation committees to quantitative metrics to set performance goals, Mercer’s survey reveals that nearly two-thirds of health care organizations rely on a mix of both internal and external standards for establishing performance targets for their annual and long-term incentive plans.
“Running a hospital or health care system is a complex job and health care organizations have been trying to improve their executive pay practices accordingly,” said Ms. Bilak. “The incentive plans associated with variable pay are important tools for rewarding effective management. Following suit of the for-profit sector, it behooves hospital executives and their board members to adjust compensation to the times and even ensure transparency exists in the process.”
Related to compensation, Mercer’s survey shows the use of tax gross-ups – payments made to increase a net amount to account for taxes that would be incurred by the receiver – continues to decline. Just 8% of health care organizations provide tax gross-ups to CEOs or other executives, and 40% of those organizations with tax gross-ups are planning to eliminate them.
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