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CEO COMPENSATION MEETS PAY-FOR-
PERFORMANCE:
EMERGING TRENDS FOR EXECUTIVE PAY

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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
attention
Ronald 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

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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

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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%

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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

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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

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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

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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)

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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.

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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.

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 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
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BEST PRACTICES: GOVERNING EXECUTIVE
COMPENSATION

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 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
BEST PRACTICES: GOVERNING EXECUTIVE
COMPENSATION

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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

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BEST PRACTICES: GOVERNING EXECUTIVE
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

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EXECUTIVE DISCUSSION
PAUL PAWLAK, CEO RICHARD SOOHOO, CFO
SILVER CROSS HEALTH SYSTEM SUTTER SACRAMENTO SIERRA REGION